The mergers and acquisitions (M&A) universe likes to toss about the phrase “deal synergies” as an indicator of how advisable or valuable a deal might be. When it comes to financial synergy in mergers and acquisitions, business owners, however, often consider “deal synergies” synonymous with “reductions in force” — a term human resources professionals use in reference to laying off employees whose functions have become redundant as a result of the merger; however, most business owners don’t want to see their employees lose their jobs after the deal.
First, a definition of “deal synergies.” According to Investopedia, “synergy is the concept that the value and performance of two companies combined will be greater than the sum of the separate individual parts.”
Boston Consulting Group offers a more technical definition: “the source of tangible expected improvement in earnings (calculated at an annual run rate) that occurs when two businesses merge.”
Synergies come in several types: those that save money, those that enhance revenue and those that optimize capital. Revenue enhancements may take the form of access to patents or other intellectual property, complementary products that can be sold together or cross-sold, and complementary geographies or customers.
Capital optimization can occur when companies can combine or reduce hard assets such as equipment or property, or better manage accounts receivable, cost of capital or debt-to-equity levels. Cost-reduction synergies may be achieved through shared information technology, supply chain efficiencies, improved sales and marketing, research and development, and — here it is — lower salaries and wages.
So while most deals do create one or more synergies of the types described above, those synergies don’t always mean the loss of jobs and often the jobs that are eliminated are at the top level of the company — which the executive or ownership team usually anticipates replacing. The new entity typically doesn’t require two CEOs, CFOs, COOs, etc. In addition, anticipated synergies in revenue — additional orders for products and services, for example — mean the new entity may need all the staff from both companies and even create hiring opportunities.
For some buyers, maintaining the existing company leadership and employees is critical to the success of the deal. They are purchasing a well-run business and have no intention of changing the recipe for the secret sauce. They may even offer retention bonuses or equity incentives to retain key staff to ensure production and revenue streams continue uninterrupted.
Owners often fear a buyer will “bring in its own people” or “cut a bunch of bodies” — damaging valued relationships and the owner’s reputation in the community. Bridgepoint uses a discovery and due diligence process that gives owners multiple options for achieving their goals and objectives when monetizing their business. We advise owners on what to look for in a potential buyer and assist in identifying those who are the best fit and have the best intentions for the company’s future. We excel at capital optimization, bringing alternative financing, debt consolidation and monetization ideas to the table. We then guide owners through the complex process of formulating the deal to ensure their goals become reality.
And those are the best synergies of all!
Bridgepoint’s team of seasoned investment bankers bring deep experience across an array of business types. Discovery conversations are complimentary and confidential. Give us a call to understand your options when it comes to financial synergy in mergers and acquisitions.