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Why publicizing M&A synergies is a big deal

When investors understand where a deal’s value comes from, they tend to reward companies up front.

By Andy West

Investors crave information—especially when it helps them understand the impact that a major strategic move might have on the value of their investments. A large merger or acquisition certainly belongs in that category.

Yet few companies talk openly about the synergies that are often key to a deal’s rationale, and the “rules of thumb” about how and when to share that information are based on little, if any, empirical evidence. I was struck by this recently when a client of mine who was working on a deal announcement received conflicting recommendations about how to treat synergies from four different advisors.

To get some hard answers, my colleagues and I recently looked at how synergy announcements affect a deal’s market value. First, we studied how often companies that made acquisitions in the past six years mentioned synergies when publicizing the deal. I was surprised to learn that only 1 in 5 actually did so.

As we delved further, we found that this seems to be a missed opportunity. You can read more about this research here, but I’ll share the key takeaways:

Investors reward deals whose rationales they understand: Acquirers who disclose synergies in their announcements see bigger immediate share-price spikes than those who don’t. That’s true even though, on average, these companies pay higher deal premiums. In the long run, those that announce synergies also enjoy an extra 6 percentage points in two-year excess total return to shareholders (TRS) over those that don’t mention synergies.

Acquirers who announce synergies enjoy stronger than usual returns than those who don't--in spite of higher premiums.

Explaining synergy benefits over time further boosts market rewards: As you would expect, when the projected long-term value of the synergies is greater than the premium the acquirer paid, investors are even more enthusiastic about the deal. Yet I’m surprised how few companies do the math to see if the implied synergies add up to justify the deal premium (after discounting for execution risk).

Offering updates on synergies captured pays off: Acquirers that keep the market abreast of synergy benefits as the integration proceeds are more likely to maintain the share-price boost they got at announcement time. Even those whose deals initially received a muted investor reaction often see significantly higher excess TRS two years after the transaction if they offer regular updates.

While there are limitations to so-called announcement effects, generally when investors understand where a deal’s value comes from, they reward companies up front. But you need to have a strong story to communicate, including distinctive rationales for cost, capital and revenue synergies; a timeline for when you expect them to be fully realized; and disclosure of any risks to successfully capturing them. Assuming you are have identified these elements before you pay a large amount of money (plus a premium) to acquire an asset, what’s the downside of letting your investors know? You only have the upside to lose.

Andy West is a senior partner in McKinsey & Company’s Boston office.