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 Understanding Synergies In M&A Transactions And Why They’re Important

Understanding Synergies In M&A Transactions And Why They’re Important

One plus one is two in mathematics, but in the M&A world, one plus one is eleven. That said, when two firms or companies merge or consolidate, their combined value is way more than when they operate individually, and this increased value is one of the biggest drivers in M&As.

There are predefined motives behind any acquisition or merger. Sometimes, companies intend to acquire firms selling related products to stretch their product line, while many firms buy companies because of their competitive management. In any case, the objective is to create a new business entity with more combined value, and this idea or concept is often termed as synergy in M&As.

But why are synergies important in M&As, and what are the different types of M&A synergies? Here is what you need to know about synergies in M&As and how to improve the M&A process through technology like virtual data rooms.

Synergies in mergers and acquisitions

Synergy in M&A, as mentioned above, is a concept or idea where two firms intend to integrate their operations (or merge) in order to create a combined value bigger than the individual value of those firms individually. Let’s get a better idea of the concept with an example.

Suppose firm A, whose net worth is $300 million, intends to buy firm B, whose net worth is $50 million. However, according to projections, the value of these two firms combined will be $400 million after the merger. That $50 million difference is synergy. Although there can be complications when the deal is actually closed, two firms, when working collectively, create more value than they can do individually.

A complete understanding of synergies in M&As is important for both buyers and sellers. Here is why.

Importance of synergies from a buyer’s perspective

Synergies affect the buyers’ will to pay a specific amount to buy the other firm. In the example given above, the stand-alone value of firm B is $50 million, but as per projections, its net value can be up to $100 million after the merger. It will allow firm A to analyze how much theoretically they can afford to pay to buy firm B. That said, even if firm A buys firm B for $70 million, it will still be a fair deal for firm A.

Importance of synergies from a seller’s perspective

Just like the buyers, understanding synergies help the sellers assess their negotiating power and how much they can demand. For instance, firm B, in the example mentioned above, will try to get more than $50 million because of that additional $50 million due to the effect of synergies.

To stay in the loop on M&A synergies, their types, results, and latest news, join the M&A community at mnacommunity.com. This is a forum focusing on investment trends, cross-border M&A, and private equity within the current economic background.

Types of M&A synergies

Revenue synergies

Revenue synergies occur when two firms combine, and as a result, they sell more services or products than they would have sold individually or separately. If firm A generated revenue of $50 million and firm B generated $25 million in revenue, but the total revenue is projected revenue is to reach $100 million after the merger, the additional $25 million is due to synergies.

Cost synergies

Cost synergies advocate the concept of how much the cost of production or other expenses will firm A and firm B will be able to reduce if they merge. It will ultimately increase the profit margins. These costs may include factory building rent, staff reduction, etc.

Financial synergies

Financial synergies are a concept that mostly affects a company’s cost of acquiring more capital. Smaller companies often look to merge with bigger companies in a certain way to get capital with minimal interest rates. Although such firms experience reduced control, it helps them get the capital they need.

How to improve M&As with virtual data rooms?

Virtual data rooms are digital document repositories used for safe and fast data storage, sharing, or distribution. Data room vendors nowadays offer dedicated M&A data rooms for better and faster due diligence phase. Here is how firms conduct data room M&A transactions.

Set up pre-due diligence data room

Pre-due diligence is a stage where sellers give potential buyers access to their basic documents like memorandum of association, articles of association, etc. sellers can create data rooms for different buyers and share pre-diligence documents.

Conduct due diligence faster

The seller can scrutinize uninterested buyers and upload all documents for those who show interest in proceeding further. Many data room providers offer checklists for different types of due diligence. Virtual data rooms give both parties an opportunity to communicate freely, fast, and, most importantly, safely. The same goes for data sharing throughout the process.

Get better transparency of business processes

Virtual data rooms make it possible for investors, shareholders, and stakeholders to participate actively in mergers or acquisitions. They can access files, participate in meetings, generate progress reports, and communicate with others.

Final words

Synergies in M&As mean the projected net worth or value that a merger of two companies or firms will generate. Synergies help buyers to determine the maximum amount they can afford to pay for an M&A deal and allows sellers to negotiate in better ways.

Edward Sims

Edward Sims

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