By Jim Jeffries, Chairman, M&A Leadership Council
Element 2 in the S3 Guidance Model
Synergies…. Aren’t they the evil reasons for doing the deal? Let’s take a look.
Webster says, “Synergy is the increased effectiveness that results when two or more people or businesses work together”
Wikipedia says, “Synergy is the creation of a whole that is greater than the simple sum of its parts”
So wait -- Isn’t it all about cutting people and saving money?
Not always. And more often than not, the major value-driving synergies are not head-count.
If we combine the two definitions above, they indicate value creation from improved efficiency and effectiveness. In mergers and acquisitions the discovery of synergies and the subsequent capture of those synergies is the essence of value creation in M&A.
In my mind, M&A synergies come in three flavors: Revenue, Cost, and Performance.
Revenue Synergies
Revenue synergies have become a stronger driving force behind deals over the past decade. Territorial expansion, channel expansion, sales force effectiveness and increasing the product portfolio can drive deal strategy. Just as there needs to be a pre-determined strategy for cost take-out, there also needs to be a specific strategy for the revenue drivers. I believe it is critical that the revenue synergy strategy needs to emerge from a much more disciplined and focused Due Diligence process than cost synergies. It’s critical that the opportunities for revenue synergies be validated to assure their existence and degrees of difficulty in achievement.
Cost Synergies
Cost synergies typically come from the redundancies between the two merging entities. You don’t need two CFO’s or two CIO’s or two accounting departments or often even two full sales forces. Cost synergies often allow for the consolidation of multiple facilities, products, services and departments. In other words, from a cost standpoint 2 + 2 might equal 3…. Huge savings that make the deal work. But here is the caution on cost synergies: you must have a “synergy action strategy” laid out long before close. Cost synergies evaporate with time and must be executed as rapidly as possible. And when it comes to people synergies, do the reductions as soon as possible and only in one tranche if possible. Get it over with quickly so the organization can become re-stabilized and you can recover lost performance.
Performance Synergies
Here’s the surprise. A nuance in the M&A community is the surfacing of performance improvements that can be achieved through M&A. It’s just a fact that some companies perform better in certain areas than others. It may come from the leveraging of technology, strategic locations, more effective business models or even culture. Obviously it’s a challenge to admit that a potential acquisition has the better management team or production capabilities that would greatly enhance throughput and quality, but the reality of competitive advantage via a performance-based acquisition will become more the norm than exception in the future.
Next month will feature the most challenging element in the S3 model, Stability. Synergies are the value drivers and should be captured with Speed to create value…….but in order not to erode value between announcement of the deal and steady state operations, we must also focus on Stabilizing all stakeholders.
Until next month,
Jim