Synergies Definition, Types + Examples in Business
Achieving these synergies tends to be easier on paper than in practice. Whether you are conducting M&A transaction on the buy or sell-side, synergies are immensely important. Overall, synergy is the potential financial benefit achieved when two companies merge. 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. Hopefully, the combination of the two creates a strong position in the market and results in higher profits. Revenue synergies are based on the concept of two companies increasing total cash flows after their integration compared to the sum of their cash flows when operating separately.
Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies. Revenue synergies most commonly occur between companies that sell in the same industry. Additionally, using a M&A project management platform, or another tool such as Excel, can be helpful in creating synergy valuation. Just as successful synergies are at the heart of all good M&A, the opposite can be said of value destructive M&A.
Examples of goodwill include a company’s brand recognition, proprietary or intellectual property, and good customer relationships. A centralized location for this tracking, such as an M&A project management platform, is recommended. Moreover, M&A synergy benchmarks for the deal should be created and revisited. In order to retain key personnel and create a comfortable environment for employees of both companies, leadership must focus on culture and change management. Poor integration practices and failure to properly plan for integration when diligence begins often result in lost synergies. Synergy, most commonly used in M&A, refers to the additional value created by a transaction.
Negative synergy occurs when the combined firm’s revenue is lower than the value of each company operated separately. For example, company A sells cheap new laptops, and company B sells used laptops. Company A is a small organization with lower capital, but it still competes with company B, which is a big corporation that seeks possibilities to get more revenue. 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.
If you think there are $100M of synergies that can be unlocked from a deal between cost, revenue, and financial synergies, it’s good to aim for them. However, history shows that it’s a much better idea to base acquisitions on realistic rather than ambitious synergies. For example, the merger of two consumer goods producers could bring revenue synergies through a complementary product range and cost synergies through savings in warehousing and distribution. It is sometimes overlooked that generating synergies is not limited to the sphere of mergers and acquisitions.
What is DealRoom?
If revenue synergies can be considered to be value added at the front-end, cost synergies might well be considered value added in the back office. Revenue synergy is based on the premise that the two companies combined can generate higher sales than the sum of their individual sales. Such strategic actions create economies of scope by exploiting each party’s resources and capabilities. Synergy is a concept that the combined value and performance of two companies after their integration will increase compared to the sum of the separate entities. The idea is that the combined efforts of two or more entities are greater than those entities alone.
As two US oil companies, they possessed several assets that were essentially overlapping each other and could be sold, including refineries and 2,400 service stations. In addition, a total of 16,000 people were laid off, allowing the company to generate cost synergies of over $5 billion. Similarly, increasing the acquirer’s access to new research and development can allow for advancements in production that yield cost savings.
What Areas Is Synergy Realized?
As a result, they not only create creative content but are also communicative. Synergies in M&A are often easy to imagine and plan but harder to implement. It always takes time to gain awaited results, and all the parties involved in synergy analysis should realize that. Merger and acquisition synergies should be well-thought-out during every stage of the deal. Let’s explain cost synergies with the help of the before-mentioned example. Post-close synergy work needs to be planned early and carried on months, sometimes even years, after a close.
All in all, 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. There are many examples of successful company mergers and acquisitions, and the reason behind their success is the identification of synergies early on. When justifying large M&A business transactions, companies invariably turn to the synergies that the deal will bring, including cost and revenue synergies. A more profitable firm acquires the target company, and the expected revenue synergies increase the cash flow of the combined firm.
Synergies may not necessarily have a monetary value but could reduce the costs of sales and increase profit margin or future growth. In order for synergy to have an effect on the value, it must produce higher cash flows from existing assets, higher expected growth rates, longer growth periods, or lower cost of capital. Mergers and acquisitions (M&A) are made with the goal of improving the company’s financial performance for the shareholders. Financial synergy basically includes revenue and cost synergies and improves a combined company’s position in the market. By achieving synergies, merged firms can profit by realizing results such as increased revenue and market share, a reduced tax burden, or combined technology.
Telecoms Takeovers – BT Buys EE in the Battle for Market Leadership
Employees are what make companies successful, and when a merger or acquisition takes place, key employees are often targets for recruiters to poach. And if two companies that generate great synergies are just able to ‘fit together perfectly’, the companies that don’t fit together – and seem like they never can – are the ones that destroy value. We’ve opted for the Quaker Oats and Snapple deal, because on the surface, it may have seemed to make sense in several ways (analysts were in unison on it being a good deal, pre-close). Financial analysts and valuation analysts will typically work together to identify potential financial synergies.
- In 2021, Thermo Fisher Scientific, a producer and supplier of scientific instruments, equipment, software, services, and consumables, purchased clinical research services provider, PPD.
- When justifying large M&A business transactions, companies invariably turn to the synergies that the deal will bring, including cost and revenue synergies.
- For example, a tool such as DealRoom’s M&A deal platform, is designed to be used before a deal even begins.
- Synergies are an integral part of mergers and acquisitions (M&A) transactions when the seller seeks beneficial offers from strategic buyers and private equity firms.
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. Let’s illustrate financial synergy by describing a mid-sized company that wants to get a loan from a bank. However, when two mid-sized companies unite into one big company, the loan borrowing conditions improve.
Types of Synergies Outside of Mergers and Acquisitions
Another option is to using 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. 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. To achieve synergy, be sure all stakeholders and team members stay focused on the predetermined objective throughout the M&A process.
In business terms, however, though companies may aim to achieve synergy by joining forces, the end result often lacks synergy, making the endeavor a wasted one. This team formation could result in increased capacity and workflow and, ultimately, a better product than all the team members could produce if they work separately. Because of this principle, the potential synergy is examined during the M&A process. If two companies can merge to create greater efficiency or scale, the result is what is sometimes referred to as a synergy merge. No matter what the merger and acquisition synergy is for a particular deal, it must be considered throughout every stage of the deal.
Synergy is a concept that says, “the whole is greater than the sum of its parts”. It is combining the effort and performance of two companies to accomplish more than the the combination of what each company could accomplish individually. The term is often used in the context of mergers and acquisitions where two companies combine their value and performance to achieve greater financial benefit.
In fact, looking for synergies in a company’s existing operations and partnerships is an excellent way to generate value. For example, pooling some resources with a trusted and non-competing partner is one such way of doing so. 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. The integration phase of anM&A transaction is essentially about getting to the synergies of the deal as quickly as possible. There is now universal agreement that, where integration is concerned, speed is everything.