Book Review: The Synergy Solution

The Synergy Solution: How Companies Win the Mergers and Acquisitions Game. 2022. Mark L. Sirower and Jeffery M. Weirens. Harvard Business Review Press.

“Poorly deliberate and executed acquisitions have virtually actually destroyed much more funding worth than managerial acts of fraud.”

Traders who keep in mind huge fraud-related wealth destroyers resembling Enron, HealthSouth, and Parmalat may ponder whether this assertion from The Synergy Resolution: How Firms Win the Mergers and Acquisitions Recreation is appropriate. Authors Mark L. Sirower and Jeffrey M. Weirens assist their declare, nonetheless, with examples resembling insurer Conseco’s ill-fated, all-stock 1998 acquisition of subprime cell house lender Inexperienced Tree Monetary. A yr after the deal was introduced, Conseco inventory was down 50%. 4 years later, the corporate filed what was then the third-largest-ever US chapter petition.

Sirower and Weirens, who respectively head Deloitte’s US mergers and acquisitions (M&A) and international monetary advisory companies, additionally present examples of vastly extra profitable offers. As an illustration, Avis Price range Group’s inventory rose by 105% within the 12 months following the corporate’s announcement that it will purchase car-sharing chief Zipcar in an all-cash transaction.

For traders, the problem is how you can predict the M&A winners and losers. The authors reveal that one vital clue is the inventory market’s preliminary response to the deal announcement. Within the Conseco / Inexperienced Tree case, the acquirer’s inventory worth instantly fell by 20%, whereas that of Avis Price range Group’s shares rose by 9% on the Zipcar information.

These usually are not remoted examples. Amongst its intensive empirical findings, The Synergy Resolution reviews that in its pattern of 1,267 M&A offers within the 1995–2018 interval, one-year returns on acquirer shares with initially constructive returns averaged +8.4%, in contrast with –9.1% for these with initially unfavourable returns. Of the acquirer shares that rose on the deal announcement, 65.2% posted good points for the following 12 months, whereas 57.1% of those who fell on the announcement had been nonetheless down a yr later.

In brief, the market tends to acknowledge from the get-go whether or not a newly introduced deal will in the end add or subtract worth for the acquirer’s shareholders (and for the acquiree’s shareholders, if the deal forex is inventory). What accounts for this prescience? Sirower and Weirens make use of case research to current their argument: A acquire is extra seemingly when the acquirer’s administration presents an in depth breakdown of believable, anticipated synergies enough to justify the premium being paid for the goal’s inventory (or estimated worth, within the case of a division being acquired from one other firm).

Conseco / Inexperienced Tree exemplified the counter case. Conseco had beforehand generated the S&P 1500’s highest complete shareholder return over a 15-year interval by rolling up 40 regional insurance coverage corporations. Administration had mastered the method of instantly lowering back-office prices, making the synergies extremely predictable. In distinction, Conseco vaguely described its diversification into client lending with Inexperienced Tree as “strategic” and never price based mostly. Traders didn’t purchase the cross-selling story, and the preliminary 20 % worth drop proved to be prologue. (The deal’s heady 83% premium didn’t assist.) Conseco’s inventory worth fell by half inside a yr and the corporate went bankrupt just a few years later.

Because the phrase “corporations” within the subtitle suggests, this e book’s main audience consists of company managers and administrators reasonably than securities analysts. Nonetheless, the authors provide immensely invaluable instruction on assessing from the surface whether or not a given M&A transaction is prone to create or destroy wealth. To make that willpower, The Synergy Resolution recommends supplementing discounted money circulation evaluation with financial worth added strategies. Sirower and Weirens present how you can look by the acquiree’s GAAP earnings, that are generally used to justify the premium by way of multiples paid in comparable transactions. The earnings per share generated for monetary reporting functions may, for instance, be overstated due to nonrecurring gadgets or headed for a decline due to upcoming collective bargaining settlement renewals—a difficulty presently rising in significance in view of rising inflation. Funding organizations with enough sources also can conduct the kind of business due diligence the authors prescribe for acquirers, together with surveys of individuals within the merged firm’s key markets.

In the middle of offering these pointers, Sirower and Weirens topic conventional analyses of M&A transactions to well-warranted scrutiny. Opposite to the assumption that acquisitions are sound provided that they’re accretive to earnings, the authors word the low correlation between accretion / dilution and market response. A lot scholarly analysis asks whether or not acquisitions work greatest when they’re in “associated” or “unrelated” companies or one thing in between the 2. Many goal corporations, nonetheless, have interaction in a wide range of companies and consequently verify a couple of field. Sirower and Weirens additionally warning in opposition to specializing in the expansion price of the merging corporations’ addressable market. The expansion price of the market that’s serviceable by their mixed operations is perhaps decrease.

At the same time as they catalogue the failings in acquisitions which might be both poorly conceived or pushed by CEO egos, Sirower and Weirens stress their perception within the virtues of correctly deliberate and executed M&As. Traders can enhance their possibilities of separating the wheat from the chaff by using some less-familiar instruments they describe, resembling shareholder worth in danger and the meet the premium line. Useful as nicely is the e book’s calculation of the comparative efficiency of all-stock, all-cash, and mixture offers. Contemplating the stakes, traders ought to actually reap the benefits of the experience and insights that inform The Synergy Resolution.

In case you appreciated this publish, don’t overlook to subscribe to the Enterprising Investor.

All posts are the opinion of the creator. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the creator’s employer.

Skilled Studying for CFA Institute Members

CFA Institute members are empowered to self-determine and self-report skilled studying (PL) credit earned, together with content material on Enterprising Investor. Members can report credit simply utilizing their online PL tracker.