On Thursday, May 23, 2024, the Private Equity Summit focused on buy & build strategies, gathering over 200 participants at KPMG's headquarters. The keynote speaker, Professor Killian McCarthy from Radboud University, addressed the high failure rates in M&A deals, revealing that 70 percent of these transactions fail – a statistic consistently supported by research.

McCarthy explained that although M&A remains a popular business tool, its success is often overestimated, especially in deals involving public companies. His analysis, based on data from over 500,000 deals, showed that many M&A deals lead to ‘value destruction’, with complex deals, cross-border transactions, and innovation-driven acquisitions having even higher failure rates – sometimes reaching 90 percent.

A key factor in these failures is unrealistic expectations of synergies, where only 60 percent of cost synergies and a mere 7 percent of revenue synergies are typically realized. Additionally, excessive premiums, sometimes as high as 500 percent, are often paid due to overconfidence. McCarthy concluded that M&A can seriously damage companies if not executed with caution and realistic expectations.

This prompted the editors of M&A, in collaboration with Ansarada, to ask dealmakers in this year's M&A Trend Survey Benelux, what steps they are taking to ensure successful value creation.

The first question focused on the biggest challenges dealmakers face in achieving value creation.

Three key challenges emerged. Topping the list, cited by 54 percent of respondents, is the overestimation of synergies – a finding that aligns closely with McCarthy’s research. A close second is leadership and management issues, while integration problems came in third, mentioned by 40 percent of respondents. Cultural issues are also regularly mentioned – often in relation to integration problems.

We asked dealmakers to elaborate on why these challenges are particularly difficult to navigate during dealmaking.

Overestimating synergies was identified as the most common challenge, with 54 percent of respondents highlighting this issue. Many dealmakers are overly optimistic about the benefits of merging two companies, underestimating the time and effort needed to realize these synergies.

Niek Kolkman, Partner and Head of Transaction Services at KPMG, explains: “There is often too much optimism about synergies, both in terms of their scale and the speed at which they can be realized."

Jan-Hendrik Horsmeier, Partner at Clifford Chance, further emphasizes the difficulty, saying, "Overestimating synergies means believing you can achieve greater efficiency from combining two companies than is realistic. For example, people often think they can cut costs by merging departments like legal or IT, but in practice, it doesn’t work that way. It takes more time and costs more money than anticipated."

Marco Gulpers, Head of Corporate Finance M&A Netherlands at ING, points out that thorough due diligence is critical in managing these expectations. He also stresses the importance of focusing on current performance before closing a deal. "With greater market volatility, budgets set at the beginning of the year are often under pressure by the third quarter. This highlights the need to focus on current trading and manage synergy expectations accordingly."

The consensus among experts is clear: synergies are often overestimated, and this can lead to disappointing post-deal results, significantly impacting return on investment.

Leadership and management are seen as pivotal to value creation in M&A transactions. Many dealmakers agree that having the right leadership in place is essential for success, especially when it comes to executing growth strategies and integrating teams.

Hans Swinnen of 3d-investors notes: "Leadership is key. Having the right management in place is crucial – people who align with the company’s DNA and can drive the business forward."

Ida Kuijken, Partner at Fortino Capital, echoes this sentiment, emphasizing the need for visionary leadership. "To accelerate growth and execute a value-creation plan, you need strong leadership – people who inspire others and can execute a clear vision."

Franck Marra, Partner Pontex Investment Partners, adds: “In all companies, management, leadership and direction determine a large part of value creation. If there are problems with this, it will have a major impact.”

Sander Neeteson, Head of Corporate Finance at ABN AMRO, highlights the importance of retaining key talent post-deal. "Value creation always starts with people. Without the right people, motivated and skilled, achieving value creation becomes very difficult. Losing key figures can directly impact a company’s value, as they carry crucial knowledge and customer relationships."

Clearly, leadership and talent retention are critical factors that can make or break the success of M&A deals.

Integration issues were another common challenge cited by dealmakers, with 40 percent acknowledging difficulties in merging companies. Cultural differences, misalignment in working styles, and team dynamics can all hinder the integration process.

Rob Faasen, Director at Risk Capital Advisors, remarks, "Cultural differences, differences in vision, and team dynamics make integration a major challenge."

Hans Swinnen of 3d-investors agrees, stressing the importance of addressing cultural differences. "If integration problems arise, it’s often because there wasn’t enough focus on cultural differences. Addressing these is essential."

Marc Habermehl, M&A Lawyer at Stibbe, highlights the importance of talent retention in successful integration. "Following strategic transactions, key people may leave because of changes in leadership, reporting structures and company culture. Keeping key players engaged during this transition is critical to the integration process."

Marcel Vlaar, Partner at RSM Netherland, points out the particular challenges in the accountancy and tax advisory sectors, where the integration of smaller firms into larger ones often leads to talent loss. "In practice, the integration of significantly different-sized companies doesn’t work well, and talent from the acquired firms often leaves post-acquisition."

Effective communication during the post-deal phase is also crucial, as highlighted by Nancy De Beule, Partner at PwC. "Clear internal communication is essential to keep everyone motivated and aligned with the group's objectives. Poor communication can lead to a drop in motivation, causing employees to leave or become less productive – both of which are detrimental to successful integration."

The insights from dealmakers in the Benelux underscore that realizing value creation in M&A deals is no easy task. Overestimating synergies, leadership and management issues, and integration challenges are the top obstacles that can hinder post-deal success. Addressing these challenges with thorough planning, realistic expectations, and strong leadership will be key to achieving successful outcomes in future transactions.

In the following article, best practices are discussed that are used to overcome these challenges.