The Ultimate Guide to Synergies in M&A [Types, Sources, Model]

Types of Synergies in Mergers and Acquisitions

Before we can begin a dive-deep into examples of synergies in mergers and acquisitions we should begin by defining synergy. Synergy is defined as the interaction or cooperation of two or more organizations to produce a combined effect greater than the sum of their separate efforts. Whether you are conducting an M&A process on the buy-side, or a sell-side M&A process, synergies are immensely important. They are the driving force behind most mergers and acquisitions. The following are sources of synergy in mergers and acquisitions:

Here are M&A Synergies Examples

1. Revenue Synergies‍

Revenue synergy is based on the premise that the two companies combined can generate higher sales than the sum of their individual sales. It should be noted, however, the research shows that capturing revenue synergies takes, on average, a few years longer than capturing cost synergies. More specifically, McKinsey & Company notes challenges, such as developing appropriate targets and executing new workflow and sales strategies across all functions, make revenue synergies more difficult to capture.

2. Cost Synergies

The merging of two companies can create cost-savings due to:

  • Shared information and resources. Similarly, increasing the acquirer’s access to new research and development can allow for advancements in production that yield cost savings.
  • Lower salaries. While layoffs are not always part of mergers and acquisitions, they are associated with the combining of two companies as most companies do not need two of each C-suite position and some staff positions. The elimination of some heavy-hitting salaries can result in cost savings.
  • Streamlined processes. Streamlined processes can save time and money as they have the potential to make the new company more efficient. Additionally, supply chains can become more efficient and the new, larger company can usually negotiate better prices from suppliers.

3. Financial Synergies

While these synergies are known for being a bit deceptive, there can be tax benefits and loan benefits associated with the combining of two companies. Financial synergies are often the most evaluated in the context of mergers and acquisitions. This type of synergy includes the improvement of financial metrics such as revenue, debt capacity, cost of capital, profitability, etc. Financial analysts and valuation analysts will typically work together to identify potential financial synergies.

How to Create Synergy Realization

As we often say, no one wants a deal that only looks good on paper; therefore, synergy realization is essential. In fact, while deals can fail for a variety of reasons, one considerable reason is the inability to capture predicted synergies. With this in mind, here is how to maximize your deal’s synergy realization:

How to Create an M&A Synergy Model

Synergies are often calculated by adding the net present value (NPV — the value of the new company) with the premium (P). Additionally, when developing an M&A synergy model consider the following categories as the cornerstones of your model: how to sell, what to sell, and where to sell. Examine where the opportunities to capture synergies and create value exist in these three categories.

Final Thoughts

No matter what the merger and acquisition synergy is for a particular deal, it must be considered throughout every stage of the deal. Synergies can often be easy to identify but hard to realize; therefore, it is critical to understand when the deal closes, there is still a great amount of work to be done to yield the identified benefits. Post-close synergy work needs to be planned early and carried on months, sometimes even years, after a close.

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