Avoiding Synergy Trap in M&A Deals

Types of Synergies

  • In a M&A transaction, synergies drive the purchase price.The common synergies that acquirers focus during a deal is Cost Synergies and Revenue synergies.
  • The synergies that can be realized in a deal depends on the deal rationale and the acquisition strategy. It is important to note that not all synergies are equal in M&A deal.A scale deal is focused on Cost synergies where as in a scope deal, revenue synergies becomes important.
  • Many acquirers fall into a trap popularly referred to as a Synergy trap.

Synergy Trap

  • Let us take a transaction where a large company is looking to acquire a small niche startup that is specialized in a particular technology. The acquirer is interested to acquire the company because this acquisition can give access to a new technology which can help to create a new service offering.In addition, the target company has an excellent brand reputation in the market and is known for its niche technology skills.
  • This acquisition creates a new source of revenues for the acquirer.In such deals, cost synergies are not going to play an important role.The cost savings that can be realized with this transaction is nominal.
  • The value driver for this transaction is that it gives the acquirer a new channel for growing its revenue, a channel where the acquirer does not have any prior expertise nor do they have any existing talent with this capability.
  • Hence the immediate priority for the integration team is to ensure that this unique value proposition the target company is bringing to the table is preserved.

Let us see how we can achieve this.

  • The integration strategy needs to be linked to the original deal value proposition. This means that the value drivers of the deal should be identified and integration needs to be focused on those activities that accelerate the realization of these value drivers.
  • The integration strategy needs to be focused on long term.This implies that the acquirer’s vision should be to emerge as a leader in the new service offering in the market. In many cases, the integration team focuses on low hanging fruits like consolidating backoffice functions in order to achieve some cost savings.They miss the big picture – The revenue synergies, which is very important in such deal types.
  • The integration team should have a dedicated budget to carry out the integration activities. They should have dedicated resources who are focused on this deal all the time.These resources should be specialists who have prior experience in executing M&A integrations before.The integration office should have a mix of resources from deal team, business team and from functions like HR, IT and Finance.
  • The deal team needs to validate the cross sales potential of the transaction during the due diligence stage.In this transaction, as the target company is in a different business compared to the acquirer, it is important that target company’s sales function continues to manage their key customers.A haphazard integration by replacing the target company’s sales team with that of the acquirer will erode the deal value.The acquirer’s sales team needs to be given adequate training to understand target company’s service offerings. In many cases, the target company’s sales team would have established long standing relationships with its customers. Hence it is necessary that acquirer continues this relationship and not disrupt it.
  • The cross selling targets should be decided in agreement with the target company’s sales team.In many cases, the target company’s sales team will not be receptive to the buyer’s idea of selling their offerings to its customer base.Revenue synergies especially cross selling will only work if the customer is interested in the value proposition. If the customer is satisfied with the existing services, they will not be inclined to replace their existing service providers.

Conclusion

  • Cost synergies are just the starting line and not the finish line for the deal success. This is even applicable in capacity reduction deals.
  • Some deals tend to overestimate the revenue synergies and underestimate the integration costs, timelines and risks.


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