Over the last several years, acquisition activity has been strong among corporate buyers. Many companies are looking to grow beyond their traditional organic growth rates and are turning to acquisitions to meet these goals. Synergies can be the competitive advantage for a “strategic” buyer and the story that is used to explain the strategic objectives of the transaction to the board, shareholders or market. Since synergies can come in many different forms, it is important to understand what exactly constitutes synergies. Synergies are defined as the present value of the net, additional cash flow that is generated by the combination of two companies that could not have been generated by either company on its own. The term “net” is important because companies need to factor in the incremental costs associated with achieving their identified synergies.
Strategic buyers should have a plan for identifying and capturing synergies prior to negotiating with the sellers. It is very common for strategic buyers to identify revenue and cost synergies and incorporate them into their valuations; however, capturing and implementing the synergies can provide a new list of challenges. Acquirers need to understand the potential magnitude and timing of the synergies, and their impact on cash flow, in order to understand the value that the company represents to them. More often, the biggest contributor to an unsuccessful acquisition is the acquirer overlooking the implementation side of a transaction and failure to capture the synergies they originally identified.