M&A Synergies Benchmarking Guide: Types, Techniques, and Best Practices

Introduction

Synergies refer to the sum of two things being greater than the individual parts. It is an important concept to understand for many stakeholders in the world of mergers and acquisitions ('M&A'). The anticipated upside from synergies is often used to determine the combined entity's value and justify the premium paid during an acquisition.

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Whether you're a strategic buyer looking to leverage operational efficiencies or a private equity firm seeking financial synergies, understanding how to unlock synergies is crucial for extracting value from any acquisition. In this guide, we will cover the following topics:

1. What are Synergies?
2. Types of Synergies
3. Who Should Know About Synergies?
4. Benchmarking Techniques for Synergies
5. Calculating Synergies Using Benchmarks
6. Five Key Risks to Unlocking Synergies
7. Best Practices and Real-World Examples
8. Conclusion

What Are Synergies?

Synergies arise when two companies combine, creating a value greater than the sum of their standalone companies. They typically manifest as increased revenue, cost savings, or other financial benefits, contributing to improved cash flow or tax benefits for the combined firm.

In summary, synergies are categorized into three types, as follows:

1. Revenue synergies – These produce higher revenue by cross-selling to each other's customers, combining sales strategies, leveraging intellectual property, and expanding market reach.
2. Cost synergies – Focused on removing duplicative costs, such as insurance, consolidating offices, and optimizing supply chains to achieve cost savings.
3. Financial synergies – Enhance the capital structure to get a potential financial benefit or generate tax benefits through financial engineering in the combined company.

By understanding the potential benefits of merger and acquisition synergies, you can be in a better position to advise on the improved financial performance from synergies that drive long-term value.

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Types of Synergies

In this section we will expand on the three types of synergies listed above, as follows:

1. Revenue Synergies

Revenue synergies result from combining two companies’ strengths to produce incremental revenue. For example, accessing broader sales channels and each other's customer books, or introducing intellectual property to new markets can yield higher revenue. While these synergies are challenging to quantify, they offer immense potential for strategic buyers focused on growth.

2. Cost Synergies

Cost synergies refer to reducing combined operating expenses by streamlining processes and eliminating redundancies when companies merge. Examples include consolidating offices, reducing marketing strategies and cost, and renegotiating supplier contracts. These tangible benefits are easier to measure, making cost synergy a priority for achieving synergies efficiently.

Cost synergies can be quickly and easily estimated using functional benchmarks. This involves using external data from similar companies to assess how many people may be required in each function based on expected revenue in the combined company - Access functional benchmarks here.

3. Financial Synergies

Financial synergy arises from improving the combined entity's capital structure or accessing tax benefits. For instance, a profitable company acquires another to leverage its lower cost of capital or enhance future cash flows. While financial improvements are often secondary, they can contribute significant to a merged firm’s success.

Who Should Know About Synergies?

We think that understanding synergies is essential for these four type of stakeholders:

Strategic buyers

This group of buyers are corporate companies that are not part of a private equity firm. They range from large publicly listed companies all the way down to small privately run businesses. Their goal is to capture synergies by integrating operations, leveraging intellectual property, and aligning sales strategies.

Financial buyers (Private Equity firms)

Financial buyers focus on financial benefits, such as improving the net present value of investments. They raise money from limited partners, then the general partners will invest the funds in many different separate entities. Sometimes the investment has a synergies focus for a combined firm, which typically results in a "bolt on" acquisition.

Finance leaders

Most M&A activity is driven by the desire for greater financial success. Therefore, finance leaders are nearly always heavily involved in any sale process and are responsible to evaluate potential synergies to assess the combined net income and operational efficiencies.

Executives managing M&A transactions

Transactions often involve input from most executives in the business. One common example is the assessment of revenue synergies with Sales executives. In this situation, they must ensure that synergies are realistic and achievable, otherwise it can have a detrimental impact to value at a later stage.

In the end, synergies are an important concept for anyone involved in merger and acquisition transactions to understand, whether planning, executing, or overseeing integration costs.

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Benchmarking Techniques for Synergies

Benchmarking offers a systematic approach to maximizing any potential synergies for any acquisition that you are considering. Here are three techniques that you can use:

Historical Comparisons

Analyzing past acquisition synergies within the industry provides insights into achievable cost synergies and expected revenue synergies. This information can be hard to find, but with some good old fashioned research you should be able to get some comparable figures.

Bottoms-Up Analysis

Assess synergies at the granular level, such as by department or function, to estimate combined operating expenses. This is where a trusted third-party data provider like CompanySights can make benchmarking simple - Learn more about benchmarking data.

Market Benchmarks

Use industry averages to gauge financial improvements or cost savings opportunities. This is usually in the form of high-level financial benchmarks, such as SG&A as a % of Revenue. Again, you can turn to CompanySights for some of these standard market benchmarks.

Benchmarking allows companies to quantify potential financial benefits and focus on areas with the highest synergy potential.

Calculating Synergies Using Benchmarks

Calculating synergies using benchmarks is a relatively straightforward exercise. Let's look at the key steps required to calculate cost synergies:  

1. Gather relevant financial information from both companies (e.g. detailed profit and loss statement).
2. Review and confirm the baseline revenue and costs for each standalone business.
3. Add the revenue from both companies together - We'll refer to this as "combined revenue".
4. Use a benchmarking tool to size up how many people and costs are required by function based on the combined revenue figure.
5. Combine costs by category for both businesses - We'll refer to this as "combined costs".
6. Compare the combined costs of both businesses to the benchmarks. The difference between these two figures will form the estimated synergy by cost category.

