As mergers and acquisitions continue to dominate the headlines, the movers and shakers involved often talk about “synergies,” those value-add benefits that can cut costs. Multichannel Merchant’s Mark Del Franco caught up with Christian Feuer, principal of Briarcliff Manor, NY-based consultancy International Retail Acquisition Group, to discuss the role of synergies when putting together a deal, something Feuer knows a thing or two about: His holding company, Pangea Holdings, purchased the Motherwear catalog in 2005 and was instrumental in Golden Gate Capital’s 2004 acquisition of Spiegel Catalog and Newport News.
What should marketers be evaluating when it comes to synergies?
Opportunities exist in several areas: procurement for services and materials; consolidation of operating facilities with elimination of fixed costs and reduced variable costs through economies of scale; or even an exchange of successful processes or experiences. These might sound boring, but most failures are a function of ignoring the obvious.
In your opinion, if a deal promises few or no synergies, is it still worth doing?
Absolutely. Acquisitions should not be driven by the potential of synergies but by a promising business plan or strategic fit. Synergies are the icing on the cake. An acquisition justified solely through synergies is high risk.
What are the first signs that synergies may not be working? What typically spells disaster?
Implementation of inferior technology or processes coming from the acquiring company; increased and unexpected complexity in the implementation; high implementation cost; and last but not least, resistance by the acquired company’s management. But mostly it’s the ignorance and arrogance of the acquiring management.
What are the paths to the successful acquisition of a business?
You have to understand what you are getting in to. In the case of a successful business with a growth plan, Is the presented business plan viable? What is the chance of execution according to plan? What is the chance of failure? What are the risks? What are the seller’s motivations to sell? Why don’t they execute the plan themselves?
In the case of an underperforming business, you have to ask, Is the poor performance the result of poor management or of market conditions? Does the existing management have the depth and breadth to implement the required changes?
What’s the most important rule of M&A?
Never pay too much. It is more important to pass on a deal than be overleveraged. For example, when Spiegel Group purchased Avon Fashions [which it renamed Newport News] from Avon in 1993, the capital required to service the debt was too high after the market slowed because of the first Gulf War. The current sale prices for direct marketing companies financed through debt might be okay for now, but a change in the market driven by external forces can create a similar situation. This is less of a problem for a strategic buyer — assuming that the strategic buyer’s core business is not overleveraged. Let somebody else pay that price, and wait for the opportunity to come around again.