Can one plus one equal more than two? The answer is YES according to companies undergoing mergers and acquisitions with the aim to generate synergies.
Synergy is the value added resulting from combined actions and initiatives. It can be understood as cooperation of two companies or business units that is to bring additional results that would not be possible to achieve on a stand-alone basis.
Sounds easy? Let’s explore the four areas of possible synergies.
# Revenue synergies
Companies tend to believe in cross-selling and up-selling of their products to their mutual customers. The thinking behind many acquisitions is that value will be generated if products will be sold through a new distribution channel or to the target’s customers.
# Margin synergies
These are often targeted in the form of bulk discounts resulting from growing scale and choosing the best sourcing partners. Depending on the industry, these can also be visible in increased pricing power versus customers.
# Cost synergies
These are the synergies we all so fear while being the employees of the acquired company. Typically these include reductions in doubling finance and accounting, IT departments as well as other specific to the sector departments.
M&A is conducted with the aim to build bigger, stronger and more diversified companies. These should in theory have higher debt capacity and be able to borrow at more favourable terms.
Yet, if this is all true, then why is it that research points to only some 30% of mergers are acquisitions achieving their targets?
Author: Milena Olszewska, CFA, ACCA has over 15 years of experience on capital markets, in business valuation and storytelling both as equity analysts at international brokerage houses and in her current role as advisory to WSE-listed management boards.
If you want to:
- learn how to be successful in M&A,
- how to avoid the most common pitfalls,
- how to value pre-merger and post-merger companies,
- how to value synergies,
- why storytelling is important in M&A communication,
See also other Master Classes in Corporate Finance