Companies are increasingly paying too much for takeover targets, a survey has claimed.
Caught up in the frenzy of the highly competitive mergers and acquisitions market, they are agreeing increasingly high prices for assets, paying almost half of the synergy benefits in the purchase price, according to new research from accountancy firm KPMG.
"As companies pay more for their assets, the room for error in delivering the anticipated benefits of a deal is diminishing," it says.
"Management teams, who frequently have to pay half the anticipated synergy benefits to put together successful bids, are now being faced with increasing challenges in delivering value once they have landed the deal."
KPMG's Transaction Services practice found on average 43 per cent of the synergy target identified by the purchaser is now included in the purchase price. This means acquirers have to deliver almost half the synergies just to break even, yet nearly twothirds failed to fully realise.
John Kelly, head of KPMG's Integration Advisory practice, said that winning the deal was only half the job.
"Waking up on the morning after clinching the deal, the chief executive is going to be worried about how to make the value stick and the finance director will want early assurance on exactly what he has bought.
"The celebration party should wait until the benefits that motivated their actions are delivered," he said.
The market for mergers and acquisitions has changed radically over recent years. The sell-side now runs tight auctions with tight deadlines and deal-focused private equity players will more often than not be amongst the line up of bidders.
"Any purchaser seeking to transact deals in this environment is likely to have to make decisions with limited time and access," noted Mr Kelly.
An assessment of the share performance of companies that conducted such deals found that over 40 per cent were 'value neutral' when compared with their market.
"For a business protecting its strategic position in a cutthroat business environment, maintaining their own against the marketplace can be a good result," said Mr Kelly.
In closing a deal, the majority of companies were subject to a regulatory period of about three months.
After completion, it took on average a further nine months for the companies to feel they had full control over the acquired business.
"The survey shows that post-deal control is important to arrest any value leakage," Mr Kelly continued.
Although a difference in organisational culture was the second biggest post-deal challenge, 80 per cent of companies were not very well prepared to handle this. "More than ever, what you do post-deal will define success or failure. The deal does not in itself create value," said Mr Kelly.
The report also found that more deals enhanced value than reduced value, despite increased competition in the M&A market, although nearly two-thirds of acquirers failed to realise their synergy targets.