Common reasons behind mergers and acquisitions include competition elimination or minimization, expansion, or utilization of a more resourceful pool of professionals.
Acquiring another firm or merging with it also has more technical purposes, with synergies being among the most popular.
Synergies in mergers and acquisitions are the enhanced or boosted outputs of combining the value of or worth of two businesses after the transaction.
In simple words, synergies are the underlying fruits of mergers and acquisitions.
In the text to follow, we will discuss:
- What are synergies in M&As?
- What are the different types of synergies in M&As?
- How to succeed in synergies in mergers and acquisitions?
- What is the role of virtual data rooms in successful M&As?
What Are Synergies In Mergers And Acquisitions Deals?
Synergy in mergers and acquisitions is an additional value that a transaction creates.
That said, the combined value of the resultant entity or venture coming from a merger or acquisition is more than the net individual values of two firms. Let’s make it clear with the help of an example.
Suppose there are two different firms worth $100 million and $80 million. When merged, the net worth of this new entity is $200 million.
That $20 million difference is the effect of synergies. But how is it technically possible?
Well, it is very much possible because when two companies integrate their resources, workforce, capital, and assets, their net worth can go way beyond their individual worth.
Types Of Synergies In Mergers And Acquisitions
In M&As, there are three main types of synergies: finance or financial, cost, and revenue.
Financial Synergies
Synergies related to finance or financial synergies are the betterments or improvements in financial conditions or activities resulting from a merger or acquisition.
It may include tax benefits, strengthened financial statements like balance sheets, lower capital costs, and better access to combined capital.
Cost Synergies
Cost synergies occur when two businesses merge their operations and reduce the cost of their operations.
A common example is the Exxon and Mobil merger, two oil companies in the US that generated cost synergies worth over $5 billion in 1998.
Revenue Synergies
Revenue synergies happen when two companies combined can generate more revenue or sales than if they operate individually.
Companies can achieve revenue synergies through cross-selling, access to new markets, and reduction in competition.
How To Achieve Successful Synergies?
All the good M&A practices direct to achieving synergies. There are two different ways to achieve synergies, but here are certain points that need prime consideration.
Focus On Valuation Process
Effective deal valuation and its effect, in the long run, are important during mergers and acquisitions.
That said, even if the acquiring company is hopeful of achieving synergies after the transaction, the amount of the deal should still be low enough to benefit from it.
For example, if the synergies are expected to be $200 million, and the acquisition/deal price is $300 million more than the market price of that firm, it can be destructive in the long run.
Go For Quick Wins First
Quickly achieving the synergies should be a primary goal during the post-merger or -acquisition integration process.
It is important to focus on quick synergies, such as sales channel integration, rather than going for bigger challenges first, such as layoffs.
Understate Synergy Value
There is a massive difference between ambitious and practical or realistic synergies. Therefore, it is better to understate the synergies before the transaction.
For example, suppose a company believes that it can achieve $50 million of synergies from finance, cost, or revenue.
In that case, it should still negotiate while keeping the $35 or $40 million figure in mind, as it is very hard to estimate the exact values to be obtained from the synergies.
The Role Of Data Room M&A Transactions
Virtual data rooms, or simply data rooms, have been facilitating M&A transactions for over 15 years now.
As a matter of fact, the M&A industry is the biggest use case of virtual data rooms to date.
Here are some primary reasons why the data room is vital in mergers and acquisitions and can lead to better synergies.
Secure Data Sharing
How to share the corporate documents during M&As safely and quickly is the most challenging thing for dealmakers.
Its importance increases in cross-border/international transactions. Virtual data rooms are paperless solutions equipped with a multitude of data-sharing tools.
These tools allow parties involved in transactions to share hundreds and thousands of files in minimum time and with maximum safety.
Real-time Communication
Efficient communication is another massive challenge for dealmakers during mergers and acquisitions.
Traditional routes like email and other free online platforms don’t cut it anymore.
Virtual data rooms come with multiple communication options, including online meetings, Q&A modules, chat messengers, email, chat posts, etc.
Faster Due Diligence
It is not hard to understand that when dealmakers and buyers have constant remote access to due diligence documents and better document sharing and group communication tools, the due diligence process becomes smooth and faster.
Final Words
Synergies are one of the biggest driving factors in mergers and acquisitions. The common types of synergies include financial or finance, cost, and revenue synergies.
Firms can achieve synergies by properly evaluating the transaction value, focusing on quick synergies possible in the post-integration period, and keeping synergies’ value realistic.
To increase the value of synergies, businesses should consider using data rooms for M&A.
These solutions have been facilitating M&A deals for over 15 years now, and they prove to give a solid boost to M&A results.
