Unlocking M&A Value: Harnessing Synergies to Drive Purchase Price

Most M&A participants know that strategics - whether a corporate buyer or a PE portfolio company (a hybrid strategic) - tend to value targets the most because of synergies. So, what goes into synergies and, more importantly, using them to drive purchase price? ⬇

▪ Non-strategics value a business based on its benefit stream (eg, EBITDA) whereas the value realized by a strategic will be the baseline benefit stream plus realized synergies (EBITDA + synergies).

▪ To realize synergistic value, the post-closing synergies must be susceptible to quantification with some degree of certainty pre-transaction.

▪ Synergies broadly fit into 4 categories, each discussed below.

▪ Cost Savings Synergies: Sometimes called "hard" synergies, these are often the easiest to quantify. Examples of cost savings synergies include elimination or reductions in facilities costs, payroll, marketing expenses, and vendor costs.

▪ Revenue Enhancement Synergies: Revenue enhancement occurs when a higher level of sales growth can be achieved by the combined company than the individual businesses alone. A common example is placing a target's goods / services in the acquiror's existing sales / distribution channels.

▪ Gross Margin Enhancement Synergies: Gross margin enhancements occur when the target can benefit from the acquiror's buying power through lower vendor / supplier pricing.

▪ Strategic Synergies: Strategic benefits can be hard to quantify and include things like marketing and geographic benefits, time to market (buy vs build), trade secrets, eliminating oversupply (ie, competition), cultural improvement, acquihire of key personnel, and similar items.

Regardless of how synergies are derived and quantified, buyers usually will not freely agree to share synergies with the target in the form of an increased purchase price. After all, typically, it's what the buyer is bringing to the table that allows the synergies to be harvested.

So, are synergies academic for sellers? Of course not. In a competitive process, buyers are usually forced to share some synergies with the seller or they'll get out bid by other buyers. That's why having an M&A advisor that can create competition for a seller is so important.