The Ultimate Guide to Synergies in Mergers & Acquisitions

Synergies are the main benefit that M&A deals hope to capture. Understanding the types of synergies that drive mergers and acquisitions, analyzing them on paper, and maximizing them once the deal has gone through are essential to getting the most from an M&A transaction.

In this guide, we’ll review everything you need to know about synergies, from definitions and objectives to real-world examples based on actual mergers and acquisitions. We’ll also provide insights and strategies around synergy capture and value creation.

Types of synergies

Synergies can be divided into three different categories: revenue synergies, cost synergies, and financial synergies. 

Any transaction can feature elements of all three; for example, the merger of two consumer goods producers could bring revenue synergies through a complementary product range and cost synergies through savings in warehousing and distribution.

Let’s dive into each type in more detail. 

Revenue synergies

Revenue synergy is based on the premise that the two companies combined can generate higher sales than each can on its own. It should be noted, however, that research shows capturing revenue synergies takes several years longer on average than capturing cost synergies. According to McKinsey & Company, this is due to challenges such as developing appropriate targets, executing new workflows, and implementing sales strategies across all product lines and departments. 

There are multiple examples of revenue synergies in M&A, but traditionally, revenue synergies result from:

• Cross-selling
• Reduction of competition
• Access to new markets

An example of revenue synergy

Disney’s acquisition of Pixar in 2006 is often cited as an example of value-generating M&A, and for good reason.The deal made sense on a lot of levels and created a series of revenue synergies that added billions of dollars in value to Walt Disney Company’s stock price.

In 2006, the company had revenues of $33.75 billion. By 2011, it had grown over 20% to $40.89 billion. In contrast, the S&P 500 shrunk 1% over the same period.

Below are just a few examples of the revenue synergies generated by the deal:

• Disney’s scale enabled Pixar to release its extremely popular motion pictures more regularly and through an expanded distribution network.
• Merchandise featuring Pixar’s characters, which included children’s favorites like Buzz Lightyear, could be sold through hundreds of Disney stores globally.
• Pixar’s characters could be promoted through Disney’s theme parks, giving enhanced exposure and sales opportunities to Pixar’s output.

Cost Synergies

If revenue synergies add value at the front-end, then cost synergies add value in the back office.

After an M&A transaction, the two merging companies will be left with excess resources (two HR departments, for example) which can then be reduced with the aim of generating cost synergies. However, achieving these synergies tends to be easier on paper than in practice.

Generally, the merger of two companies creates cost-savings through:

• Marketing strategies and channels: Broader marketing channels and increased marketing resources may result in reduced costs.

• Shared information and resources: Increasing the acquirer’s access to new research and development can yield cost savings through production advancements.

• Reduced salaries: Most companies do not need two of each C-suite position, and the elimination of some heavy-hitting salaries can result in significant cost reduction.

• Streamlined processes: Streamlined processes have the potential to make the new company more efficient; in addition, the new, larger company can usually negotiate better prices from suppliers.

An example of cost synergy

The merger of Exxon and Mobil in 1998 created the world’s largest oil company by market cap and generated massive cost savings.

As two US oil companies, they possessed several assets that were essentially overlapping each other and could be sold, including refineries and 2,400 service stations. In addition, a total of 16,000 people were laid off, generating cost synergies of over $5 billion.

Financial synergies

Financial synergies are the improvements in financial activities and conditions that come about as a result of a transaction. These typically include a strengthened balance sheet, a lower cost of capital, greater tax benefits, and easier access to capital. The last of these is usually not easy to measure, but the logic behind the reasoning is widely held to be solid.

An example of financial synergy

A real-world example of potential financial synergies was the proposed $160 billion acquisition of Allergan by Pfizer. Ireland-based pharmaceutical company Allergan enjoyed low corporate tax rates, which Pfizer wanted a piece of. The deal would have saved Pfizer billions in annual tax returns, until the US government stepped in and prohibited the deal on that same basis.

Achieving successful synergies

Unlocking the value inherent in combining two or more companies is what should drive all M&A practice. In that sense, what passes for good M&A practice is often the same as achieving successful synergies.

However, not all acquisitions will create synergies, so the following points are important to keep in mind.

