- July 24, 2019
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
Revenue synergies in mergers and acquisitions
Achieving revenue synergies in mergers and acquisitions is challenging. Most acquisitions are done lately to either increase market share and build capabilities to provide additional service offerings that increase revenues.The traditional method of acquiring companies to leverage scale and consolidation by resorting to cost cutting initiatives is no longer the strategic rationale for most of the M&A deals.Most of the M&A deals have moved from traditional scale deals to Scope deals.
With cheap capital available due to low cost of debt, companies look at M&A as a tool for a quick route to increase their market share.As organic growth is declining, inorganic activities like acquisitions are used more to deliver high shareholder returns.
One of the important objectives for doing a M&A is the synergies opportunities that the acquirer identifies during the target due diligence.Of late, due to digital disruption, more companies are looking to either transform their business model or add new capabilities or service offerings by using acquisitions.In these acquisitions, the target companies are much smaller in size compared to acquirer, thus giving rise to bolt-on acquisitions.For these deals, cost synergies cannot be a factor to drive the deal success.These deals needs to bring revenue synergies that impacts the revenues of the acquirer post acquisition.
Achieving Revenue synergies are more difficult compared to Cost synergies.Cost synergies are in the control of the acquirer and are much easier to plan and execute. In the case of revenue synergies, there is no guarantee that the customer would be ready to buy the bundled service offerings of the acquirer and target.In addition, setting the baseline and target for revenue synergies are challenging as against Cost synergies.
Inspite of these challenges, there are ways that can help in achieving revenue synergies.Though the below steps do not guarantee any results, but incorporating them in the integration strategy will increase the probability of success.
Deciding ‘What to sell’ and ‘Where to sell’
- Revenue synergies are given focus in Scope deals where acquirers buy companies with complementary capabilities.The deal rationale is primary driven by the acquirer able to strengthen its existing capabilities/ introduce a new offering and able to expand its presence in the target markets.Post integration, the integration strategy needs to look at the combined value proposition of the services the acquirer will be able to position and sell either to the existing customer base or new customers.The value proposition can also be extended to the new markets or geographies, by tapping the combined customer bases of both the entities.
- The pricing of the service offerings should also be decided based on the revised value proposition. In the acquisition, the target might be following a premium pricing compared to an acquirer.In this case, the acquirer should continue with the premium pricing approach for the target customers.In the case of acquirer, when the customer contracts are up for renewal, the acquirer should plan at increasing the rates for services based on the prevailing situations.
Allocating revenue synergies in mergers and acquisitions to Customer base
- During the deal stage, the acquirer identifies the additional revenue synergies opportunities available as post acquisition.This estimate needs to be based on the additional revenue opportunities that acquirer foresees in the combined customer base.This includes the additional revenues by cross selling each other services or bundling the acquirer service offerings with the target or through capturing additional revenues by expanding to new markets.
- Cross selling opportunities are successful only when the acquirer/target have a very good relationship with the customer.In this case, it becomes easier for the acquirer and target to persuade the customer to look at other services.
Ownership of Synergies targets by the leadership team
- The revenues synergies targets needs to be shared with senior business leaders who needs to approve the targets and also should own and be accountable for the targets realization.
- Once the synergies numbers are identified and added in the financial model, the M&A team needs to share this with the respective business leaders to get their approval on the feasibility of achieving the targets.The business team needs to look at their opportunities pipeline to identify how and where the additional revenue opportunities are present along with at what time will the synergies come into play.Such a detailed analysis will go a long way for the business leaders to be ready in achieving the targets post acquisition.
Getting support from the Salesforce
- Revenues synergies targets cannot be achieved without the support of front line sales who shall be responsible for selling the additional services to customers.Hence the revised targets needs to be shared with Sales team to get their buy-in and support.
- Salesforce should have a deep clarity on the rationale behind the acquisition and how it will benefit both the combined entity.This clarity should help them in devising a sales strategy to achieve the targets.Support needs to be provided to the sales team in helping them achieve this target.
- It is also necessary to assess the competency of sales force to be able to sell the new services.Sufficient training needs to be provided to the sales force on the new services and products that they would be selling to the existing customers.Post that, an incentive model needs to be devised that rewards the sales people for achieving the revenue synergies targets.The incentive model should be attractive enough to motivate the Salesforce to achieve the revenue synergy targets.
Integrating Sales Operations
- Before finalizing the cross sell opportunities and account planning strategies for achieving the revenue synergies, backoffice functions like Sales operations, pipeline management, HR and Financial systems of acquirer and target needs to be integrated.
- In addition, the entire process from identifying an opportunity to closing the deal needs to be seamless for the sales people to have the complete visibility to track the status of each opportunity.Any revenues synergies targets generated needs to be credited to the correct P&L account of the business team.This entire process of seamless integrating the sales operations of the acquirer and target needs to be driven by Integration Management Office which will house cross functional teams from Finance, HR, IT and Sales.
Measuring and Tracking the revenue synergies in mergers and acquisitions
- Measuring and tracking the revenue synergies forms an important activity.At the end of every month, a report needs to be generated which will provide a status on the leading and lagging indicators like account activity along with additional opportunities generated, incremental revenues added, products/services sold etc.This will be shared with steering committee for their review.
- Tracking revenues synergies on a regular basis helps in building the momentum of Salesforce to continue hunting for opportunities.This will help in refining the strategy based on the progress achieved and also rewarding the Salesforce on achieving the synergies targets.
- Achieving revenue synergies in mergers and acquisitions is challenging when compared to cost synergies. Studies show that most companies fail to achieve their synergies targets or take more time to achieve their revenues synergies targets.
- Buy-in and leadership support is critical to execute the revenue synergies.The business leadership should be ready to taken ownership of synergy targets and be accountable to achieve the targets.
- Finally, without the support of front line Salesforce, it would be impossible to achieve the synergies targets.Hence buy-in of sales team for the deal is necessary. Additional training needs to be given to Sales team on the new products and services they would be required to sell to existing customers.A suitable incentive model should be in place to motivate and rewards the sales team to achieve the revenue synergies targets.