How to capture synergies in an M&A deal

Only 14% of executives report complete success in their M&A deals, and the difference between losing synergies and capturing them comes down to the pre-deal phase, execution discipline, and people

Operating synergies vs. financial synergies

In mergers and acquisitions (M&A), the promised synergies don't always materialize. They often slip through your fingers due to over-optimism, lack of data, operational complexity, or undisciplined execution. In this article, we share some lessons from our experience in telecommunications on how to turn a post-merger integration into real value creation.

The available research consistently shows that companies tend to capture less value than expected from the M&A deals they pursue. Only 14% of executives surveyed in 2022 reported significant success across the strategic, operational, and financial metrics of their deal, and in fact, barely half (53%) set synergy targets, while only 43% formally track synergy capture.

We won't focus today on financial or shareholder value metrics, but on operating synergies. Financial synergies depend on the cost of achieving the operating ones and the price paid to obtain them, as well as other external factors related to the market in which the company operates, especially when it is publicly traded. In some cases, the savings achieved are only enough to "pay for" the acquisition premium, generating little net new value. In others, operational improvements are offset by external factors or by the need to invest more than planned to properly integrate the companies.

Why does synergy capture fail in mergers and acquisitions?

Across all sectors, capturing operating synergies (both revenue and cost) is a top concern for acquirers in M&A deals, because in a large number of cases the targets are never met. Several structural factors explain this pattern.

Overpaying and inflated expectations

Buyers overpay, anticipating synergies that actual returns later fail to justify. A high price is frequently rationalized with synergy promises that are hard to deliver.

Revenue synergies, the most uncertain

Revenue synergies (for example, cross-selling across customer bases) are especially uncertain. Competitive dynamics introduce unforeseen factors that erode combined market share and create temporary dis-synergies, including the loss of key customers. On top of that, both setting targets and verifying the revenue synergies actually delivered is difficult in most cases.

Cost synergies, the largest share and the most achievable

Cost synergies tend to make up the majority and are more readily achievable. They rest on clearer rationales, with measurable metrics both in volume (headcount, third-party circuits, network equipment, offices...) and in economic terms (salaries, monthly payments, maintenance costs, depreciation, leases...).

Insufficient data in due diligence

Poor visibility and unreliable data during due diligence, the use of superficial benchmarks, weak analysis of the combined cost structure, and underestimating integration costs all lead to unrealistic synergy estimates.

Underestimated integration complexity

Integration complexity is underestimated in most cases, and execution fails to deliver a good part of the cost synergies, which are only achievable after fairly deep, and therefore costly, transformation processes within the acquiring company.

Unrealistic integration timelines

Planned timelines tend to reflect wishful thinking rather than rigorous bottom-up planning. Close to half of post-M&A integrations are completed behind the original schedule, and synergies not captured in time tend to be lost or diluted.

Pressure from the macroeconomic and regulatory environment

The macroeconomic and regulatory environment adds pressure after closing. It pays to deliver synergies before that environment shifts to the point of rendering the business plan assumptions obsolete.

Consolidation, delayering, and carve-outs in telecommunications

The telecommunications sector has gone through an intense wave of consolidation over the past ten years, with major mergers. It is a global phenomenon, with regional nuances and regulatory environments that lead to different balances between sustainability and competition.

Recent years have also brought a wave of delayering, meaning the separation of the service and infrastructure layers and the sale of the latter (towercos, fibercos, etc.), driven less by classic synergies than by the pursuit of capital efficiency and freeing up resources. This trend has reshaped the corporate strategies of many operators and given rise to numerous carve-outs (the separation of a business unit for sale) followed by the sale and integration of assets.

From our experience supporting these deals, several lessons stand out.

Keys to capturing synergies in a post-merger integration

A good post-deal starts in the pre-deal

The deal rationale, the business plan assumptions, and the transaction price are all built in the phase leading up to the agreement. This is when the potentially achievable synergies are estimated, along with the cost of delivering them and of the integration itself. The urge to close the deal ahead of other potential buyers often turns into a race against the clock in which scrutiny of the value creation assumptions loosens. Having true sector experts on board to guarantee minimum standards and properly surface deal risks before closing makes the difference at this stage.

Prioritize operating and capex synergies

One plus one adding up to more than two holds far less often on the revenue side than on the cost side. Our recommendation is to focus on "industrial" synergies tied to improving the combined opex and containing capex.

