Mavengigs

Mavengigs is a global consulting firm providing consulting services for Mergers & Integrations (M&A) and Transformations. Through our network of independent resources and partners, we serve clients in USA and Europe. Mavengigs is a division of Panvisage Inc. (a holding company with interests in consulting, education, real estate and investments).

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Synergies in M&A

Synergies results from the increased value created by an M&A transaction so that the resulting entity is greater than the combined value of the separately valued parts.

Synergies are the financial benefits, including estimated cost savings or incremental revenue, arising from the M&A transaction. For each M&A transaction, Acquirer has a deal thesis that includes planned synergy targets, and they need to track synergies achieved during the transaction to avoid erosion of deal value.

Different types of synergies include cost synergies (reduced operating costs), revenue synergies (increased sales together), financial synergies (improved financial activities), marketing synergies (combined marketing efforts), and management synergies (benefits from reorganization). Synergies are recorded on the goodwill account and balance sheet.

M&A transactions may fail to realize synergies due to miscalculations, culture clashes, and poor integration processes. Calculating the present value of synergies can be done using multiples or a Discounted Cash Flow (DCF) method.

Types of Synergies

Synergies can be categorized into distinct categories:

Revenue Synergies:  Revenue synergies (soft synergies) assume that the combined companies can generate more cash flows than if their individual cash flows were added together. While viable in theory, revenue synergies often do not materialize, as these types of benefits are based on more uncertain assumptions surrounding cross selling, new product/service introductions, and other strategic growth plans. One important fact to consider is that capturing revenue synergies, on average, tends to require more time than achieving cost synergies. Frequently referred to as the phase-in period, synergies are typically realized two to three years post-transaction, as integrating two separate entities is a time-consuming, complex process, regardless of how compatible the two appear.

Cost Synergies: The main reason for an acquisition is frequently related to cost-cutting in terms of consolidating overlapping R&D efforts, closing manufacturing plants, and eliminating employee redundancies. Cost synergies (hard synergies) occur when combined companies reduce their operating costs after merging. This results from increased efficiencies and lowered expenses (like equipment, insurance, and physical space). Since synergies are challenging to achieve in practice, they should be estimated on a conservative basis, but doing so can result in potentially missing out on acquisition opportunities (i.e., getting out-bid by another buyer).

Financial Synergies: Financial synergies occur when a company’s financial activities and conditions improve because of an M&A transaction. As opposed to operating synergies (e.g., cost and revenue), financial synergies primarily occur due to a reduction in the cost of capital, tax benefits, increased debt capacity, etc.

Marketing Synergies: Marketing synergies arise in the form of research and development, marketing tools, marketing staff, and information campaigns when two companies combine. With marketing synergies, the newly formed company can enjoy deploying better marketing campaigns for its product or service with larger budgets & better tools. 

Management Synergies: Management synergies are realized when the new management team works in harmony to achieve the organizational vision, resulting in increased staff motivation, better use of resources, and additional opportunities for business growth. 

Synergy Management

Synergy management aims to combine two merging entities as efficiently as possible, thus releasing hitherto untapped value. 

Synergy realization requires a structured approach to maximizing value in post-merger integration (PMI) to realize targeted synergy potentials. This requires a synergy realization plan, then monitoring and tracking synergy achievement, while balancing short-term and long-term goals, managing risks, and overcoming challenges.