M&A Synergies Explained

Merger and acquisition synergies are the benefits of combining two or more companies to increase the value beyond what each company could independently deliver. M&A synergies can come from different sources, such as organizational redesign, more efficient procurement, asset and real estate footprint optimization, and sharing knowledge and best practices.

Here is how we will look at synergies:

1. Types of synergies
2. Hard (tangible) vs soft (intangible) synergies
3. Synergies by functional area
4. Synergies by channel

On the other hand, dis-synergies can occur in the M&A process, resulting in higher costs and reduced topline revenue. For example:

• Cannibalization of sales across overlapping customer segments
• Loss of customers due to uncertainty caused by a merger
• Increased taxes across different jurisdictions or countries
• Loss of suppliers (e.g. due to a negative experience working with the acquired company)
• Negative brand impacts (e.g. by acquiring weaker brands or brands that have negative reputations)

There are five key synergy activities along the typical mergers and acquisitions stages. The synergies start with a high-level view and become more detailed and specific further down the M&A stages.

1. Identify key value drivers, build deal narrative, and develop synergy hypotheses

   During the target identification and initial proposal development stage, the company identifies and integrates pricing and key value drivers into the deal narrative and develops the deal hypothesis.

2. Identify and confirm target synergies

   The due diligence process focuses on identifying and confirming the target synergies expected from the deal. The refined target synergies inform the negotiation and finalization of the deal.

3. Define overall top-level synergy targets

   The company develops top-level synergy targets as part of the integration planning process to ensure a focus on value realization throughout the post-merger integration.

4. Set up top-down integration synergy targets by area

   During the design of the target operating model for the combined company, the company defines top-down integration synergy targets by functional area to ensure accurate detail and ownership.

5. Track bottom-up synergies

   Lastly, the integration management office tracks bottom-up synergies for each workstream and in an aggregated view throughout the post-merger integration phase to ensure benefits from the deal are realized on the ground.

Lastly, the integration management office tracks bottom-up synergies for each workstream and in an aggregated view throughout the post-merger integration phase to ensure benefits from the deal are realized on the ground.

Types of M&A synergies

There are four main categories of synergies:

1. Revenue synergies
2. Cost synergies
3. Capital and asset synergies
4. Accounting and tax synergies

The examples below capture the majority of synergies that we have experienced working with our clients.

Revenue synergies result in higher revenue for the combined organization.

1. Up-sell and cross-sell: Up-sell and cross-sell synergies are based on the combined company’s ability to sell new or additional products and services or enhance its existing products and services with newly acquired capabilities. Examples of up-selling and cross-sell synergies include new functions and features, add-on services, and bundling various offerings to capture higher revenue.
2. Sales operating model optimization: Sales operating model optimization synergies occur when the combined company optimizes its sales processes to drive higher revenues. Examples include reworking the sales organization and compensation model and channel mix—technology and processes such as prospecting.
3. Product/service offering redesign: An acquisition can impact the market structure and the company’s market share, improving the pricing power of the organization. It may enable the company to reposition its product and service offering and adjust pricing as a result. Dynamic pricing models and refined product category pricing can significantly drive topline revenue.
4. Brand leverage: Merging with a stronger brand can increase awareness and drive higher revenue for the integrated company.

Cost synergies are focused on reducing total expentidure in the combined organization.

1. Economies of scale in core operations: An integrated company can exploit economies of scale across its core activities, such as production and manufacturing, operations, and servicing. Examples include better operational capacity use, optimized processes, workforce management, and skill transfer.
2. Economies of scale in support functions: The new organization can leverage economies of scale across functional areas such as sales and marketing through consolidation and streamlining redundant functions and teams, technology platforms (e.g. HRIS, GL, ERP) or simplifying processes.
3. Procurement efficiencies: An integrated company typically can procure at a better rate and negotiate better conditions with its suppliers across all domains, from raw materials and equipment to IT licenses and third-party service providers.
4. Sourcing and offshoring efficiencies: An integrated company might identify opportunities to leverage outsourcing and offshoring partners already in place in one of its companies. An increased volume of transactions might qualify a combined company for outsourcing and offshoring opportunities.

These synergies focus on better leverage of capital and assets.

1. Asset portfolio optimization: After a merger, a combined company has a unique opportunity to examine the entire baseline of existing assets and make adjustments, such as selling underperforming assets. It may also eliminate assets that are less relevant to the core business or bundling and selling sub-scale assets.
2. Improved asset use: An integrated company can examine its existing assets and explore opportunities for improvement, such as building one optimized contact center where previously one company had a sub-scale contact center and the other had outsourced its contact center at a premium.
3. Access to capital: The combined company may be able to access capital that the standalone companies couldn’t access in the past. Examples include investment from PE firms that require a minimum valuation or access to investors in new geographies.

These synergies relate to optimizing taxes and capital structure.

1. Capital structure optimization: A combined company may benefit from various adjustments to its capital structure, such as increased debt capacity or better financing.
2. Tax optimization: A combined company may be able to identify tax-related optimization levers, such as using tax reductions from relocation or tax loss carry-forwards.
3. Industry-specific financial optimization: A combined company can benefit from optimizing industry-specific financial constructs, such as reserve funds.
4. Working capital and inventory management: Significant synergies can occur if a combined company maintains low working capital levels, reducing funding costs.

