What are synergies?
Synergies are the additional value created by combining two enterprises, creating opportunities not available to those businesses while operating independently. The theoretical idea of synergies is that 1 plus 1 can equal 3 (or 4 or even 5). The value of a merger proposal is normally strongly driven by its ability to generate synergies.
Outlined below are the synergies we most commonly evaluate and measure in our day-to-day practice. The impact of these potential synergies should be evaluated as a minimum prior to the completion of any merger.
Economies of Scale: Generally, this refers to cost savings available through increased production volumes. We find this of most relevance in mergers involving competitors. An example would be the benefit of decreased production input costs through bulk-buy savings.
Pricing Power: In mergers involving competing businesses, the elimination of competition and heightened market share can provide the combined enterprise the ability to increase prices.
Strengths and Weaknesses: Matching strengths in one business against weaknesses in another can create synergies. For example, business one may have a superior distribution network, while business two may have access to an innovative new product. By completing a merger, greater value can potentially be realised for the combined entity by distributing business two’s innovative new product through business one’s distribution channels.
Diversification: This synergy could be realised in mergers involving businesses with complimentary product offerings. Normally, this happens when value is created through the ability to cross-sell products to other potential customers previously not accessible to you. An example could be an accounting practice merging with a financial planning firm.
By identifying and valuing synergies likely to be realised from a merger, integration plans can be tailored to stress the importance of synergy realisation. This process can create a reporting and measurement platform for management to follow post transaction completion, ensuring the maximum value is derived from a deal.
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If you are seeking a professional advisor to assist you with the merger, acquisition, divestment or valuation of a business with an enterprise value of between $1 million and $50 million please contact Quinn M & A on 02 9223 9166 or email email@example.com to find our nearest office.