Understanding Synergies in M&A Strategies

What makes or breaks an M&A deal? Synergies. Complete capture of synergies = Success Lost synergies = Failure When synergies are not fully captured, this results in underperformance and lower ROI. Important reminder: Synergies are captured after the deal is closed. But they are calculated and planned BEFORE the deal happens. During the due diligence process. However, diligence teams consider synergies as part of their typical processes - taking some seemingly easy ones as granted. This oversight leads to ramifications later on. The solution: Conduct a standalone synergy-capture diligence. Identify areas of: > Cost savings > Revenue boosts > Operational improvements Quantify them and create synergy baselines. Create consistent cost and functional baselines. Segment and prioritize synergy opportunities. Develop financial models and conduct variance analysis. Create a synergy-capture integration plan. Set milestones for realizing synergies. Monitor and track synergy realization after the deal. The most important aspect of M&A requires a tailored framework - and there is little room for error. 𝙄𝙣𝙩𝙚𝙧𝙚𝙨𝙩𝙚𝙙 𝙞𝙣 𝙢𝙤𝙧𝙚 𝙈&𝘼-𝙧𝙚𝙡𝙖𝙩𝙚𝙙 𝙘𝙤𝙣𝙩𝙚𝙣𝙩? 𝙈𝙖𝙠𝙚 𝙨𝙪𝙧𝙚 𝙩𝙤 𝙛𝙤𝙡𝙡𝙤𝙬 𝙢𝙚. #entrepreneurship #venturecapital #startup #mergers #acquisitions Serial Entrepreneur & Investor Helping Startups Become Unstoppable – David Hauser

Don't buy hype. Buy the business. When acquiring a business, one plus one doesn't always equal two. Sometimes, it equals three or more. When two companies are combined, additional value can be created. This additional value is called synergy. Here is a simple example of this concept. Let's say we own a company that sells pens. We have sales of $1M and 1000 customers. If we acquire a company with $1M and 1000 customers that sells paper, it might appear that we have doubled the size of our business. But because customers buy pens and paper together, we can cross-sell our products. This means our customers who purchased pens from us now will spend more with us because we can offer them paper. This additional revenue is a synergy. Other types of synergies can be realized through M&A. In addition to increasing revenue, reducing costs and improving financial positions can be synergies. Increased buying power, eliminating redundancies, and sharing efficiencies can lower the combined expenses of the businesses. Lowering the cost of capital, shared tax benefits, and increasing competitive advantage can benefit the performance of the combined businesses. Pretty awesome, right? While synergies are great, the problem we can run into is when we incorporate anticipated synergies into our purchase price. It is reported that 70% to 90% of M&A transactions fail. This is a misleading statistic because these are not failures in the sense that we spent $1M to acquire this business, and now it's worth nothing. Rather, they fail because the acquiring entity did not realize the anticipated value of the investment. In other words, the buyer overpaid for the business. Revenue synergies are the easiest way to see this issue. McKinsey & Company published a study showing a 23% shortfall between the anticipated and actual revenue increases created by synergies. If your purchase price and deal structure are based on expected cash flow (i.e., we can afford this purchase price because we expect cash flow to be $X with these synergies), falling 23% short of expectations can make any deal look bad. While synergies can add value to a transaction, accurately estimating their value is difficult. There are people who are smarter than me working on 9-figure transactions (way bigger than the transaction I work on) that use large data sets and sophisticated formulas to predict the value of synergies. The results show that they are incorrect most of the time. If experts with much larger data sets can't get these predictions right, how would I stand a chance of accurately estimating their impact on the transaction's value? This is why I shy away from including the effect of synergies in my valuations. Including the value of synergies in your purchase price is risky. It isn't based on the business's historical performance. It values the acquisition based on what may or may not happen in the future. It is highly speculative and leads to many bad deals.

“Knowing Something” M&A in a Minute ⏰ — 1️⃣ ➕ 1️⃣ 🟰⁉️ Even for lawyers, that’s some pretty easy math. Or is it 🤔? If you’re doing mergers and acquisitions (M&A), the answer might not be so simple. Despite hard work and the best intentions, many M&A deals fail to deliver—some fail spectacularly 📉 1 + 1 < 2. Often, that’s because of a poorly designed integration strategy and failed execution. What you often hear in M&A is optimistic talk about “capturing value” and “delivering synergies,” where 1 + 1 > 2. With the continuing uncertainty and volatility, it’s more important than ever to develop a solid integration plan early in the deal process and execute with tactical precision. Here are some things to think about ⬇️ 1️⃣ Think expansively about synergies. Don’t be limited by the deal model to identify synergies. 💡Figuring out what to PAY for a business is a lot different than figuring out what to DO with the business once the deal is done. 2️⃣ Cost synergies are easy targets…but don’t stop there. When people think about synergies, the usual starting place is cutting operating costs. Makes sense—cost synergies are usually easier to find and measure. But much of the real long-term value in deals flows from… transformation. And revenue and capital synergies provide a lot more opportunities for growth and transformation. For example, doing a deal that improves the combined business’ balance sheet, working capital needs, and financing costs can provide real long-term value. So spend some time looking at ways to ADD rather than SUBTRACT. 3️⃣ Day 1 is too late. Before you integrate a new business, you have to integrate your own team. The days of silos and separation in the deal and integrations teams are long gone—or they should be if you want your deals to succeed. Integration planning should permeate through your deal planning process—business development, finance, operations…all working together with a consistent strategy. One band…one song 🎶 And legal shouldn’t be left out of the fun. The lawyers need to understand the strategy, deal drivers, and areas of expected synergy—that way they can structure the deal and target protections in ways that maximize the chance of post-closing success. So tell me…how do you make sure that 1 + 1 > 2? ______________ If you like “Knowing Something” M&A in a Minute ⏰, please click the 🔔 at the top of my profile so you don’t miss any new posts! #mergersandacquisitions #mergersacquisitionsdivestitures #klgates #integration #antitrust