6/13/2021 The Ultimate Guide to Synergies in M&A: Types, Sources, Model

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Dealroom Blog Mergers & Acquisitions

The Ultimate Guide to

Synergies in Mergers and
Acquisitions with
Examples
Marsha Lewis
Resource: 
Director of Marketing at
DealRoom
M&A Management GET A FREE

Software DEMO

Synergies are the fruit that M&A deals hope to capture.

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6/13/2021 The Ultimate Guide to Synergies in M&A: Types, Sources, Model

Understanding the types of synergies in mergers and acquisitions, analyzing

them on paper, and maximizing them once the deal has gone through, are
essential to getting the most from your M&A transactions.

In this article, we will increase your synergy realization by discussing examples

of synergy in mergers and acquisitions, as well as provide insights and
strategies related to their capture. 

Let’s take a look at the meaning of synergy first.

What is Synergy in Mergers and

Acquisitions (M&A)?
In a business sense, synergy by definition is a mutually beneficial concurrence or
compatibility of distinct business participants or elements, such as resources or
services. In applying this to M&A, synergy is the idea that the combined value
and performance of two working independent companies will be greater than
the sum of the separate individual parts.

From the very beginning of a deal, the purpose and meaning of M&A is to create
synergies in the long run by increasing market share, broaden customer base,
and enhance corporate finance strength of business.

Overall, synergy is the potential financial benefit achieved when two companies
merge.

There are many examples of successful company mergers and acquisitions,

and the reason behind their success is the identification of synergies early on.

Learn also more about the complete M&A process.

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6/13/2021 The Ultimate Guide to Synergies in M&A: Types, Sources, Model

Types of Synergies in Mergers and

Acquisitions
Before we can begin a dive-deep into examples of synergies in mergers and
acquisitions we should begin by defining synergy.

Synergy is defined as the interaction or cooperation of two or more

organizations to produce a combined effect greater than the sum of their
separate efforts.

Whether you are conducting a M&A process on the buy-side, or a sell-side

M&A process, synergies are immensely important. They are the driving force
behind most mergers and acquisitions.

The following are sources of synergy in mergers and acquisitions:

Sources of synergy in mergers and

acquisitions
1. Revenue Synergies

2. Cost Synergies

3. Financial Synergies

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6/13/2021 The Ultimate Guide to Synergies in M&A: Types, Sources, Model

Here are M&A Synergies Examples

Sources of synergy in mergers and acquisitions tend to revolve around
revenue, cost, and financials. Below we breakdown these M&A synergies
examples:

1. Revenue Synergies

Revenue synergy is based on the premise that the two companies combined
can generate higher sales than the sum of their individual sales.

It should be noted, however, the research shows that capturing revenue

synergies takes, on average,  a few years longer than capturing cost synergies.

More specifically, McKinsey & Company notes challenges, such as developing

appropriate targets and executing new workflow and sales strategies across
all functions, make revenue synergies more difficult to capture. 

There can be multiple examples of revenue synergies in M&A, but traditionally,

revenue synergies result from:

Cross-selling

Reduction of competition

Access to new markets

2. Cost Synergies

The merging of two companies can create cost-savings due to:

Marketing strategies and channels. Increased marketing channels and

resources may result in reduced costs. 

Shared information and resources. Similarly, increasing the acquirer’s

access to new research and development can allow for advancements
in production that yield cost savings. 

Lower salaries. While layoffs are not always part of mergers and
acquisitions, they are associated with the combining of two companies
as most companies do not need two of each C-suite position and some
staff positions. The elimination of some heavy-hitting salaries can result
in cost savings.

Streamlined processes. Streamlined processes can save time and

money as they have the potential to make the new company more
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6/13/2021 The Ultimate Guide to Synergies in M&A: Types, Sources, Model

efficient. Additionally, supply chains can become more efficient and the
new, larger company can usually negotiate better prices from suppliers.

With this in mind, how does one calculate cost synergies in M&A?

Well, this is more of an artful and thoughtful estimation, than exact calculation.

Identifying overlapping staff and the corresponding saved compensation

costs, estimating the impact of sharing supplies and perhaps even office
locations, and predicting the role efficiency will play when the two companies
and their best practices and best employees merge are some of the main
considerations taken when calculating cost synergy.

3. Financial Synergies

While these synergies are known for being a bit deceptive, there can be tax
benefits and loan benefits associated with the combining of two companies.

