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What are the best practices for identifying synergies between two companies during deal execution?

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When two companies merge or acquire each other, they often expect to create value by combining their resources, capabilities, and markets. This value creation is called synergy, and it can arise from various sources, such as cost reduction, revenue enhancement, tax benefits, or strategic advantages. However, identifying and realizing synergies is not easy, and many deals fail to deliver the expected results. In this article, you will learn some of the best practices for identifying synergies between two companies during deal execution, and how to avoid some common pitfalls.

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Ashutosh Kar

Founder & CEO | Advince - Your Trusted Partner for Global Finance & Legal Consulting | Advince Books - Online…

1 Define synergy types and sources

The first step in identifying synergies is to define what types and sources of synergies are relevant for the deal. There are two main types of synergies: operating and financial. Operating synergies refer to the benefits of improving the efficiency and effectiveness of the combined business, such as eliminating duplicate functions, sharing best practices, cross-selling products, or leveraging economies of scale and scope. Financial synergies refer to the benefits of lowering the cost of capital or increasing the cash flow of the combined entity, such as reducing debt, optimizing tax structure, or using excess cash. The sources of synergies depend on the industry, market, and strategic objectives of the deal, and they should be aligned with the value proposition and rationale of the transaction.

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Ashutosh Kar

Founder & CEO | Advince - Your Trusted Partner for Global Finance & Legal Consulting | Advince Books - Online Accounting Software for Seamless Financial Management
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During deal execution, identify synergies by conducting comprehensive due diligence, analyzing overlapping capabilities, and assessing cost-saving opportunities. Evaluate cultural alignment and leadership styles to ensure smooth integration. Utilize cross-functional teams for a holistic perspective, focusing on technology, operations, and market synergies. Foster open communication between the merging entities to address challenges promptly. Prioritize customer retention and employee satisfaction, acknowledging their impact on synergy realization. Regularly reassess and adjust integration strategies as needed for optimal synergy extraction.

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2 Estimate synergy value and timing

The next step in identifying synergies is to estimate their value and timing. This involves making assumptions and projections based on historical data, industry benchmarks, and deal-specific factors. The value of synergies should be expressed as the present value of the incremental cash flows that the combined entity can generate over a certain period, usually five to ten years. The timing of synergies refers to when they can be realized, which depends on the complexity and duration of the integration process. The timing of synergies should be reflected in the discount rate used to calculate their present value, as well as in the integration plan and budget.

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Sri Malladi

Advised on $8B+ in M&A | CEOs and CFOs hire us to acquire 2-3 right fit-businesses / year without burning out their team | Business owners hire us to prepare and sell their business at the best value
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Some steps to estimate synergy value: 1) Due diligence: Conduct thorough due diligence to identify potential synergies in various areas. Understanding the target company's operations and financials is essential for estimating the potential value of synergies. 2) Engage experts: Engage financial and industry experts who can provide insights into the potential synergies specific to the industry and the companies involved. 3) Benchmarking: Compare the performance of similar M&A transactions in the industry to gain insights into the typical synergy levels achieved in similar situations.

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Eleonora De Guerra

ESPACIOS URBANOS INMUEBLES, ELEONORA DE GUERRA
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Para mí la sinergia debe trabajarse en equipo, solo así habrá esfuerzo combinado de un grupo de individuos que resulta en un resultado más efectivo y eficiente que la suma de los esfuerzos individuales . Así que es esencial, que se utilice en el lugar de trabajo porque mejora la productividad, fomenta la innovación y mejora el rendimiento general del equipo.

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3 Validate synergy assumptions and scenarios

The third step in identifying synergies is to validate the assumptions and scenarios used to estimate their value and timing. This involves conducting due diligence, market research, and sensitivity analysis to test the validity and robustness of the synergy estimates. Due diligence is the process of verifying the information and data provided by the target company, and identifying any potential risks or issues that may affect the deal value or execution. Market research is the process of gathering and analyzing external data and insights from customers, competitors, suppliers, regulators, and other stakeholders to assess the market potential and competitive position of the combined entity. Sensitivity analysis is the process of examining how the synergy value changes under different assumptions and scenarios, such as changes in revenue growth, cost savings, tax rates, or integration costs.

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Sri Malladi

Advised on $8B+ in M&A | CEOs and CFOs hire us to acquire 2-3 right fit-businesses / year without burning out their team | Business owners hire us to prepare and sell their business at the best value
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Some ways to get started: 1) Speak to subject matter (industry) experts to understand what synergies are par for the course. 2) Leverage the functional expertise in the acquiring company to understand what synergies are realistic and how easy it is to achieve them 3) Build scenario analysis to factor in the different options that could play out when the integration commences.

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4 Communicate synergy expectations and targets

The fourth step in identifying synergies is to communicate the expectations and targets for synergy realization to the internal and external stakeholders of the deal. This involves preparing and presenting a clear and compelling synergy story that explains the sources, types, value, and timing of synergies, as well as the risks and challenges involved. The synergy story should be consistent with the overall deal strategy and objectives, and supported by credible data and analysis. The communication of synergies should be tailored to the needs and interests of different audiences, such as shareholders, employees, customers, suppliers, regulators, and media. The communication of synergies should also be transparent and realistic, and avoid overpromising or underdelivering.

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5 Monitor and measure synergy performance

The final step in identifying synergies is to monitor and measure the performance of synergy realization during and after the integration process. This involves setting and tracking key performance indicators (KPIs) and milestones for each synergy source and type, and comparing the actual results with the expected targets. The monitoring and measurement of synergies should be done at different levels of the organization, such as business units, functions, or teams, and involve regular reporting and feedback mechanisms. The monitoring and measurement of synergies should also be flexible and adaptive, and allow for adjustments and corrections if needed.

Identifying synergies between two companies during deal execution is a critical and challenging task that requires careful planning, analysis, validation, communication, and monitoring. By following these best practices, you can increase the chances of creating value and achieving success in your mergers and acquisitions.

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Sri Malladi

Advised on $8B+ in M&A | CEOs and CFOs hire us to acquire 2-3 right fit-businesses / year without burning out their team | Business owners hire us to prepare and sell their business at the best value
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1. Define key performance indicators (KPIs): - Establish specific and measurable KPIs that align with the identified synergies. KPIs can include financial metrics (cost savings, revenue growth), operational efficiency indicators, and employee satisfaction measures. 2. Regular reporting and analysis: - Implement a reporting system to provide regular updates on synergy performance. - Conduct in-depth analyses to compare actual performance against the forecasted synergies, identifying variations and root causes. 3. Cross-Functional Teams: - Empower cross-functional teams responsible for synergy realization to monitor and report on their respective areas.

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Eleonora De Guerra

ESPACIOS URBANOS INMUEBLES, ELEONORA DE GUERRA
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Cuando tenemos que realizar una actividad difícil y debemos conseguir un éxito al final. Por lo tanto la sinergia es cuando el todo es mayor que la suma de las partes, por lo tanto, el resultado será mayor o habrá una mayor efectividad que si se actúa por separado.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Andrea Edwards

Pest Control/ management services expert Commercial , Residential , Food Plant, Audit Ready. Multi housing and Restaurant.
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Knowing and understand the business, environment and process. Stay honest. It may take time, but , patience is a business growth opportunity .

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What are the best practices for identifying synergies between two companies during deal execution?

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1 Define synergy types and sources

2 Estimate synergy value and timing

3 Validate synergy assumptions and scenarios

4 Communicate synergy expectations and targets

5 Monitor and measure synergy performance

6 Here’s what else to consider

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