The most successful M&A acquirers are able to build a winning formula for value creation. In order to do so, pinpointing synergies must become a key part of your integration due diligence and its subsequent execution. Often when we introduce the concept of synergies to our clients, it ruffles feathers. There’s a preconceived notion that synergies means staff redundancies, which understandably creates anxiety and concern within our clientbase. However, synergies can be an incredibly valuable tool to generate growth and drive revenue, it’s not solely about cutting costs. Once that distinction is understood, the conversation begins to change.
When it comes to synergies, organisations typically lean more heavily upon cost synergies and reducing expenditure; they often fail to build revenue synergies into their models. Cost synergies can be attained by finding operational efficiencies within the new combined organisation. These may be seen as slightly “easier” than revenue synergies, in the sense that cost-cutting can be realised straight away and is usually achievable on Day 1. For example, many of our clients find that streamlining their in-house and third-party platforms can be a lucrative “quick win” for cost-saving. To do this, we help our clients build a strategy for their procurement process: we map out an exhaustive list of all services used by both organisations, then assess their pros, cons, features and cost implications. We can then eliminate platform duplication or redundancy, thereby establishing a combined IT offering that takes the best from both businesses. Similarly, in the age of work post-Covid, there are opportunities for securing cost synergies within your office allocation strategy. Following the coronavirus pandemic, businesses are far better placed to support remote working and build office culture digitally. With that in mind, we urge our clients to carefully consider lease renewals and reduction of physical space (where appropriate) in order to reduce overheads. Each of these processes help to reduce unnecessary expenditure.
Evidently, many cost synergy opportunities arise from M&A activity. However, our experience at Scion has demonstrated that revenue synergies tend to drive up deal value far more than cost synergies, as these look to the long-term. We encourage our clients to focus their efforts on their ability to cross-sell and upsell any new services that are being introduced via acquisition. New products, platforms, IP and technology will allow you to provide a broader suite of tools to your existing clientbase. This subsequently generates financial uptick as you introduce new revenue streams and opportunities. We also recommend performing assessments of your employee population and internal structure. Separate out your fee-earning and back-office staff, then figure out where individual teams should sit and how best to motivate each group. Your organisation design should be built in such a way to maximise knowledge-sharing (and therefore revenue growth) within fee-earning staff, and eliminate duplication of responsibilities in back-office staff.
Crucially, you must diligently track all cost and revenue synergies throughout the lifecycle of your 100-day integration period and beyond. This synergy data will be key in calculating how successful your M&A programme was, which in turn can be reported back to shareholders and investors to feed into your wider long-term business strategy.
When planning potential cost and revenue synergies, it’s vital to understand that any action taken must not diminish the core value of the company you are acquiring, or your existing business. By more productively using your core assets as a new combined organisation, you can generate revenue upside and subsequently rely less on cost synergies. Whilst revenue synergies may take longer to achieve than immediate cost savings, they tend to move the needle further than short-term cuts to expenditure. Your aim should be to maximise synergies that drive up your deal value, ensuring your two organisations are worth more when combined than when valued separately.
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