5 minute read 26 Jul 2023
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Mega mergers can have mega payoffs — with the right approach

Elizabeth Kaske
By Elizabeth Kaske

EY Americas Strategy and Transactions Buy & Integrate Leader

Focused on mergers, acquisitions, divestitures and large-scale transformations. Mother, golfer, runner. Enjoys yoga, wakesurfing and global travel.

5 minute read 26 Jul 2023
Related topics Strategy and Transactions Mergers and acquisitions
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Mega mergers can pay off with higher shareholder value if companies take the right approach.

In brief

  • Transformative billion-dollar-plus mergers have the potential to generate significant shareholder value.
  • An EY analysis shows mega mergers outperform Fortune 500 M&A, with the difference in TSR increasing over time.
  • Focusing on culture and defining and communicating the deal value drivers can help mega mergers reach their goals.

Transformative billion-dollar-plus mergers between large companies can be one of the most effective tools for generating significant shareholder value.

EY teams have seen the payoff for this approach firsthand, assisting one particular technology company merge with another competitor twice its size. The result: Over $150 million in synergy benefits were realized and the one-year excess total shareholder return (TSR) in the first year after closing was more than 50% higher than the relevant sector indices.

The challenge for CEOs and their transaction teams is to approach each deal with a proven approach that covers state-of-the art dealmaking imperatives.

What are mega mergers?

We define mega mergers as M&A transactions with a deal value greater than $1 billion and where the target company’s revenue is more than 60% of the buyer’s. Because of their sheer size and breadth, these mergers have the potential to be transformative in terms of achieving substantial revenue and cost synergies with scale advantages that can significantly increase shareholder value.

Our experience and analysis indicate that the growing recognition of mega mergers’ ability to generate long-term value is likely to increase the frequency of these transformational transactions. However, there is a critical precondition: executing on a clear and well-mapped dealmaking approach that addresses culture, clear performance metrics and empowering integration teams to make decisions within established rules of engagement.

How EY can help

M&A advisory: Buy and integrate

We help enable strategic growth through better integrated and operationalized mergers and acquisitions, JVs and alliances. In particular, we help companies refine their growth strategy, perform deal sourcing, conduct diligence and valuation, and implement M&A integration.

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Mega mergers generate significant shareholder value

What do the facts say about the benefits of mega mergers? We analyzed the TSR of mega mergers and Fortune 500 company M&A with deal values over $1 billion. To normalize the returns, individual S&P sector indices were used to calculate excess TSR. As summarized in Figure 1, mega mergers on average generated significantly more value for shareholders than that created by all M&A involving Fortune 500 companies with a deal value of more than $1 billion.

This result held looking out one, three or five years from the merger’s closure date. As the time horizon expanded, the dispersion in value creation increased — with mega mergers delivering 56% higher shareholder value than Fortune 500 M&A at five years past the deal’s closure.

The significant shareholder value that mega mergers can unlock is proof that these transactions can be successful at capturing meaningful scale (e.g., geographic reach) and scope (e.g., new product offerings) and building financially stronger and more competitive global platforms that can drive operating improvements and growth.

Over a one-, three- and five-year horizon, mega mergers created greater shareholder value compared with Fortune 500 companies on an average basis

Mega mergers generate significant shareholder value chart

Source: “Over a one-, three- and five year horizon, mega mergers created greater shareholder value compared with the Fortune 500 companies on an average bases” Capital IQ - July

  • Chart Description#Hide Description

    Four bar charts showing the excess TSR performance of mega mergers and Fortune 500 M&A, from announce date to close, close to 1 year, close to 3 years and close to five years. Mega mergers outperformed by 23 percentage points, 30 percentage points, 34 percentage points and 56 percentage points, respectively.

Key steps to help improve the success of a mega merger

Our work with mega merger outperformers demonstrates that to achieve quality integration, day one operations and synergies, leaders must focus on accomplishing the following five imperatives:

  1. Establish clear merger value drivers: Define, monitor and communicate success KPIs that align with the merger’s strategic and value creation logic and will successfully guide the integration process. Strong executive leadership commitment is crucial for integration alignment, support and momentum. These can be defined during diligence and refined through the integration process.
  2. Announce clear guiding principles and rules of engagement: Establish a clear integration decision-making framework and guiding principles to effectively drive integration priorities and empower teams to make rapid value-enhancing decisions. An integration leader can be responsible for planning, execution and adherence to guiding principles.
  3. Define and communicate an integration governance model that drives deal success while supporting the combined leadership team: Striking the right balance from both the acquirer and target company, the governance model and leadership structure for the deal may need to be clearly defined and agreed upon. The structure and team will be responsible for ruthless prioritization and executing on deal value drivers.
  4. Establish a disciplined integration cadence with an experienced team. This will enable integration planning and expedite execution at the close. Putting an experienced team in place with established integrations plans, rigor, reporting and escalation will enable faster decision-making on the most critical topics.
  5. Integrate a new and unified corporate culture: Take the best values and guiding principles from each legacy company to build a new cultural DNA that powerfully aligns and motivates employees to the new combined company’s mission. Effectively promote the new culture and company purpose to employees and the broader business community to help drive integration.

In our experience, companies too often spend billions of dollars on deals but do not devote sufficient resources to actual deal execution and the integration strategy. Successful execution requires investing in preparation — time, attention and resources.

Conclusion

Executing a transformational mega merger and building an industry-leading global platform requires a proven approach that aligns the key tactile planning and implementation steps with the merger’s purpose and strategic goals. A customized approach guided our work on the tech mega merger noted at the start of this article. It was integral to achieving a win-win for shareholders, employees and customers resulting in deal success.

Shelley Gupta, Pulkit Banura and Nitish Goel, of Ernst & Young LLP contributed to this article.

Summary

Mega mergers of more than $1 billion have been shown to deliver higher total shareholder return than all Fortune 500 M&A. To help reach their goals for these transformative deals, leaders need to address state-of-the-art deal making imperatives.

About this article

Elizabeth Kaske
By Elizabeth Kaske

EY Americas Strategy and Transactions Buy & Integrate Leader

Focused on mergers, acquisitions, divestitures and large-scale transformations. Mother, golfer, runner. Enjoys yoga, wakesurfing and global travel.

Related topics Strategy and Transactions Mergers and acquisitions
Upvote