In the last decade, we have seen organic growth at many of the large consumer companies slow. In an effort to continue to create high levels of return that shareholders have come to expect from this sector, many executive teams have undergone aggressive cost cutting plans and have been turning to M&A to achieve their financial and strategic ambitions. However, in today’s aggressive capital markets environment, companies often question whether they can achieve accretive deal value given the high valuations that strategic assets can command. This has become an even more critical question since much of the low hanging fruit in traditional cost take-out programs have run their course.
KPMG research reveals that acquisitions can increase shareholder value despite high valuations and that three key tactics can improve the likelihood of success.
Announce the details of synergy expectations and plans before the transaction close
Consumer companies who publicly stated the types of synergies expected (both revenue and cost), detailed the value of those synergies and had a roadmap with the expected time frame for realizing those synergies, saw an average increase of shareholder return of approximately three percent higher than their peers.
Real life example: Of the 168 transactions evaluated, one food company deal was one of the highest performing deals that we analyzed per the TSR methodology. During the course of the transaction, the acquirer disclosed the total synergies attributed to the deal ($255 million in synergies in the first year and $500 million in the second year) as well as how the synergies would be attained.
Publicly track and report synergy progress post acquisition
Companies that not only had a willingness to evaluate the deal’s progress, but also publicly reveal the results had an average increase of shareholder return of approximately 6 percent more than their peers.
Real life example: When a leading food company acquired a leading beverage company, they viewed the acquisition as more of a growth play, but also expected $50 million in synergies. Many investors, including debt holders, were not initially convinced of the value of the transaction. But the acquirer regularly reported to investors (on a quarterly basis) how the integration was progressing and whether the synergy capture was in line with the plan.
Capture a significant portion of synergies quickly, usually within the 1st year
The strongest indicator of shareholder value return is actually demonstrating results quickly. Companies that do this have an average increase of shareholder return of approximately 20 percent more than their peers.
Real life example: A key component of the investment thesis for one leading food company’s acquisition of a smaller health focused food company was SG&A spend reduction. Prior to the deal, the target spent ~$1 billion on SG&A, with the acquirer targeting to reduce spend by ~20%. By executing quick wins within SG&A, the acquirer was able to initiate synergy realization just two months after close of the transaction. Their first critical key wins were closing of facilities, consolidating the sales force and implementing spend discipline.