Strategic M&A Value Creation: Key Performance Indicators

Mergers and acquisitions (M&A) are vital strategic moves for companies aiming to expand, diversify their offerings, or secure a competitive advantage. Especially in the global market, mergers and acquisitions (M&A) have emerged as the most successful strategic alliances for business, product, and geographic strategies (Hossain, 2021).? According to McKinsey (2020), companies that excel in M&A consistently align their M&A deals with their long-term strategic goals. This alignment emphasizes the importance of using strategic performance indicators to measure the effectiveness and success of M&A efforts. This article investigates five performance metrics related to strategic M&A success.

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Revenue

According to Yang and Ma (2022), mergers and acquisitions (M&As) could lead to an initial boost in revenue growth, especially in the short term. However, the research indicates that M&As often result in immediate financial gains, and the long-term effects on revenue may diminish or even fall in the long run. Therefore, successful integration is vital to ensure long-term M&A success, which relies on effective communication and human resource management (Fang, 2022). Three drivers of revenue growth post-merger are the expanded market share, economies of scale, and the creation of cost and operational synergies (Harumová, 2020). Furthermore, while economies of scale and synergies represent considerable advantages of cross-border mergers and acquisitions, their efficiency may be affected by the institutional environments of both the target and acquiring countries (Yu et al., 2020). In developed markets, the degree of revenue growth is frequently limited by efficient operational activities and established regulatory frameworks. In contrast, in less developed markets, organizations have the opportunity to leverage institutional weaknesses to realize synergies, reduce costs, and enhance their market share more effectively (Yu et al., 2020). A study by Kyriazopoulos and Aphrodite (2023) shows the importance of M&As in the banking industry, including a case study on the Piraeus Bank's acquisition of the Agricultural Bank in 2012. The study highlights that M&As can be used in banks' strategies to realize growth, improve overall efficiency, expand to new markets, and strengthen their competitive position. Another study focused on the Indian IT market by Kar et al. (2020) highlights that M&As positively impact revenue, especially when both domestic and cross-border deals are considered. However, the study stated that while revenue increases, M&As can negatively impact operational performance, affecting the company’s EBITDA due to integration costs. Therefore, it is crucial that firms implement effective integration strategies and manage post-merger synergies carefully to mitigate operational disruptions and optimize the financial benefits of M&As (McKinsey, 2020).

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Economic Value Added (EVA)

Research by Gulati and Garg (2022) found that mergers and acquisitions can significantly boost the economic value added (EVA) of acquiring firms in the long term. EVA is a metric used to evaluate a company’s financial performance by determining the value it generates above the required return on its invested capital (Chen, 2024). In this way, EVA serves as a crucial strategic metric, as it reflects the true economic profit of a company while considering the cost of capital. However, EVA is most effective for asset-heavy companies and may not be as suitable for firms with significant intangible assets, such as service-focused companies (Chen, 2024). According to Mun et al. (2021), companies that focus on operational efficiency and cost control practices experience improvement in EVA, which could serve as a metric used to assess whether a merger has successfully generated long-term value for shareholders. Furthermore, EVA is a crucial metric for assessing the strategic performance post-M&A because it focuses on sustainable value creation beyond immediate revenue increases. A study by Williams et al. (2020) shows that M&A transactions led to a 26% improvement in hospital capital expenditures between 2012 and 2015, which is also related to an improvement in EVA post-merger.

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EBITDA

EBITDA (Earnings before interest, taxes, depreciation, and amortization) is crucial to determine during the due diligence phase of M&A since it provides a clear view of a company’s operational profitability (Calabrese & Rafferty, 2003). Especially for the valuation, EBITDA becomes an important metric for identifying whether a company is overvalued or undervalued (Dierks et al., 2017). After an acquisition, EBITDA becomes an essential strategic measurement for evaluating the success of integration, the realization of synergies, and the overall financial performance of the merged company. However, Rozenbaum (2014) stated that only focusing on EBITDA can lead managers to overinvest in capital, which results in excessive debt. Whether EBITDA is vital for assessing the strategic performance of a business, it should be balanced with other financial indicators such as depreciation, amortization, and cash flow measures (Nissim, 2017). Relying solely on EBITDA can overlook significant costs that affect long-term sustainability and profitability. Therefore, it is vital that EBITDA is used and balanced with other financial metrics, such as free cash flow return on investment (ROI), to avoid overemphasis on short-term gains (Nissim, 2017).

Cultural Integration Success

Cultural integration is a crucial strategic performance indicator in M&A (Denison et al., 2011). Especially during cross-border M&A transactions, it is vital to manage cultural integration by identifying the differences in corporate cultures. Cultural integration plays a critical role as a strategic performance indicator in M&A (Denison et al., 2011). Effective management of cultural integration is crucial in cross-border transactions, requiring a clear understanding of the differences between corporate cultures. Research conducted by Z. Yu and Yu (2022) evaluates the success of cultural integration by examining key variables such as identity, cultural differences, values, and ideologies. These factors are used to assess how effectively individuals and communities adapt to different cultural environments. For example, language barriers and value conflicts are key signs of integration challenges. Contrary to this, successful integration is reflected by the minimization of these obstacles and the extent to which individuals’ values and ideologies align with those of the host society, signaling both sociocultural and psychological adjustment. Furthermore, collaboration, communication, and decision-making between different cultures are essential factors that influence the success of cultural integration (Denison et al., 2011). According to Fantaguzzi and Handscomb (2024), companies that effectively manage cultural integration demonstrate a significantly higher likelihood of achieving their synergy targets. The research shows that 75% of organizations with strong cultural management meet or exceed their cost synergy goals, compared to only 48% of those with ineffective cultural management. Furthermore, 74% of companies that effectively manage their culture meet their revenue synergy objectives, whereas only 45% of those lacking successful cultural integration. This is supported by a study by Coisne (2011), which emphasizes that the success of an M&A is closely aligned with the management of differences of cultures. The study highlights that cultural integration can either be an asset or a liability, which depends on how effectively management is managing cultural challenges. Companies that succeed in addressing cultural differences can use cultural integration as a strategic long-term asset.

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Customer Retention and Satisfaction

According to Gates and Very (2003), customer-related factors such as customer retention and satisfaction serve as vital variables for examining the integration process and the success of the whole M&A transaction. Customer retention, also known as brand loyalty, is expressed in the customer retention rate, which measures the share of repeat purchasers from customers. Customer satisfaction can be measured through survey tools, which can be expressed in customer satisfaction scores (McColl-Kennedy & Schneider, 2000). Research (Degbey, 2015) indicates that customer retention may serve as a strategic performance indicator and is associated with long-term innovation and value creation. The capacity to retain these customers enables the acquiring firm to fully realize the strategic advantages of the acquisition over time, contributing to the overall success of M&A. A study by álvarez-González and Otero-Neira (2022) shows that product or service quality is an essential factor influencing customer loyalty post-merger. Other related variables are the image, services, products, prices, and sales channels.

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Conclusion

Strategic KPIs are crucial in assessing whether an M&A transaction meets its goals and provides real value. Key metrics such as revenue growth, economic value added (EVA), and EBITDA margin offer crucial financial and operational performance insights. Integrating these KPIs into M&A strategies allows companies to improve the degree of value creation for all stakeholders, including shareholders, employees, and customers. Strategic M&A KPIs are vital for establishing a solid foundation for growth and ensuring M&A success.

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