Synergy – The essential element

How does synergy add value? Why is it important for buyers and sellers?

When companies come together, either through acquisition or merger, it is synergy that forms the links that results in the creation of additional value. It is the driving force that leverages the combined strengths of the new business, enabling value creation above and beyond the sum of the separate companies.

Some quantifiable synergies are common to most acquisitions as they result from the consolidation of combined resources.

Typical examples would be the elimination of surplus facilities, fixed assets and from reductions in overhead costs. There may also be financial synergies, for example increased purchasing power and debt capacity.

The value derived from these is, however, short-lived if there are no other synergies from the acquisition that will provide long-term, revenue generation.

If an acquirer has paid a premium price for a business the return on investment must come from the long-term synergies. These are perhaps harder to quantify and harder to put into action, but they have the potential to squeeze much greater value from the acquisition.

Whilst the acquisition team may have identified and put a value on a number of these synergies, in practice they may need resourcing, possibly even further investment, in order to realise that value.

Typically, long-term revenue synergies result from direct opportunities to increase sales, such as:

  • Marketing and selling complementary products
  • Cross-selling into a new customer base
  • Sharing distribution channels
  • Access to new markets

In a more indirect way, acquisitions build critical mass, providing some protection from competitors.

In today’s market where many traditional skills are in short supply, it is often the acquired company’s workforce that provides the greatest synergistic value.

In a recently completed transaction, both buyer and seller were aware of the synergies that could be leveraged. This is not always the case; I can think of several where the seller was blissfully unaware of the value held within the company and could easily have lost out by accepting a lower offer.

So if you’re planning to sell a business, it’s important to understand the intangible assets in your business that will deliver the extra value acquirers will look for and, more importantly, pay a premium for. Try and see where the synergies would be for a potential buyer. It will enable you to focus on these areas and maximise their value.

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