Six Ways Cost Synergies Are A Benefit Of M&A

In any merger or acquisition, the buyer and seller anticipate synergy will be crucial. Synergy in M&A can manifest in several forms, but cost synergy is one of these critical areas. It is essential to note that cost synergy is not the same as revenue or financial synergy. We will delve into those topics in upcoming articles.

Cost synergy is the savings in a business's operating costs after two companies merge or acquire each other. This occurs due to increased efficiencies that reduce expenses in some regions of day-to-day business operations. With the completion of an M&A deal, these companies can achieve such economies of scale as individual entities.

How Does It Work?

There are several ways that cost synergies can benefit a company after a merger or acquisition, specific to the particular deal on the table.

1. Supply chain efficiency is a critical benefit that can help a business after an M&A transaction. This business aspect has become more important than ever following the extreme supply chain disruptions due to the COVID-19 pandemic. No business owner ever wants to be caught off guard like that again, so more and more companies are taking measures to shore up their supply chains. When one of the merged entities has better supply chain relationships, the other can take advantage of it through the merger, ultimately streamlining the supply chain, which can translate to cost savings. This benefit is beneficial for companies that manufacture complementary products.
2. Shared technology is another way a business can find synergy after an M&A deal. Once the deal is done, the combined company can access both companies' proprietary information and technology. This is a great way to boost operational efficiencies and improve products without spending more money. This is especially true today when technology is central to our lives and significantly impacts a business's ability to innovate and remain competitive. For example, in 2024, we are seeing a record number of companies scrambling to find ways to acquire artificial intelligence capabilities.
3. Streamlining management is another benefit that occurs after a merger or acquisition. This is because a business can't use more than two CEOs, two CFOs, two directors of marketing, etc. When this headcount is reduced, it optimizes salary spending, saving on working capital.
4. An M&A transaction can also improve sales and marketing. This is because two companies, becoming one, now have access to better distribution and marketing channels, creating cost savings when establishing more efficient marketing options. For example, say Company A has $100, and Company B has $50. As a combined company, the total revenue becomes $175 rather than $150 because Company A can sell more products to Company B's customers.
5. A merger of two businesses can also benefit research and development because it reduces the need for a company to spend on R&D operations independently. As a result, there is a greater opportunity to develop better products and services and save money. This is especially important if the buyer is paying to acquire the other company's patents and licenses.
6. Saving money on real estate, rent, equipment, and insurance is a cost synergy between two companies. When they operate separately, they must pay for more buildings, equipment, or policies. But together, they can eliminate these redundancies, translating to significant cost savings.

Ways to Measure Cost Synergy Success

So, say you've recently merged your company with another company. How do you know if the benefits of cost synergy are hard at work? There are several ways to gauge this success.

The first way is to look at cost savings versus projections. Compare the projected cost savings before the deal with the savings you have seen thus far. This includes all expenses, operational costs, overhead, and eliminated redundancies.

The next thing to analyze is your business's financial performance. Look at the combined entity's financial statements and performance metrics following the merger, including profit margins, return on investment, and earnings before interest, taxes, depreciation, and amortization (EBITDA).

You can also assess whether the merger resulted in streamlined and improved operational efficiency. Check out your productivity metrics and improvement timelines to figure this out.

Another way to know if the deal resulted in cost synergies is to look at the satisfaction levels of your customers and your employees. You want to see improved customer experiences and ongoing or improved employee satisfaction.

Management and stakeholder perception are also ways to gauge the deal's benefits. If you hear nothing but good things, then you have likely achieved successful integration and synergy.

What to Look Out For

If you are thinking of the cost synergies you will enjoy after a merger or acquisition, that can be exciting. But you want to recognize certain pitfalls that could negatively impact the results you're hoping to achieve. 

Overestimating synergy is a widespread mistake when considering the possible cost savings from a deal. This leads to unrealistic expectations. Be sure that you account for all aspects when you project the potential of cost synergies during the deal structuring stage.

When two companies merge, so do their cultures. If you do not take proper care to ensure cultural synergy, it can lead to cultural clashes. This can really botch the post-integration process and tank the deal's overall success. 

Combining different systems and processes into one can also be challenging. Before any deal is completed, you should take careful steps to align operations smoothly to avoid disruptions and other problems that could impact the business's ability to thrive. 

It is also essential to remember that the costs of integrating two businesses can often be much higher than you initially expected. This underestimation will impact your measurement of cost synergies. Preplan for unforeseen extra costs, such as legal fees, employee training expenses, or updating technologies.

Proper due diligence before any M&A deal can help you plan for what cost synergies you can expect to see as part of the company valuation process. Enlisting the help of a professional M&A expert can help you navigate this complex process and avoid overestimating the results.