Synergies Realisation In M&A

Synergies Realisation In M&A

In an #mergersandacquisitions transaction, post-merger integration becomes crucial to realizing deal rationale. First, however, the speed of the integration; the sooner the buyer integrates the target, the better its success rate in learning the projected returns for this transaction, particularly when the buyer pays a premium to close the deal. Let me substantiate.

A buyer acquires a target whose market value is $100 million. To consummate the transaction, the buyer pays a 25% premium to the target’s shareholders. The buyer is ready to pay this premium and is confident of recovering this premium by realizing cost savings from integrating two businesses.

Target’s market value – $100 million
Deal premium – 25%
Enterprise value – $125 million
WACC – 10%

If the buyer completes integration in a year1, it has to realize cost synergies of $27.5 million (25(1+10%)^1) to recover the premium paid plus the cost of capital. On the other hand, if the buyer fails to integrate into year one and finishes integration in year 2, it has to realize $30.25 million(25(1+10%)^2) of cost synergies to recover the premium and WACC. Thus, the longer the integration, the higher the synergies that buyer needs to recover.