Synergies: 1 + 1 = 3

Synergies refer to the potential benefits that arise when two companies combine, resulting in greater value than the sum of their individual parts. Synergies are often a key driver of which buyer wins an M&A transaction, since underwriting to better synergies increases their ability to pay a higher price.

There are two main types of synergies; Revenue Synergies & Cost Synergies

Revenue Synergies

Revenue synergies refer to the potential increase in revenue that can be achieved when two companies merge. There are a few ways that revenue synergies can be achieved:

Cross-Selling Products or Services: One company can sell the other company's products to its existing customers.

Expanding Market Reach: The combined entity can access new geographic markets or customer segments.

Bundling Products: Companies can offer combined product or service packages at a competitive price.

Improved Pricing Power: The merged company may have increased market share or bargaining power, allowing it to raise prices or gain better terms with suppliers.

Cost Synergies

Cost synergies refer to the potential cost savings that result from the combination of two companies. Here are a few ways that cost synergies can be achieved:

Eliminating Redundant Roles: The merger may result in the reduction of overlapping staff, such as combining administrative or managerial positions.

Consolidating Facilities or Operations: The combined entity may close or consolidate offices, manufacturing plants, or distribution centers to reduce overhead costs.

Negotiating Better Terms with Suppliers: With increased purchasing power, the merged company may be able to secure better pricing or more favorable contracts with suppliers.

Shared Technology and Resources: The companies can pool resources like IT infrastructure, software, or research and development efforts, reducing costs for each.

Streamlining Marketing or Sales Functions: Merging marketing, sales, and advertising efforts may lead to lower overall spending on customer acquisition and promotion.

Now let’s walk through a sample transaction and do quick math on both!

Sample Transaction & Synergy Calculation

Let’s say that we’re evaluating an example transaction where FlowerCentral, a producer of flowers is up for sale. Their main competitor, FlowerBoys, is currently evaluating opportunities for synergies.

Assumptions:

• Bidding Base: All buyers are bidding off 2025E EBITDA
• Multiple: All buyers are wiling to pay 9.0x EBITDA at most

So this is what we’re working with to start. As you can see, we’ve provided a high-level P&L and simple Enterprise Value calculation using our 9.0x EBITDA multiple. Without synergies, it looks like FlowerBoys can pay $386 at most.

Synergy Identification

FlowerBoys works closely with FlowerCentral’s bankers and identifies the below synergies:

They believe they can reduce accounting expenses by $800k per year by using FlowerBoys’ accounting team

They believe they can accelerate revenue growth by 5% per year by cross-selling FlowerCentral’s products into FlowerBoys’ customer base

They believe they can reduce COGS by $10mm each year by using FlowerBoys’ favorable arrangements with shipping companies

The Effect of Synergies

We’ve outlined the line items that are affected by our synergies. As you can see, there is a dramatic difference in Enterprise Value in 2025E, as well as in the long-run.

Although this is a dramatic example, this is the power of synergies.