Buyer beware: The key to unlocking hidden value in M&A

In the dynamic realm of mergers and acquisitions (M&A), unlocking a deal’s potential requires a thorough understanding of the fundamental drivers of performance and asset value. While traditional financial performance metrics remain a key focus, M&A practitioners are increasingly seeking a broader understanding of a target’s operations through operational due diligence (ODD) and synergy assessments to achieve sustainable value creation. By integrating these aspects, organizations can gain valuable insights into the operational landscape of target companies, paving the way for long-term cost savings, synergistic benefits, and maximized investments. 

Operational due diligence and synergy assessments 

ODD is a forward-looking evaluation of the target’s operational health, designed to identify opportunities and risks within key operations that may influence future performance. Unlike conventional due diligence, which primarily focuses on financial metrics and legal compliance, ODD highlights operational resilience, potential for growth, and opportunities for synergy realization. Through a detailed ODD assessment, acquirers gain a holistic view of the target's capabilities, technological infrastructure, applications, and overall organizational efficiency. This enables them to identify target areas for enhancement and value creation. 

Synergy assessments provide clients with detailed insights into the alignment between the acquirer’s operations and infrastructure and the target company’s overall strategy. These assessments can be conducted through various key functional areas such as procurement, production, and marketing. When organizations undergo this exercise, they can uncover potential synergies that may lead to long-term cost savings and enhance operational efficiency across the organization. Synergy assessments provide clients with a roadmap for integration and optimization post-acquisition, defining strategies and next steps to capitalize on opportunities and ensure sustainable value generation.

Synergy assessments: Long-term cost saving opportunities and revenue generating potential

Synergy assessments play a crucial role in identifying cost-saving opportunities that emerge from aligning the resources, capabilities, or operations of an acquirer and a target firm. By identifying and assessing synergies across various functions, organizations can reveal potential efficiencies, such as leveraging joint purchasing power for long-term cost reductions and optimizing processes while utilizing shared resources to enhance operational efficiency. Additionally, synergy assessments enable companies to identify redundancies and inefficiencies, facilitating rationalization and consolidation to achieve long-term cost savings across the organization.  

Moreover, synergy assessments provide clients with key insights into revenue enhancement opportunities, often stemming from cross-selling activities and effective synergy realization. Through the strategic utilization of complementary products and customer bases, organizations can create further revenue streams and drive top-line growth in the post-acquisition period. This approach can facilitate a smoother integration process while also promoting long-term sustainable growth and, in turn, profitability. 

Case study one: eBay’s acquisition of Skype 

In eBay's acquisition of Skype, the inability to identify and leverage value creation factors significantly contributed to the deal’s failure. Despite initial enthusiasm around the strategic fit of the deal around synergies between the e-commerce giant and the communication platform, the implementation of the integration efforts did not capitalize on these opportunities. The main challenge was the failure to seamlessly integrate Skype's communication services into eBay's online platform. Despite the businesses seeming complimentary, eBay struggled to develop a detailed integration strategy to leverage Skype's capabilities to augment user experience and grow transaction volume. This is a key example of where integration remained superficial, lacking the strategic and functional depth necessary for sustained operational value creation.

Regulatory hurdles posed significant challenges to the transaction, hindering the long-term realization of synergies and sustainable value creation. The heavily regulated telecommunications landscape proved a barrier for eBay to fully integrate Skype's services into its platform. These barriers funneled down within the organization, creating compliance issues and operational bottlenecks that shifted employee goals from the larger strategic initiative, ultimately impacting the development of innovative solutions. In addition, incompatibilities in technology infrastructure hindered platform alignment, slowing down the development of user-centric solutions and transactional efficiency. The lack of integration planning to bridge these technological divides impacted eBay's ability to leverage Skype's technology as a value creation lever, not maximizing deal value. 

Case study two: The Daimler-Benz and Chrysler merger

The failure of the Daimler-Chrysler merger underscores the inability to leverage value creation drivers due to strategic missteps and operational barriers. The merger struggled to integrate organizational cultures and management styles due to cultural differences. Unclear strategies and ineffective implementation led to operational inefficiencies and cultural misalignment, significantly hindering value creation potential. 

Regulatory challenges, including labor relations and corporate governance issues, diverted focus and resources from the overarching vision and strategic initiatives, limiting the realization of synergies.  

Moreover, technological disparities emerged as significant obstacles, creating integration bottlenecks and impeding the alignment of product development and manufacturing processes. 

Product platform misalignment obstructed cost-saving synergies and hampered the development of competitive products. Failure to address these technological gaps early in the deal was a critical factor in the merger’s collapse. The collapse of the Daimler-Chrysler merger highlights the significance of strategic alignment, cultural integration, and technological compatibility in actualizing synergies and sustaining long-term value creation in M&A.

Strategic buyers vs. private equity (PE) firms

 Both strategic buyers and private equity (PE) firms approach M&A with distinct strategies and objectives, each adopting tailored methods to achieve their strategic goals. Strategic buyers, such as large operating companies aiming to expand geographic reach or enhance product offerings, typically focus on integration planning to achieve synergies and gain a competitive edge in the market. For example, the acquisition of WhatsApp by Facebook (Meta), a strategic buyer, aimed to leverage WhatsApp's messaging platform to enhance its core social media ecosystem. Facebook sought to establish a dominant position in the messaging market by utilizing WhatsApp's user base and core functionalities, while also realizing synergies to drive significant value creation over time. 

Strategic buyers often face challenges related to cultural integration, strategic alignment, and organizational coherence. For example, the acquisition of AOL by Time Warner illustrates the complexities often faced in strategic acquisitions. Time Warner aimed to merge its traditional media operations with AOL’s digital expertise in content and distribution. However, integration efforts were hampered by misaligned business models, company cultures, and operational goals. Failure to address these challenges early in the transaction led to AOL’s divestiture, underscoring the risks of strategic acquisitions lacking comprehensive integration strategies.

Private equity (PE) firms create value through targeted initiatives that leverage their financial and operational expertise. When 3G Capital acquired Burger King, it identified and implemented initiatives for cost savings and operational efficiencies, improving profitability, and streamlining operations. 3G Capital transformed Burger King’s supply chain, introduced innovative marketing strategies, and created a lean, efficient organization that began generating returns for investors.   

In summary, ODD and synergy assessments are vital tools for gaining detailed insights into a target company’s operational landscape and identifying opportunities for sustainable value creation. Through meticulous ODD processes, acquirers can identify areas for enhancement and strategic decision-making, while synergy assessments provide a roadmap for integration and optimization, fostering long-term cost savings and revenue enhancement. These assessments are essential for both strategic buyers and private equity firms, enabling them to unlock the full potential of acquisitions and drive sustainable growth by understanding operational risks and opportunities. 

By Saima Jalal, Partner and Hisham Saadat, Assistant Manager, Stategy & Transactions, Deloitte Middle East

Endnotes

1. Nanda, Ashish and John C. Coates. "Better M&A Advice Starts with Better Questions." Harvard Business Review, 1 Sept. 2016.  
2. "Lessons from the Daimler-Chrysler Merger." IMAA Institute, 11 May 2018.  
3. Elgin, Ben. "Skype Out?" Bloomberg, 3 Dec 2007.  Schenker, Jennifer.
4. "Skype's Life After eBay: Free in More Ways Than One." Knowledge Wharton, 9 July 2008.