Valuation is key

Even if there are synergies to be achieved through a deal, the amount paid for the acquisition has to be low enough to benefit from them. So, if the synergies are estimated at $100M, and the acquisition price is $200M, the deal will still almost certainly be value-destructive in the long run.

You can learn more about valuation in the M&A Science Academy.

Under-promise and over-deliver

When it comes to synergies, it’s always better to understate them before the deal. If you think there is $100M of value that can be unlocked between cost, revenue, and financial synergies, it’s good to aim for them. However, history shows that it’s a much better idea to base acquisitions on realistic rather than ambitious synergies.

Focus on quick wins first

The post-merger integration phase of an M&A transaction is essentially about getting to the synergies of the deal as quickly as possible. Where integration is concerned, speed is everything. Concentrate on the quick wins first (for example, sales channel integration) and slowly work toward the more challenging ones (layoffs and redundancy packages for surplus employees).

An example of positive (successful) synergy

Facebook’s (now Meta) purchase of Instagram in 2012 offers an example of a positive synergy. 

The acquisition enabled Facebook to create a unique and hitherto unassailable proposition for advertisers looking to reach certain demographics. It also allowed the company to gain access to some of the best developers on the planet, pooling the human capital of the two technology firms. Finally, Instagram had many of the same users as Facebook and was growing quickly; that growth only accelerated once the deal went through. 

An example of negative synergy

Just as successful synergies are at the heart of all beneficial M&A, the opposite can be said of value-destructive M&A. One example of such an acquisition was the Quaker Oats and Snapple deal. On the surface, the merger seemed to make sense. 

Under the hood, however, there were major issues. Although both companies sold fast-moving consumer goods, they did so through distinctly different sales channels: Quaker Oats in supermarkets and large retailers, and Snapple in gas stations and small, independent stores. The branding for each was distinctly different. Whereas Quaker Oats sought to appeal to mothers and family buyers, Snapple was aimed at teenagers and young adults. It used “shock jock” Howard Stern in its advertisements—not someone you’d expect mothers to listen to when making consumption choices.

In addition, Quaker Oats was ultimately looking to take a slice of the soft drinks market, pitting itself against Coca-Cola. That’s a tall ask for any deal, and one they were unable to reach. 

How to create synergy realization

No one wants a deal that only looks good on paper; that’s why synergy realization is essential. While deals fail for a variety of reasons, one of the most common is the inability to capture predicted synergies.

With this in mind, here’s how to maximize your deal’s synergy realization:

1. Don’t lose sight of your overarching goal/objective

Be sure all stakeholders and team members stay focused on the predetermined objective throughout the M&A process. Adopting a more Agile M&A practice can help with this, as the Agile methodology is focused on achieving the main objective rather than plowing through a long list of tasks that may not be necessary (and can cause deal fatigue). 

2. Focus on “easy” value drivers

Because the first year of integration is critical for capturing synergies, it is wise early on to prioritize synergies that are “easy” to capture and will produce the highest return. More specifically, these “easy” value drivers should match your overarching goal, be measurable and trackable, and have a high probability of success. 

3. Properly plan for integration

Poor post-merger integration practices and failure to properly plan for integration when diligence begins often result in lost synergies.

4. Keep acquired companies’ key employees (and don’t underestimate the importance of culture)

Employees are what make companies run, and when a merger or acquisition takes place, important employees are often targets for recruiters to poach. In order to retain key personnel and create a comfortable environment for employees of the merged firms, leadership must focus on culture and change management.

5. Track synergy process

When trying to capture different types of synergies, company leaders must find a way to track each one’s progress. A centralized location for this tracking, such as an M&A project management platform, is recommended. Moreover, M&A synergy benchmarks for the deal should be created and then revisited on a regular cadence. 

6. Analyze your customer base

In order to capture revenue synergies, it’s critical to complete a deep analysis of each customer relationship. When analyzing each customer, specifically consider: how long you’ve had a relationship with the customer, how strong the relationship is, what you currently sell to the customer, and what other services and products the customer uses that you could provide. The sales team should be part of this customer study, as your reps need to understand the strategy as it relates to synergy goals.

