Synergy Identification and Capture in M&A

Identifying synergies between companies is often the first and perhaps the most important step in the acquisition process, as it should in most instances form the foundational justification for a merger or acquisition.

Synergies can manifest in a number of different ways. Companies should look for complimentary parts of the business which will allow for cost savings, revenue growth, margin improvement or other areas where value will be created by the joining of the two businesses.

Some examples of synergies a business might see in a potential acquisition include revenue creation through cross-selling of a broader offering of products or services, a greater geographical reach quickly increasing the company's client base, the opportunity to capitalise on lower corporate tax rates, cost savings from the reduction of resources needed to support the merged entity, or easier access to capital from a more liquid public market or investor.

Despite being such an important component of making an acquisition, synergy identification is often performed at a relatively superficial level. According to a McKinsey study, nearly 50% of due diligence fails to provide an adequate path to capturing synergies post-acquisition.

Companies performing due diligence on an acquisition need to not only identify synergies but also become proficient in creating an integration plan which capitalises on those synergies. Management should strategise how to attain the value of synergies through cost-cuts, increased revenue streams, and marketing or cross-selling strategies early on to get the most value out of an acquisition.