Mergers and Acquisitions are crucial strategies for business growth, allowing companies to expand rapidly, access new markets and acquire new capabilities. However, for these transactions to be truly successful, it is vital to identify and maximize synergies between the companies involved. Below we explain how to achieve this.
What are Synergies?
Synergies occur when the combined value of two merged companies exceeds the sum of their individual values. For example, if Company A is worth $500 million and Company B is worth $75 million, but the combined value of both is $625 million, there are $50 million in synergies. These can arise in a number of ways, including cost savings and revenue increases, among others.
Types of Synergies
Cost Synergies
1. Supply Chain Efficiencies:
- The merged company can leverage better relationships with suppliers, obtaining volume discounts and consolidating suppliers to reduce costs.
2. Sales and Marketing Improvements:
- Companies can share distribution and marketing channels, reducing redundant costs and improving efficiency.
3. Research and Development (R&D):
- Combining R&D efforts can lead to better products and lower production costs. For example, one company may be developing a cheaper material that the other could use.
4. Reduced Salaries and Wages:
- There is no need for two CEOs or two CFOs. Eliminating duplicate roles creates immediate savings.
5. Redundant Facilities:
- The new merged company will not need two corporate headquarters, allowing for one to be closed and offices to be consolidated, reducing costs.
6. Patents and Intellectual Property:
- If one company was paying the other for the use of patents, those payments are eliminated in a merger as they are considered internal transactions.
Revenue Synergies
1. Patents:
- Access to new patents to create more competitive products and generate higher revenues.
2. Complementary Products:
- The products of both companies can be combined to increase sales.
3. Complementary Geographies and Customers:
- The merger allows access to new geographic and demographic markets, increasing potential revenues.
Financial Synergies
Financial synergies improve the capital structure of the merged company, which can lead to tax benefits and greater borrowing capacity. Here are some examples:
1. Diversification and Cost of Capital:
- Diversification can result in more stable cash flows and a lower cost of capital.
2. Increased Debt Capacity:
- Merged firms may have more stable cash flows, allowing them to borrow more than they could as separate companies.
3. Tax Benefits:
- Using net operating losses (NOLs) from the acquired company can reduce the tax burden of the merged company.
How to Model Synergies in an M&A Model
In an M&A model, different types of synergies can be incorporated, such as revenue improvements, cost of goods sold (COGS) savings, marketing savings, and general and administrative (G&A) expenses. This process is gradual and synergies may take one to three years to fully materialize.
Estimating Synergies
One method to estimate synergies is to compare similar transactions. If you see that the synergies of a comparable transaction represented 5% of the total enterprise value (EV), you can assume that the synergies of the analyzed transaction will be similar.
Possible Risks
Synergies may not be effective immediately. In fact, in the short term, costs may increase due to integration expenses and temporary inefficiencies. In addition, cultural clashes between companies may prevent synergies from materializing.
Keys to Realizing Successful Synergies
1. Create an Integration Plan:
- It is essential to maximize the combined value and avoid operational problems.
2. Effective and Transparent Communication:
- All employees must be informed about the integration plan and its benefits.
3. Change Management and Culture:
- Create a new culture that employees of both companies can adopt.
4. Continuous Monitoring:
- Implement metrics to track synergy progress and adjust the plan as needed.
Conclusion
Identifying and maximizing synergies is essential for success in M&A. Through detailed analysis and strategic integration, companies can generate additional value and ensure sustained growth.
