Types of Synergies achieved through M&A

Synergies are achieved by combining two companies to improve overall performance, create scale, lower costs, and eliminate redundancies. We recently shared an article covering the many possible cost synergy benefits of mergers and acquisitions, but it’s important to remember that cost synergies differ from revenue and financial synergies. Let’s delve into the differences between the latter two. 

Revenue Synergies 

Revenue synergies occur when a newly merged company generates more sales than the two pre-merger companies could generate.1 These revenue synergies can be achieved by reaching more customers in several ways. 

• Intellectual Property: Access to another business’s IP or patents can enable the newly formed company to create more innovative and competitive products that result in higher revenue.2 Pooling such resources can also lead to enhanced opportunities for research and development. 

• Complementary products: Two companies producing complementary products before a merger can now be marketed to increase revenue from both customer bases.2 

• Complementary geographies: By merging two businesses in different regions, the newly formed company can capitalize on improved access to more geographies and demographic populations, increasing revenue.2 

Financial Synergies 

Unlike revenue synergies, financial synergies are achieved when the newly merged company is able to improve its capital structure beyond what was possible when the two companies were separate. By improving the capital structure of a business entity, potential benefits include:  

• Tax savings 
• Improved cash flow 
• Risk diversification 
• Lower cost of equity 
• Higher debt capacity 
• Lower cost of capital 

Together, these synergies can lead to improved and more stable cash flow and a higher company valuation than the two individual companies.2 

Best Practices to Achieve Synergies 

An M&A transaction can create synergies, but it doesn’t happen overnight, like magic. Careful steps should be taken to ensure that a deal is designed to create synergies. These steps include:3 

• Conducting a thorough due diligence process early on is critical to identifying potential synergies before getting too far down the road. This means profoundly diving into both companies regarding all financial documentation, operational processes, market position, and cultural fit. 

• Ensure alignment among leadership from both companies regarding the strategic big picture and how the integration is planned to take place.  

• It develops a detailed integration plan with actionable items and timelines to achieve them.  

• It continuously monitors and improves by gathering feedback, evaluating the effectiveness of the process, and making any adjustments that will improve the results. 

• Studying and carefully understanding the cultures of both companies and being proactive in ensuring these cultures will mesh successfully in terms of collaboration, inclusion, and employee engagement. 

One of the most important things to remember in a merger or acquisition is that timing can damage synergies and destroy value.4 Timing is critical because of the volatility of financial markets.4 Taking too long because you are worried about designing the “absolutely perfect M&A plan” can be less fruitful than executing a simple, solid plan at the right time.   

Additionally, by completing a deal more quickly, you are posing less risk to your valuable customer base and any other stakeholders impacted by the transaction. While planning is key to nailing down synergies, you don’t want to get bogged down with obsessive planning that leads to wasting valuable time and squandering possible synergies that you could easily capture by moving at the right pace. 

An experienced M&A advisory partner can guide you through the complicated deal process and ensure it remains managed at a proper pace that works for you and makes sense with market timing and economic conditions in your sector. They will also help you team up with the right business or buyer to achieve the right synergies for a successful outcome. Achieving the right balance can be tricky, but that’s why you don’t have to do it all on your own. 

References: 1. Investopedia. What Is Cost Synergy? Definition, How It Works, and Types. 2. Corporate Finance Institute. What are Synergies? Revenue, Cost, and Financial Synergies Explained. 3. Datarooms.org. What are Synergies in M&A? Types of Synergies and Examples. 4. Corporate Finance Institute. Timing of Synergies.