It may seem obvious, but mergers and acquisitions (M&A) only make sense if the value of the deal is greater than what existed before. In other words, after acquiring or merging with a second company, the result should be a company worth more than before. Sometimes simply adding up the numbers isn't enough. To be sure the resulting business will create value, you need to consider the synergies between the firms, analyze each of them, and see what benefits they can bring.
Most synergies tend to be strategic. In fact, as Pablo Rodríguez-Solano, Director of Deal Strategy at KPMG, points out, the main reasons for doing a deal are: “consolidating market share, expanding geographically, and expanding the customer base or business lines.”
What are synergies?
In the M&A process, synergies refer to the benefits and advantages that combining the companies can generate. For example, if two furniture retailers merge, one synergy is market share, which will increase; another may be geographic expansion, with more physical stores. But there are also financial synergies, such as cost or revenue synergies. That's why we're going to take an in-depth look at which synergies should be analyzed in a merger and acquisition process.
Which synergies should you analyze in an M&A deal?
Generally, there are two main types of synergies, which are divided into several categories: strategic and financial. The first, strategic synergies, have to do with the company's positioning, which should improve after the deal. Financial synergies, on the other hand, are those that can save costs and optimize profits through the merger.
Strategic synergies
These are the ones related to the company's position. The most important are those involving consolidating or increasing market share, expanding geographic reach, being a good opportunity in terms of valuation, growing the customer base, entering new business lines, and continuing to grow in the industry.
Following the previous example, in which two companies in the same industry merge, the strategic synergies are clear. To increase market share, you need to look at which regions each company operates in, how many physical stores they have, what their online business looks like, and so on. If one has a stronger presence in one part of the country and the other is stronger in another part, that's a very positive synergy, because market share, the customer base, and geographic reach all increase in a single deal.
However, if the two companies are very similar and operate in the same geographic area, the synergy will be increased market share and a larger customer base, but not geographic expansion. So you need to consider a range of factors that affect all of these aspects.
Financial synergies
When it comes to financial synergies, it is essential to look at how the deal will affect costs and revenue. Generally, when a merger or acquisition takes place, several departments are integrated, leading to a reduction in headcount and savings on labor costs. Costs can also be optimized when dealing with suppliers, if the companies are in the same industry, or in transportation.
As for revenue, if the company has different business areas or a different geographic presence, the parent company will generate more revenue, which should be offset by cost savings for the deal to make sense.
In any case, all these synergies depend on each industry and each deal: whether the companies are in the same industry or not, whether they have a physical presence and where, whether they have an online presence and how much, and so on. But the most important thing is that the synergy results in a larger, stronger company with optimized costs and higher revenue.
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