How to create an M&A synergy model

Synergies are often calculated by adding the net present value (NPV: the value of the new company) with the premium (P). Consider the following categories as the cornerstones of your model: how to sell, what to sell, and where to sell. Examine where the opportunities to capture synergies and create value exist in these three categories. 

Using an M&A project management platform, or another tool such as Excel, can be helpful during synergy valuation. For example, a tool such as the DealRoom M&A Optimization Platform is designed to be used before a deal even begins. Teams can use features like pipeline management to access company information that is vital to evaluating synergies. Another option is to use a valuation spreadsheet, which compares the inputs and outputs of the acquirer and the target individually to the combined inputs and outputs if the two companies were to merge.

Types of synergies outside of mergers and acquisitions

Generating corporate synergies is not limited to the sphere of mergers and acquisitions. In fact, looking for synergies in a company’s existing operations and partnerships is an excellent way to generate value.  Different types of synergies that occur outside of M&A include:

Modular synergies

Pooling resources can be an effective way for two non-competing companies to generate value. These are sometimes referred to as modular synergies, and usually involve companies bundling packages of products or services to generate greater value from the combinations. For example, Southwest Airlines partnered with hotel firms and car rental companies to provide complete travel packages to customers. Another instance of modular synergy was Coca-Cola teaming up with Jack Daniels to create a “Jack and Coke” offering.

Sequential synergies

Sequential synergies refer to value generated along a company’s value chain. Although in many cases, this value is generated by virtue of acquiring a firm upstream or downstream in a company’s supply chain (see our article on vertical acquisitions here), it can also be achieved by choosing partners that are naturally synergistic with your own. One example of a sequential synergy was Chanel outsourcing production of their branded watches to Swiss watch manufacturers, then subsequently acquiring them. Another is Amazon Direct Fulfillment, which has become the logistics provider for thousands of small businesses, generating far more value for them in their warehousing and distribution than would have been possible individually.

Examples of M&A synergy capture in different industries

Let’s explore some of the ways specific industries capture synergy through M&A. 

The software industry 

The software industry, and especially software as a service, is marked by intense competition and high user expectations around UX, UI, design, and accessibility. Combining two software firms can lead to increased resources for product development and innovation, and software platforms with services or products that complement each other may generate a great deal of value for customers. 

The entertainment and media industries

The entertainment and media world has changed at a lightning-quick pace, with digital streaming taking over from traditional broadcast networks, and user-generated content overtaking paid advertisements in terms of engagement. Synergy capture in this arena often comes from combining different media formats, such as print, digital, etc., or from building a larger pool of creative resources for content production and marketing initiatives. Cost synergies are also possible through economies of scale and reduced production and distribution spending. 

The telecommunication industry 

Telecom companies face challenges related to balancing legacy systems with innovation, increasing rates of change, consumer volatility, and supply chain management. As a result, mergers between telecom companies are especially difficult and require a great deal of forethought and planning to successfully capture synergies. Potential benefits of such a transaction could be network improvements, increased customer satisfaction and loyalty, and penetration into new markets. 

The high tech industry

In this rapidly-changing and highly competitive industry, the protection of intellectual property is paramount, as it means staying one step ahead of the considerable competition, particularly in the consumer electronics space. Synergies typically result from access to a broader resource pool to drive innovation, as well as cost reductions across the supply chain. 

The healthcare, pharmaceutical, and life sciences industries

R&D costs are huge for companies working to create new medications, medical devices, and other types of healthcare treatments. When companies in these industries merge, synergies are usually related to a greater product portfolio, research cost reductions, economies of scale, and access to new markets. 

Major deals, lasting effects 

No matter what the desired M&A synergy is for a particular deal, it must be considered throughout every stage of the transaction. Synergies can be easy to identify but hard to realize; therefore, it is critical to understand that when the deal closes and the post-merger transition begins there is still a great amount of work to be done to yield the identified benefits. Post-close synergy work needs to be planned early and carried on for months, and sometimes even years, after a close.

Additionally, while practitioners should be ambitious in identifying and outlining expected deal synergies, it’s more important to be realistic and not overestimate the deal’s potential synergies and value drivers.