The Ultimate Guide To M&A Synergies
Businesses will often acquire or merge with another to increase their profit and productivity. A company will calculate and identify mergers and acquisitions synergies to evaluate a merger or acquisition’s potential or success. These synergies represent the possible or achieved value of the two businesses coming together.
M&A synergies can refer to the increased demographic, engagement, scope, or production value that results from a merger or acquisition. At Beacon Advisors, we specialize in M&A services to help businesses with their mergers and acquisitions and related efforts.
As professional business brokers in Toronto, we offer buy-side and sell-side advisory services for businesses and help companies facilitate effective and suitable mergers and acquisitions.
Our guide to M&A synergies is designed to help business buyers and sellers understand mergers and acquisitions synergies, the types presented in a merger, how they are calculated, and how they can benefit a company overall.
What Are Synergies in M&A?
When looking for companies to acquire, business buyers and advisers often use the word ‘synergies’, but what does that mean? In mergers and acquisitions, synergy refers to the accretive value generated by combining the two merging businesses’ operations.
The Two Types of M&A Synergies
Hard Synergies: Cost-Synergies
Cost or cost savings synergies refer to the literal cost savings of a merger or acquisition. Generally, cost-synergies make themselves apparent sooner than revenue ones as revenue may take some time before trickling into the company’s income statement. Strategic buyers will assess synergies’ potential and formulate a plan of action to integrate operations before making an acquisition. This process may involve cost-cutting measures and expansionary strategies designed to maximize value.
Soft Synergies: Revenue & Financial Synergies
Soft synergies refer to the mergers and acquisitions synergies that enhance the revenues of companies when they merge.
Let’s take a look at the first type.
Types of Cost Synergies
Reducing costs is an excellent way for businesses to grow and expand as they can cut down their expenses and better direct these saved funds into areas where they can better invest money. There are various types of cost synergies that businesses can experience in a merger or acquisition.
Shared and improved information access is a type of cost synergy as it allows both businesses involved to increase the information technology they have access to. This shared technology saves costs as neither company needs to pay for this increased access, and the shared information makes for improved operational efficiency.
In many cases, companies will merge because they are different stages of a supply chain and, by coming together, can streamline supply chain processes. Cost savings can result from this streamlined supply chain and the removal of other parties.
Sales & Marketing:
Companies may merge to improve both parties’ sales and marketing channels or capitalize on their successful sales and marketing processes. Additionally, when companies come together, they can save the costs they would spend on individually marketing both businesses by consolidating their marketing budget to market one brand.
Research and development (R&D) refer to resources that improve the overall knowledge of a team. A merger allows companies to capitalize on one another’s R&D efforts, which can help them cut R&D costs like training while maintaining quality.
Staff & Salary Optimization:
When two businesses come together, they can often streamline their team. There is no need for two department heads, two CEOs, etc. A merger can result in fewer salaries, as businesses sometimes consolidate teams and then make cuts as needed. In other cases, companies may keep both of their teams. The cost value here is the salaries are paid by the revenue and profits of two businesses, instead of one. This can also result in a better division of labour, allowing companies to take on more work and offer more services.
Businesses in all industries require access to equipment, whether heavy machinery or smaller-scale devices like computers or even office supplies. Businesses save costs when they merge by obtaining access to new equipment or machinery owned by the other party. This access can remove the need to replace or purchase more equipment.
Besides cost-synergies, synergies as a result of revenues or financial strategies are of equal importance in strategic M&A.
Revenue synergies refer to any improvement or advantage that allows merged businesses to increase their revenue or profits.
When one business merges with another, they can absorb the other company’s demographics, which allows them to expand their reach and engagement. This inherited demographic could be an increased volume of a business’s current audience or an entirely new target audience. In both situations, the two involved companies can access a higher volume of people to invest in their products or services. This increased volume directly results in an increased revenue stream.
Access to new employees, departments and equipment can allow merged businesses to streamline their processes to optimize their production, be more efficient, and increase their output.
Increased Products & Services:
In some cases, a business will merge with another that sells products or services relevant but different from what they offer. Providing new or an increased volume of products or services will also increase a company’s revenue.
When one business merges with another, they don’t only obtain their finances and resources; they get their loyal customers. Access to a new solidified customer base can improve sales and return, increasing profit as a result.
When a company merges with another with patented products or services, they are often able to produce more competitive offerings to give them an edge and obtain higher revenues.
Like revenue synergies, financial synergies also fall under the category of soft synergies. Financial synergy is any increased access to funds experienced by two growing businesses who come together to obtain more financing to achieve growth and expansion.
Financial synergies are often achieved for two reasons:
Two or more related businesses looking to obtain financing will often merge to improve their credit and present higher revenue to get a business loan.
When two companies merge to obtain and repay a loan, they can pay less interest than if they separately took out two loans. Additionally, if one or both businesses are indebted to a loan, merging can increase their revenue to repay the loan faster.
Calculating M&A Synergies
Now that we know that there are different ways to value a merger, it is essential to identify how to calculate the exact value of these mergers and acquisitions synergies.
The equation often used to calculate a mergers and acquisitions synergy is Synergy = NPV (Net Present Value) + P (premium). Theoretically, if company A acquires company B to form a new company C, the synergy generated from the acquisition will be equal to company C’s excess value over the sum of individual values of company A and Company B.
Factors considered in this calculation include increased revenue, cost reductions, savings or revenue from optimized processes, and the business’s overall financial standing in terms of credit.
M&A Advisory With Beacon Advisors
Beacon Advisors is your source for professional mergers and acquisitions services in Toronto. We will advocate for you and look out for your best interest throughout the negotiation process to help you make the best decision for your business.
We help business sellers and buyers make strategic decisions for expansion and growth. As part of our mergers and acquisitions advisory, we offer business valuation services in Toronto and more to ensure the business you are acquiring or merging with has been properly valued and is a cost-effective decision for you.
Contact us today to book a consultation, and we’ll help you weigh your options for valuing, buying, or selling a business.