The Ultimate Guide to Synergies in M&A [Types, Sources, Model]
Synergies are the fruit that M&A deals hope to capture. Understanding the types of synergies in mergers and acquisitions, analyzing them on paper, and maximizing them once the deal has gone through are essential to getting the most from your M&A transactions. In this article, we will increase your synergy realization by discussing examples of synergy in mergers and acquisitions, as well as provide insights and strategies related to their capture.
Let’s take a look at synergy meaning first.
There are many examples of successful company mergers and acquisitions, and the reason behind their success is the identification of synergies early on.
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.
Revenue synergies result from:
2. Cost Synergies
The merging of two companies can create cost-savings due to:
- Marketing strategies and channels. Increased marketing channels and resources may result in reduced costs.
- 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.
Revenue, cost, and financial are the three most common acquisition synergies examples. The goal of any merged firm is to grow the synergies and hope that they reach their full potential post-close.
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:
To achieve synergy, be sure all stakeholders and team members stay focused on the predetermined objective throughout the M&A process. Adopting a more Agile M&A practice can help with this as with Agile the focus is always on the main objective rather than plowing through a long list of tasks that may or may not be necessary (and can cause deal fatigue).
Because the first year of integration is critical for capturing synergies, it is wise early on to prioritize synergies that are “easy” to capture and will produce the highest return. More specifically, these “easy” value drivers should match your overarching goal, have the ability to be tracked, and have a high probability of success.
Poor integration practices and failure to properly plan for integration when diligence begins often result in lost synergies.
Employees are what make companies successful, and when a merger or acquisition takes place, key employees are often targets for recruiters to poach. In order to retain key personnel and create a comfortable environment for employees of both companies, leadership must focus on culture and change management.
Finally, when trying to capture different types of synergies, company leaders must find a way to track the progress of the different synergies involved in their deal. A centralized location for this tracking, such as an M&A project management platform, is recommended.
In order to capture revenue synergies (remember these often take longer to capture) it is critical to complete a deep analysis of each customer relationship. When analyzing each customer, specifically consider: how long you’ve had a relationship with the customer, how strong the relationship is, what you currently sell to the customer, and what other services and products does the customer use that you could provide. The sales team should be part of this customer study as it will need to understand the strategy and synergy goals.
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.
Additionally, using an M&A project management platform, or another tool such as Excel, can be helpful in creating synergy valuation. For example, a tool such as DealRoom’s M&A deal platform, is designed to be used before a deal even begins. Teams can use features like pipeline management to access company information that is vital in determining synergies. Another option is to use a valuation spreadsheet, compare the inputs and outputs of the acquirer, the target, to the combined inputs and outputs if the two companies were to merge.
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.
Additionally, while practitioners must be ambitious in identifying and outlining expected deal synergies, it is vital that they are realistic and do not overestimate the deal’s potential synergies and value drivers.
Originally published at https://dealroom.net.