Assessing synergies – when is a combined business more valuable than the sum of the parts?

Synergy is the concept that combined businesses will be more valuable than the sum of the parts. Synergies are often touted as a key reason for undertaking transactions, with the success of the deal often determined by management’s ability to execute on its integration strategy and deliver the forecast synergies.

Potential sources of synergies include:

  • Shared information technology and licensing costs
  • Shared service centres
  • Supply chain efficiencies
  • Distribution and marketing economies of scale
  • Shared research and development knowledge
  • Cross selling across different markets and geographies

Transactions often present an opportunity for both cost and revenue synergies to be realised, however cost synergies tend to be easier to measure and deliver than revenue synergies as management tend to have greater control over cost than revenues.

Realising synergies is harder than identifying them. Achieving the convergence of IT platforms is never easy, politics and procedures hamper shared service efficiencies, and revenue synergies often ascribe far too great a value to customers seeking (or even accepting) a ‘one stop shop’ for goods or services.

Minimising execution risk and maximising the value of the synergies requires a robust process not just to identify, but critically test synergy assumptions. It is vital that those tasked with implementing the synergies are an integral part of the team assessing them, and appropriately resourced to achieve this while still running the existing business. It is also important that due diligence providers, who bring an independent perspective, are also charged with assisting in identifying and refining synergy assumptions.

To ensure management remains accountable the board should remain sceptical and challenge the proposed value of potential synergies, particularly when they largely underpin any transaction premium. Questions for the board to consider are:

  • Do we fully understand the achievability of these assumed synergies and the costs involved in achieving them?
  • Do the synergies truly justify an acquisition premium, with an appropriate buffer if all synergies aren’t achieved?
  • Have we exhausted all opportunities for synergies?

Boards should ensure that the identification of synergies is not a static exercise. Just as some assumed synergies may prove too costly or difficult to achieve, it is possible that a continued focus may identify further potential as the merging businesses better understand each other during and after the integration phase.

This article is part three of the ‘Transaction lifecycle’ series.

Part one: Don’t let a poorly planned transaction destroy value, or your business 

Part two: Assessing the strategy – why transact?

Part four: Driving success (and minimising risk) of transactions with focussed due diligence

Part five: Assessing and refining the deal


Christopher Davey

Christopher Davey
Partner, Melbourne
T: +61 3 9038 3137
E: cdavey