Synergy, the ‘Magic Dust’ of Value

Synergy is the magic dust that allows for the achievement of revenue enhancement and cost efficiencies in business mergers and acquisitions. The value of synergy depends entirely on the assumptions made about how combined businesses will operate after closing. The assumptions are unique to the companies involved in the deal and may not always be achievable. Synergistic value includes:

  • Revenue Enhancement: cross-selling & branding, improved market reach & visibility
  • Cost Reduction: economies of scale, staff reductions, purchasing power, technology, logistics, distribution
  • Asset Reduction: disposal of idle assets; buildings & inventories
  • Tax Reduction: depreciation derived from step-up in basis; transfer of net operating losses
  • Financial: improvements in free cash flow, low cost of capital, coinsurance
  • New Options: existing in growth, exiting, ability to change

Achieving synergy is easier said than done; synergies do not happen until possibilities are converted into results. Although the Buyer would appear to be entitled to the value of the synergy of a merger or acquisition, the Seller must negotiate for his share of the value.