The main M&A synergies come from infrastructure integration (network, data centers, and service platforms), capex avoidance initiatives, optimization of O&M processes and contracts, migrating customers onto the company's own network, consolidating other third-party contracts, integrating customer service centers and sales channels, and streamlining processes and organization (right-shaping and right-sizing). To a lesser extent, and not in every case, overhead can contribute synergies, as can systems integration (BSS/OSS), although not in the short term, when costs may even rise. Revenue synergies, at least in the telco sector, deliver a low net contribution.

Early termination of TSAs (Transition Service Agreements)

TSAs are the transitional service agreements under which the selling organization continues to serve the divested unit after closing. When the integration follows a prior carve-out, the goal is to reach full autonomy of the absorbed business unit from its former parent as soon as possible. Target dates are usually set for terminating these agreements, along with renewal mechanisms in case the transition timeline needs to be extended. Working from Day 1 to accelerate that timeline, wherever possible, helps improve the cost forecast in the integration business plan and offset underperformance in other parts of the synergy plan.

Managing information, scarce before closing and incomplete after

In the pre-closing phase, there are understandable limits to the open exchange of information, and no matter how much documentation the seller provides for due diligence, the picture the buyer can form will be partial and full of uncertainty. Before closing, the priority is to gather as much information as possible and read between the lines, both in the available data and in the gaps that emerge.

After closing, access to information opens up completely, but data quality tends to be poor and some gaps never get filled, leaving essential aspects without reliable data. That is why it pays to invest significant early effort in gathering information, cleaning and organizing data, and taking nothing for granted without on-the-ground verification. A thorough initial investigation surfaces hidden flaws, allows assumptions to be revisited, and occasionally uncovers upsides or additional sources of synergies.

Preparing Day 1 between signing and closing

Once the sale and purchase agreement (SPA) is signed, both parties must ensure the conditions precedent are met, and the buyer must prepare for Day 1 of the integration, as soon as closing occurs. Whenever possible, it helps to set up a period of deeper information sharing, while respecting the compliance requirements both parties must observe. This builds a better understanding of the implications of the acquisition, setting up an integration that captures the expected value.

Day 1 sets the tone for communication with employees, customers, and the market, and fires the starting gun for the teams who will lead the integration, with a special push during the transition until the acquired company is fully independent from the seller (in the case of a prior carve-out) or until the key initial integration goals are met. Setting up an IMO (Integration Management Office), a dedicated integration office with exclusive focus, a cross-functional view, strong sponsorship, and expert support, goes a long way toward the success of an integration program.

The three priorities of an M&A integration program

Although all three dimensions must be worked in parallel, the integration program should initially prioritize making sure nothing "breaks."

1. Business continuity

This means constant attention to customers, key employees, and suppliers, as well as to service quality and the experience delivered. If operations are running and nothing is touched that shouldn't be, both the acquiring business and the one being integrated should keep operating normally. Where TSAs and MSAs (Master Service Agreements) exist with the seller, rigorous compliance with them is part of that continuity.

2. Synergy capture and autonomy

Capturing value through synergies is also a priority from the start, though always subordinate to business continuity, without which everything else is at risk. It requires a detailed plan, metrics, and dedicated governance reporting directly to the executive committee. Tempo and discipline determine the outcome. As we have seen, synergies that aren't captured early fade away.

As the integration moves forward, the new combined business becomes reality and, if the acquisition stems from a carve-out, the degree of autonomy grows gradually. The transition can be considered truly complete when the last TSA ends and all dependence on the selling organization disappears.

3. Transforming the buyer

Few scenarios lend themselves as well as an integration to changing not only the acquired company or business unit, but the acquirer itself. Best practices, processes, or tools from the acquired company can be adopted, or both models can be combined into something new that is greater than the sum of its parts.

It is also the moment to push through those changes that, for whatever reason, had been postponed for some time, preventing the buildup of duplication, silos, and a patchwork of operating models instead of something new and better. From the standpoint of the customer value proposition, it is likewise the time to rethink, simplify, and work from the customer journey rather than from the operational back office.

People, the decisive factor in a successful integration

A large share of an integration's success depends directly on people. Their leadership, commitment, and motivation make the difference between an integration that transforms and a mere combination of businesses.

The starting point is identifying and supporting the people whose knowledge and capabilities make the integration and the capture of the expected value possible. It also helps to accept that some key people may decide to leave the company if the new project doesn't fit their career plans or expectations, and there is little that can be done to prevent it. 

An integration and transformation process is demanding for teams, so its impacts and costs need to be anticipated, along with actions that protect top talent and sustain steady leadership over time, guided by a clear vision of what the company wants to achieve in the medium and long term.