Valuing synergies: Will 1 + 1 = 3?

BVWireIssue #139-4
April 23, 2014

A major factor behind most M&A deals is the expectation of an increase in value triggered by the combination of two firms into a new entity. In reality, this synergy takes a lot longer to materialize than you think—and often does not happen at all.

New studies: A pair of reports from PwC reinforce existing research findings that the acquiring firms simply do not realize the full value of the synergies they expect. One report, Capturing Synergies to Deliver Deal Value, lays out a framework for delivering deal value by identifying, managing, and executing on synergy opportunities. A synergy analysis needs to be done early on in the assessment of the target company—long before the deal is announced.

The second report, PwC’s 2014 M&A Integration Survey Report, backs up the general belief that cost synergies are more achievable than revenue (growth) synergies. Two-thirds of buyers report favorable results for capturing cost synergies, but results from capturing revenue synergies are much worse, with just over half (54%) reporting a favorable result.

What it means: For valuation analysts, these findings reinforce the notion that expected revenue or growth synergies need to be viewed as more uncertain than cost synergies when doing projections. Also, they will take more time to achieve. Because of this uncertainty, more risk is associated with revenue synergies, so the discount rate should be adjusted accordingly.

The findings also stress the importance of focusing specifically on the identification and valuation of synergies prior to a merger. By doing this, the acquiring companies can develop a clear integration plan that will help ensure that the synergies are achieved.

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