Businesses create teams or departments because collective efforts to achieve a single goal are always much bigger than individual efforts. Similarly, the objectives behind corporate mergers and acquisitions are to create an additional value that two individual businesses cannot create on their own.
There are different types of M&A, and every type serves a different purpose. Businesses acquire other businesses to reduce or eliminate competition, extend their product line, invest in new technologies, or buy a pool of skilled workforce. However, what businesses actually want is synergies — a value created after the merger or integration of two business entities.
What exactly is synergy in M&As, and why do businesses intend to create synergies through M&As? You will be able to learn about synergies in M&As, how they affect businesses post-merger, and how technology like virtual data rooms can help the corporate sector make the M&A process faster and more efficient. You can also get more M&A insights, due diligence checklists, and post merger integration checklists here.
What are synergies in mergers and acquisitions?
Synergies in m&a transactions are an additional value created due to the combination of two business entities. Of course, when two businesses merge, their overall financial net worth increases automatically. That said, if a firm worth $50 million merges with a company worth $100 million, their net value should be $150 million.
However, due to synergies, that net value may reach $175 million; is that practically possible? Yes, it is not just a theory; it happens in M&As, and businesses mostly invest in transactions that can create synergies. How does it happen?
Well, mergers and acquisitions help businesses either reduce their costs, generate more sales, or eliminate the competition (which will also help the company increase its sales and capture more market share). When the collective revenue or market share increases, the net worth of the merged business entity also increases.
Common types of M&A synergies
There are three major types of m&a synergies — financial, cost, and revenue.
As the name suggests, when a merged or consolidated business entity generates more collective revenue than those businesses separately, it creates a synergy effect in the revenue. For example, if company A and company B produce complementary products and they merge collectively, they will be able to target two markets and thus generate massive revenues. Revenue synergies can also be created through the elimination of competition and cross-selling.
Financial synergies result in the improvement of the financial situation of the two companies after the merger. M&As give companies access to more capital and also improve the chances of getting more investment. Apart from that, it also strengthens the balance sheet health and gives businesses access to more assets.
Many companies acquire other businesses relevant to their industry or product line to produce cost synergies — reduce the costs of production. For instance, a company may buy a distribution company to minimize the costs of distribution in the long term. The Mobil and Exxon merger (two oil companies in the United States) is a classic example that created cost synergies worth $5 billion.
Importance of M&A synergies for buyers and sellers
Why are synergies important for buyers?
Synergies help buyers or investors determine how much they can afford to pay for a certain M&A transaction. It affects their will to stretch their purse during the negotiation. Suppose a company’s net worth is $100 million, but after the merger, it can create a synergy value of up to $50 million. In that case, buyers can buy that firm for up to $130 million or even $150 million
Why are synergies important for sellers?
Where synergies help buyers evaluate the maximum price they should pay for the transaction, it gives sellers a clear picture of how much they can negotiate during the transaction. If the seller believes that their $100 million company can create a synergy value of $25 million, they can get more than $100 million as the selling price.
The role of data room in M&As
An M&A data room software is a cloud-based digital platform with a combination of multiple technologies for data management, meeting management, and other forms of online communication.
The M&A community has been using virtual data rooms for due diligence, fundraising, capital raising, etc. Private equity firms use data rooms for m&a, data management, prospecting, pre-due diligence, and asset portfolio management.
Here is how an M&A data room facilitates mergers and acquisitions:
Sellers can use data room software to set up temporary pre-due diligence rooms for buyers. They can upload initial documents and communicate with them in those data rooms.
Once the pre-due diligence stage is over, sellers can set up due diligence rooms for interested buyers. Virtual data rooms also provide due diligence checklists for different industries.
Data room software acts as a central document repository for buyers and sellers. Buyers can access files remotely and request any document they need.
Investors, stakeholders, boards, and shareholders from both sides can communicate through virtual data rooms.
Data rooms minimize the cost of transactions by reducing administrative expenses like paper and printing costs.