This section aims to raise a fuller discussion on important attributes and assumptions of the thesis, thereby critically reviewing the value creation derived from the realization of synergies. The value cre-ation will be challenged in respect to critical value drivers, conditions of the macro-environment and integration costs.
The determination of synergies arising from M&A activities is a field with many challenges. Both profes-sionals within advisory and academic research agree that even with full access to insider information, the determination of synergies is a difficult field to grasp and fully foresee (McKinsey, 2010; Damodaran, 2005). Therefore, it should be stressed that the estimated value of synergies must be interpreted with even greater care, since it is prone to limitations of both an unpredictable future and the external per-spective where only public data is applied.
In addition to the challenges that the estimation of synergies in general create, this specific case is complexified with the introduction of a new business model. This thesis wishes to answer the problem statement of how ISS A/S can create value through synergies from an acquisition outside their current in-dustry. In order to create value through synergies from the acquisition, it was found necessary to change the current business model of XING. Thus, the estimated value of syner-gies partly stems from the profitability of the new business model and is therefore not a clear synergy in accordance with the definition in Section 2.3.2. The twofoldness of the
cap-tured value makes it difficult to distinguish between the created value caused by the direct synergies, and the value created from the profitability of the new business. However, it was indicated that no mat-ter where the value stems from, ISS can indeed create value from an acquisition outside their current business. Moreover, the analysis showed that the potential of the new business plan was enhanced by the synergies emerging from the strategic fit of the companies. Thus, the value creation from clear syn-ergies and the business model is intercorrelated, entailing a broader understanding of the concept of synergy. Having this in mind, it is important to discuss what could possibly affect the realization of these synergies in order to challenge the findings of this theses.
Figure 28. Estimated Value of Synergies.
The synergies primarily affected the expected EBITDA-margin and the forecasted level of revenue growth. The expected EBITDA-margin and the revenue growth are best-guess estimates, and it is there-fore important to test the value of synergies in both a more pessimistic and optimistic scenario. One of the renowned pitfalls of acquisitions is that companies pay too high premiums in their desperation to grow through acquisitions (Kim et al., 2011). In order to prevent opportunistic expectations of growth, conservative estimates of future prospects in the base case scenario have been applied. The combined value with synergies has improved 19.9% compared to the combined value without synergies. From Table 21 it is clear that a decrease in the revenue growth of 1%-point in the terminal period will still create shareholder value, ceteris paribus.
Table 21. Sensitivity Analysis - Synergies.
The same goes for the EBITDA-margin and the table reveals that only in an extremely pessimistic sce-nario, where both measures drops simultaneously, it will lead to the acquisition destroying value.
Therefore, it seems reasonable to conclude that the acquisition is value creating even when lowering the expectations to the revenue growth and the EBITDA-margin.
Moreover, the realization and value of synergies are influenced by changes in the macro-environment.
In this thesis, a great focus has been placed on the analysis of external factors, in order to fully under-stand the potential of the acquisition. Yet, some of the factors are more or less unpredictable, e.g. the development in AI technology. One might argue that a platform targeting Blue-Collar Workers becomes superfluous if robots are to disrupt the labor market in the future. However, since lower birthrates are expected whereby the labor market will decline in numbers, it seems unlikely that this decrease should be completely balanced out by the AI technology.
Another macro factor, entailing a potential effect on the profitability of the new business model, is the competition in the market for networking platforms. The current rivalry in the new industry was as-sessed low which was an important reason for the expected above-average revenue growth. Yet, it should be stressed, that the profitability of the new business model will decrease if competition in the industry intensifies. However, looking at the historical performance of the similar industry of NP target-ing professionals, it seems unlikely that competition will increase rapidly due to same-side networktarget-ing effects. Since ISS gains a first-mover advantage, the same-side networking effects will make it difficult for competitors to get a foothold in the market. On the other hand, there is a risk of other platforms, not currently targeting Blue-Collars, expanding to this segment. In the event of this, the rivalry in the indus-try will increase and thereby drive down the profitability prospects. Take LinkedIn as an example, they possess the know-how, technology and capital to invest in a NP for Blue-Collars. Even if this happens, ISS is expected to possess a first mover advantage in the new industry. In connection with this, ISS could explore the opportunities to dispose off the new platform in the case of progressive rivalry in the indus-try. The discussion of possible changes in the external factors are therefore not considered to undermine the fact that the acquisition creates shareholder value.
Looking at the internal factors influencing the value of synergies, several M&A advisors emphasize the importance of post-acquisition integration, including the merger of corporate cultures. The integration becomes highly critical in the process of securing the realization of synergies wherefrom integration costs emerge (EY, 2013). Integration expenses can be costs associated with the integration of tangible resources, e.g. IT-systems and accounting practices, or the merge of human resources. The analysis showed that some of the synergies emerged from the combination of valuable human resources and capabilities. Thus, it can be argued that it is extremely important to consider the integration expenses regarding the merge of human resources. However, the majority of XING’s business operations are kept separate from ISS, whereby most of the issues revolving around human resources are avoided. Even though this indicates a low level of integration costs, one could argue that humans are creatures of habit, and the integration of the business operations, including the necessary restructuring, might result in dissatisfaction from employees.
This possible dissatisfaction will, most likely, result in integration costs including the payment of high severance packages and the loss of talent. Contrary to the NP and the E-recruiting services, the Event Management services are merged with ISS’ IFS solution. The inclusion of the Event Management services in ISS’ portfolio requires the employees’ willingness to adapt to the corporate- and management culture of ISS. It is to be expected that a technological firm as XING with relatively few employees, embraces values reflecting more flexibility and creativity, than a big corporation as ISS. The ISS culture is expected
to reflect some degree of bureaucracy, and the merge of these values could, very likely, result in a culture clash. However, since XING is a German-based company, their corporate culture is expected to reflect stricter working procedures resulting in XING’s culture being more compatible with the culture of ISS.
The discussion of integration expenses deems it necessary to investigate the effect that integration costs will have on the value of synergies. From a comprehensive survey on M&A activities, Ernst & Young, together with the Mergermarket Group, estimate an average synergy realization cost of 14% of the ac-quisition price (EY, 2013-a).
Table 22. Cost of Realizing Synergies.
Even though integration costs will drive down the value created from the synergies, taking the markup of 14% into account, it is clear that there is still value added from the acquisition. More precisely, the estimated value with integration costs results in an improvement of 17.1% when comparing the com-bined value with synergies to the comcom-bined value without synergies.
When determining the value of the combined entities, it was assumed that the acquisition premium was 33%. However, the size of this premium is questionable since M&A researchers point to various factors influencing the premium, such as the competition between acquires. It could be argued, that XING’s ca-pabilities within the technological sector make them an attractive acquisition target for several buyers, since the know-how within technology is highly demanded in the market of today. If acquirers engage in a bidding war of XING, this will drive up the acquisition premium. However, the chosen premium of 33%, was in the high end of the proposed premiums in Section 9.4.1 and is therefore deemed to be a rather conservative estimate.
The discussion above touches upon the various pitfalls of M&A by critically reviewing the realization of the synergies and the estimates derived in the analysis. The discussion showed that it seems reasonable to conclude that ISS can create value by acquiring a business outside their current industry.