Synergies

Synergies are value contributions that only arise from combining two companies. Cost synergies from duplicate functions, procurement bundling and site consolidation are comparatively predictable, while revenue synergies from cross-selling and greater reach are far less certain and are frequently missed in practice. Financing synergies from better terms and tax effects are added and usually turn out smaller than expected. They are valued as the present value of the incremental cash flows less the one-off integration costs for severance, IT migration, rebranding and advisors, which often run to the equivalent of the first one to two years of recurring synergies.

Dis-synergies must also be considered, such as losing customers who do not want to buy from a larger supplier, or key people leaving after the combination. In the purchase price they appear as the takeover premium, so a buyer who is too optimistic hands the value to the seller before having realised any of it. They are only credible when each one carries a date, an owner and a measurable target. Only then can they be tracked after completion and compared against plan. The timing of the contributions is also decisive for valuation, because an effect that only takes hold in the third year is worth considerably less once discounted.