From here users can input the estimated synergies into robust models, such as:

• Discounted Cash Flow (DCF) – Forecasting future cash flows from the combined company helps determine the present value of synergies.
• Revenue Synergy Models – Evaluate expected revenue synergies by assessing sales channels or intellectual property integration.
• Cost Synergy Analysis – Identify specific opportunities, such as reducing professional services fees or consolidating supply chains, to calculate tangible savings.

Combining benchmarking data with financial models enables companies to capture synergies effectively.

Calculate your synergies with trusted benchmarks here

Five Key Risks to Unlocking Synergies

While synergies offer many potential benefits, realizing them can be fraught with risks, such as:

1. Integration Costs – The expenses required to merge two companies often exceed initial estimates, delaying financial benefits. Make sure to properly assess the one-time integration costs with input from many stakeholders, especially the finance executives.

2. Cultural Clashes – Differences in organizational culture can hinder the alignment needed for successful synergy. Perform a proper assessment of culture from the outset of any deal. This activity is usually part of HR or people due diligence.

3. Operational Inefficiencies – Combined companies may face inefficiencies during the transition, impacting cash flow and profitability. The transitional period where the business is being integrated must be project managed, especially when it comes to IT systems integration.

4. Negative Synergies – When the integration process fails, costs may rise, leading to negative synergy (a.k.a. dis-synergy) instead of value creation. Dis-synergies arise when integrations are poorly managed and leadership loses control of the integration process.

5. Overestimated Synergies – Setting unrealistic expectations upfront regarding incremental revenue or cost savings can undermine the merger’s success. Many lenders will require independent due diligence to be performed on buyer synergy estimates. If your lender doesn't, then you should get a qualified professional to review the estimated synergies to de-risk any issues down the line.

Recognizing these risks allows companies to plan proactively and safeguard their combined value.

Best Practices and Real-World Examples

Here are four simple best practices for achieving synergies and delivering value, as follows:

• Set Clear Goals – Define the specific synergies you aim to capture, such as cost synergies or revenue synergies.
• Plan Integration Early – A well-thought-out strategy reduces integration costs and enhances operational efficiencies.
• Leverage Benchmarking Data – Use data to validate assumptions about financial synergies and combined operating expenses - Access trusted benchmarking data here.
• Communicate Transparently – Align stakeholders by sharing clear plans for achieving synergies.

Now let's look at two cases where revenue synergies and cost synergies were achieved in the real-world, as follows:

Case 1: Revenue Synergies – Disney’s Acquisition of Pixar

Overview

In 2006, The Walt Disney Company acquired Pixar Animation Studios for $7.4 billion. The acquisition aimed to merge Disney’s extensive distribution network and global brand recognition with Pixar’s cutting-edge technology and unparalleled creativity in animation.

Key Revenue Synergies

1. Enhanced Creative Pipeline
   By combining Pixar's innovative storytelling and Disney’s production and marketing capabilities, the combined entity was able to produce films that appealed to a broader audience, generating higher revenue from box office sales, merchandise, and theme park attractions.
2. Expanded Sales Channels
   Disney’s extensive sales channels helped Pixar's films reach international markets more effectively, boosting revenue from DVDs, streaming platforms, and other distribution avenues.
3. New Revenue Streams
   The integration led to the creation of new intellectual property that Disney monetized across multiple platforms, including sequels, theme park attractions, and retail products.

Results

The deal produced higher revenue for Disney, with iconic Pixar films like Toy Story 3 and Finding Dory becoming massive commercial successes. Revenue synergies contributed significantly to Disney’s growth in animation and related sectors.

Case 2: Cost Synergies – Kraft’s Merger with Heinz

Overview

In 2015, Kraft Foods Group and H.J. Heinz merged to form The Kraft Heinz Company, orchestrated by private equity firms 3G Capital and Berkshire Hathaway. The primary focus of the merger was to extract cost synergies and improve profitability in the highly competitive food and beverage sector.

Key Cost Synergies

1. Consolidation of Offices
   By combining headquarters and eliminating duplicate corporate offices, the merged firm significantly reduced overhead costs.
2. Supply Chain Optimization
   The companies streamlined their supply chains by renegotiating contracts with suppliers, integrating logistics networks, and standardizing production processes.
3. Reduction in Workforce
   By eliminating redundant positions across both organizations, Kraft Heinz achieved significant savings in personnel expenses.
4. Marketing and Operations Efficiency
   Joint marketing strategies and the unification of operational systems reduced professional services fees and other recurring costs.

Results

The merger achieved over $1.5 billion in cost synergies within two years, largely through improved operational efficiencies. These savings boosted the combined firm’s profitability and helped it remain competitive in a cost-sensitive market.

Both of these examples underscore the importance of aligning strategy with execution when companies combine.

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Conclusion

Synergies are the cornerstone of successful mergers and acquisitions, offering opportunities to increase revenue, reduce costs, and unlock other financial benefits. By understanding the types of synergies and leveraging benchmarking techniques, companies can capture tangible benefits and avoid the pitfalls of negative synergies.

From strategic buyers to private equity firms, those involved in M&A transactions must prioritize achieving synergies through meticulous planning, integration, and data-driven decision-making. By applying the best practices outlined in this guide, organizations can realize the full potential of their merger synergies and create a combined entity positioned for long-term success.