The latest analysis from McKinsey & Company (McKinsey) reveals that over the past 12 years approximately half of oil and gas M&A deals have lost shareholder value.
The announcement comes as part of McKinsey’s recent research, which expects a new M&A wave driven by record cash flow in North American upstream exploration and production (E&P).
McKinsey notes there have been roughly 750 upstream deals with a transaction value of at least $100 million. However, most deals greater than $1 billion in size have not created value. This performance reflects many factors, including the effectiveness of pre-deal diligence, asset-performance uncertainties, pricing outlooks, and transaction management to deliver value.
The insights showcase how E&P companies can maximize value for their shareholders through raising synergy aspirations beyond general and administrative expenses and also publicly committing to synergy targets. Analysis of 776 deals across the oil and gas sector showed that companies who announced synergy targets outperformed those that did not by seven percent in total return to shareholders over a median of two years.
Steve Miller, Partner at McKinsey said: “While the next wave of mergers and acquisitions may differ from previous waves due to evolving macroeconomic conditions, the importance of value delivery remains critical. Many upstream firms view acquisitions as a ‘bread and butter’ activity that they do well. However, the reality is that many deals don’t create value for shareholders. Clever decisions need to be made by companies to maximize the value from their deals and build resiliency for the future.”
McKinsey’s research shows that often upstream deals have constrained synergy goals to the low-hanging fruit of general and administrative (G&A) reductions. However, operational synergies are almost always larger than G&A savings, often by a factor of three or more. To maximize the ability of a deal to create value and move beyond G&A, companies can take two important steps, including:
- Raising synergy aspirations beyond G&A expenses by adopting a transformative approach to value capture, systematically pursuing synergies across financial categories and across functions, including operations.</li
- Publicly announcing synergy targets to mobilize the organization to drive performance. Internal targets are up to 200 percent higher than those publicly announced, and executive teams are encouraged to overcome difficult decisions.
Tom Grace, Partner at McKinsey concludes: “The most successful mergers are usually those that open the aperture across revenue and production, operating costs, and capital efficiency in addition to G&A, and use the merger as a “moment in time” to catalyze performance improvement across both entities.”
To read full article: https://www.mckinsey.com/industries/oil-and-gas/our-insights/beyond-g-and-a-maximizing-synergy-from-oil-and-gas-mergers
