Investment Knowledge: 3 Signs That M&A is Done Right
Understanding the market reaction
Mergers and Acquisitions or M&A are among the boldest strategic moves a company can make. While headlines often focus on the size of the deal or the brand names involved, it is important to understand some concepts to assess whether an acquisition will create value for shareholders or not.
In this article, we will explore the 3 key elements that signal a successful acquisition. We will also examine the major risks that can derail an M&A deal and illustrate these ideas with a real-world example.
First sign: operational synergies
One of the most immediate and often easily measurable signs that an M&A is being executed well is the realization of operational synergies. These are efficiencies and cost savings that arise from integrating operations across the two firms.
Well-executed operational synergies typically include:
Consolidation of overlapping functions, such as HR, finance, and IT systems
Shared supply chain and logistics, leading to better bargaining power and reduced redundancy
Streamlined manufacturing or production processes, especially in asset-heavy industries
These elements tend to increase the net profit margin / increase profitability. These synergies are often communicated and good companies report progress in their quaterly reports (for major acquisitions at least).
Second sign: commercial synergies
Beyond internal efficiencies, the best M&A deals generate commercial synergies. Unlike operational synergies, commercial synergies tend to increase top-line growth. These synergies emerge when the combined company leverages complementary assets to expand market reach or accelerate product innovation.
Key commercial synergies include:
Cross-selling opportunities (sell one company's products to the other's customer base)
Expanded geographic footprint by accessing new markets and customers previously out of reach (due to regulation, increased size, requirements for tenders, …)
Enhanced brand power with greater pricing leverage or consumer awareness through brand consolidation
For example, when a software company acquires a complementary SaaS provider, it is not just about integrating platforms, it is about selling more to each other's clients, bundling services, and creating a stickier customer ecosystem.
Accelerating growth after a M&A often means that there were commercial synergies. 1 + 1 = 3.
Third sign: multiple arbitrage
It is also possible to generate immediate shareholder value through what's known as multiple arbitrage, a strategy that takes advantage of valuation differences between 2 companies.
Consider a (very) simplified example:
Company A earns $50M in net profit and trades at a PE of 20x, giving it a market capitalization of $1B
Company B earns $20M in net profit and trades at a PE of 12x, resulting in a market cap of $240M
If Company A acquires Company B for $240M and the combined entity is valued at the same PE of 20x, total profits would rise to $70M ($50M + $20M) leading to a combined market cap of $1.4B. That is a $400 million increase in market value for an acquisition that cost only $240M, effectively creating $160 million in shareholder value without factoring in any other synergies.
While market valuations can fluctuate, this kind of multiple arbitrage is a powerful lever, especially for serial acquirers that maintain high valuation multiples and consistently purchase targets at lower ones. Over time, this strategy alone can be a significant driver of long-term shareholder returns.
An example: Paxman acquisition of Dignitana
The goal of this article is not to present Paxman, if you are interested in this company you can read my deep dive!
Paxman announced 2 montha ago, a recommended offer to acquire all shares in Dignitana, its major competitor, valuing the company at approximately 153M SEK.
Here are the 2025 P/S (price-to-sales) of each company:
Dignitana: 1.5x (100M SEK sales for 150M SEK acquisition)
Paxman 3.2x (370M SEK sales for 1,400M market cap)
Of course, buying the #2 when you are the #1 have other advantages:
Operational synergies (IT, sales, HR, finance, etc)
Commercial synergies (creating an almost monopoly in this sector)
Avoiding big players to buy Dignitana and create a stronger competition
Only time will reveal the full impact of this acquisition, but for now, it appears to tick many of the right boxes.
Key risks to watch for
Despite the strategic promise of M&A, the failure rate is alarmingly high: studies estimate that between 50% and 70% of deals end up destroying shareholder value. Understanding the risks can help investors better evaluate whether an acquisition is likely to succeed or stumble.
Overpaying for the target. Valuations often factor in expected synergies, but these are notoriously difficult to quantify and realize. Paying too much up front can erode any potential upside
Ineffective integration. Merging operations, systems, and teams is complex. Poorly managed integration processes often lead to inefficiencies, delays, and unexpected costs
Weak communication. Both internal and external stakeholders need clarity during a transition. A lack of timely, transparent communication can cause confusion, erode trust, and lead to talent attrition or market uncertainty
Cultural misalignment. Even when the financials make sense, incompatible company cultures can create friction that undermines productivity, morale, and long-term cohesion
Operational disruption. During the integration phase, attention can drift from core operations, affecting performance and customer satisfaction
Regulatory hurdles. Deals in heavily regulated industries or across jurisdictions can face delays, unexpected conditions, or even outright rejections from authorities
Conclusion
M&A is a high-stakes game, and not all deals pay off. But the best ones are more than just headline-grabbing: they deliver real synergies, drive commercial momentum, and lead to shareholder value creation.
As investors, learning to spot these 3 signs can help you distinguish between flashy deals and strategic home runs and align your portfolio with companies that know how to grow the right way.
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