Financial synergies are often the most evaluated in the context of mergers and
acquisitions. This type of synergy includes the improvement of financial
metrics such as revenue, debt capacity, cost of capital, profitability, etc.

Financial analysts and valuation analysts will typically work together to identify
potential financial synergies.

Revenue, cost, and financial are the three most common acquisition synergies
examples. The goal of any merged firm is to grow the synergies and hope
that they reach their full potential post-close.

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6/13/2021 The Ultimate Guide to Synergies in M&A: Types, Sources, Model

How to Create Synergy Realization

As we often say, no one wants a deal that only looks good on paper; therefore,
synergy realization is essential.

In fact, while deals can fail for a variety of reasons, one considerable reason is
the inability to capture predicted synergies.

With this in mind, here is how to maximize your deal’s synergy realization:

1. Don’t lose sight of your overarching goal/objective

To achieve synergy, be sure all stakeholders and team members stay focused
on the predetermined objective throughout the M&A process.

Adopting a more Agile M&A practice can help with this as with Agile the focus
is always on the main objective rather than plowing through a long list of tasks
that may or may not be necessary (and can cause deal fatigue). 

2. Focus on “easy” value drivers

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6/13/2021 The Ultimate Guide to Synergies in M&A: Types, Sources, Model

Because the first year of integration is critical for capturing synergies, it is wise
early on to prioritize synergies that are “easy” to capture and will produce the
highest return.

More specifically, these “easy” value drivers should match your overarching
goal, have the ability to be tracked, and have a high probability of success. 

3. Properly plan for integration

Poor integration practices and failure to properly plan for integration when
diligence begins often result in lost synergies.

4. Keep acquired companies key employees (and don’t

underestimate the importance of culture)

Employees are what make companies successful, and when a merger or

acquisition takes place, key employees are often targets for recruiters to
poach.

In order to retain key personnel and create a comfortable environment for

employees of both companies, leadership must focus on culture and change
management.

5. Track synergy process

Finally, when trying to capture different types of synergies, company leaders

must find a way to track the progress of the different synergies  involved in
their deal.

A centralized location for this tracking, such as an M&A project management

platform, is recommended. Moreover, M&A synergy benchmarks for the deal
should be created and revisited. 

6. To capture revenue synergies analyze your customer

base

In order to capture revenue synergies (remember these often take longer to

capture) it is critical to complete a deep analysis of each customer
relationship.

When analyzing each customer, specifically consider: how long you’ve had a
relationship with the customer, how strong the relationship is, what you

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6/13/2021 The Ultimate Guide to Synergies in M&A: Types, Sources, Model

currently sell to the customer, and what other services and products does the
customer use that you could provide.

The sales team should be part of this customer study as it will need to
understand the strategy and synergy goals. 

How to Create an M&A Synergy Model

Synergies are often calculated by adding the net present value (NPV - the
value of the new company) with the premium (P).

Additionally, when developing a M&A synergy model consider the following

categories as the cornerstones of your model: how to sell, what to sell, and
where to sell. Examine where the opportunities to capture synergies and create
value exist in these three categories. 

Additionally, using a M&A project management platform, or another tool such

as Excel, can be helpful in creating synergy valuation.

For example, a tool such as DealRoom’s M&A deal platform, is designed to be

used before a deal even begins. Teams can use features like pipeline
management to access company information that is vital in determining
synergies.

Another option is to using a valuation spreadsheet, compare the inputs and

outputs of the acquirer, the target, to the combined inputs and outputs if the
two companies were to merge.

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6/13/2021 The Ultimate Guide to Synergies in M&A: Types, Sources, Model

Final Thoughts
No matter what the merger and acquisition synergy is for a particular deal, it
must be considered throughout every stage of the deal.

Synergies can often be easy to identify but hard to realize; therefore, it is

critical to understand when the deal closes, there is still a great amount of
work to be done to yield the identified benefits.

Post-close synergy work needs to be planned early and carried on months,

sometimes even years, after a close.

Additionally, while practitioners must be ambitious in identifying and outlining

expected deal synergies, it is vital that they are realistic and do not not
overestimate the deal’s potential synergies and value drivers.

Product updated · March 4, 2021 · 4 min read

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6/13/2021 The Ultimate Guide to Synergies in M&A: Types, Sources, Model

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6/13/2021 The Ultimate Guide to Synergies in M&A: Types, Sources, Model

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