Be careful when valuing synergy

Synergy is an M&A phenomena that looks great on paper but is a different story in practice. So valuation analysts need to be careful not to overvalue it.

“Typically, in the transactions we look at there is an overly inflated view of synergies,” says Jeff Litvak (FTI Consulting). “You may think that combining administrative departments and deriving synergies from complementary clientele might be easy,” he says, speaking at a recent webinar. “But what you find is that they take time to realize, and sometimes they just never come to fruition—yet you paid for them.”

How much is paid?  Buyers pay, on average, 31% of the average capitalized value of expected synergies to the sellers, according to BVWire, which cites recent research from the Boston Consulting Group.

What has been your experience in valuing synergy? Share your thoughts.