1. Optimization of current project portfolio: A combined company may have a closer look at the portfolio of all ongoing or planned projects and eliminate those which are duplicative or not working towards the target integrated state.
2. R&D spent optimization and IP and patent acquisition: Some industries, such as pharmaceuticals, depend more on knowledge than others, and mergers can result in reduced R&D costs attributed to newly acquired patents and knowledge.
3. Posing an obstacle for competitors: An indirect benefit may be the elimination of acquisition opportunities for competitors, which would limit their ability to grow.

Hard (tangible) vs soft (intangible) synergies

Another way to look at synergies is by differentiating between hard and soft synergies. Hard synergies, or tangible synergies, can be associated tangibly with cost reductions or revenue increases.

Examples of hard synergies include:

Savings-based hard synergies

• Restructuring the new integrated organization
• Eliminating redundant tech platforms
• Negotiating better procurement rates
• Optimizing the real estate footprint
• Consolidating shared services
• Reducing advertising spend

Revenue-based hard synergies

• New product opportunities for a new client base
• Upselling clients of one company with services and products from the other company
• Pricing adjustments driving higher revenue
• Product bundling to increase the average order size
• Expanded market reach to new geographies or customer segments
• Additional cross-channel sales, such as an e-commerce channel of the acquired company

Soft or intangible synergies are indirectly associated with a cost-saving or revenue increase and are more challenging to measure.

Examples of soft synergies include:

• Skill transfer across the workforce
• Knowledge transfer and sharing of best practices
• Improved culture and alignment
• Stronger brand equity
• Stakeholder confidence in the combined entity
• Risk mitigation through diversification of markets or business lines
• Increased innovation through the combination of ideas and talent

M&A synergies by functional area

One significant advantage of examining revenue and cost synergies by functional area or department is the ability to track and assign synergy realization responsibility to individual workstreams during post-merger integration.

Furthermore, a functional view can also help companies understand which functional units generate most of the synergy value during the transaction. This view is beneficial in the later stage of integration, known as bottom-up synergy confirmation and capture.

As an example of function-specific synergies, here is a summary of HR-specific cost synergies:

• HR organization structure redesign
• Consolidating HRIS platforms or licensing
• Benefits plan savings based on a higher number of employees
• Payroll consolidation
• Streamlining HR processes
• Adjusting the compensation structure for new employees, including variable and fixed compensation, perks, and benefits

It is important to mention that there may be negative synergies when target state HR policies require additional investment. For example:

• Adding new employees to a more expensive benefits plan
• Facing additional labor costs to accommodate unionization
• Increasing HRIS spend to add acquired companies to a higher-cost platform

M&A synergies by channel

Our work has identified many channel-specific synergies, including physical locations, e-commerce, contact centers, and third-party channels. While our examples are not exhaustive, they provide a good starting point for determining synergies by channel.

Physical locations

• Optimized geographical footprint, store format, and market coverage
• Shared resources and infrastructure, including warehouses, inventory, and logistics
• Operational efficiencies through process standardization, such as sharing best practices
• Optimized store operations, including opening hours or staffing levels

E-commerce

• Additional capabilities added to existing platforms, such as lead generation and e-commerce
• Using all acquired digital properties for SEO purposes like cross-linking, ranking-boosting
• Savings on technology costs, including licensing fees for the e-commerce platform, system applications and infrastructure
• Consolidation of digital marketing teams
• Improved data and analytics to optimize digital marketing spend (e.g. new SEM insights)

Contact center

• Rightsizing the organization
• Simplifying or consolidating technology, including IVR, CTI, call recording, routing or training platforms
• Leveraging existing or new offshoring and outsourcing opportunities
• Leveraging digital channels to divert a specific call volume
• Shared support services for the integrated contact center
• Shared best practices and knowledge

Third-party channels

• Improved negotiation power with the third party, such as with brokers or independent advisors
• Increased market coverage using third-party
• Economies of scale for support or and back-office services related to the third party

Tracking synergies throughout the merger is important to ensure that a merger delivers value as initially planned. Synergy trackers are helpful tools for monitoring these synergies over an extended period. They align leaders on the value expected from the integration and indicate whether it is going according to plan.

Burnie Group offers a broad range of M&A capabilities to support you during each stage of the deal cycle, including:

• Primary research
• Commercial, operations, and technology due diligence
• Value creation planning and growth strategy
• Post-merger integration

Burnie Group has extensive experience as an M&A partner throughout the deal lifecycle and differentiates through:

• Hands-on support working with various workstreams to help capture synergies as opposed to only guiding the process
• Ability to support the implementation of various solutions driving savings, for example, automation implementation, enterprise software deployment or process redesign
• Having a robust, battle-proven integration approach, PMI tools, and playbooks to accelerate integrations
• Deep expertise in primary research enables us to tailor our due diligence approach using traditional and bespoke research methods that identify unique synergies
• Offering a flexible engagement model to match your timeline and budget allows us to work with large and mid-size organizations