Synergies - M&A Case

M&A Synergies
Recent activity on Apr 26, 2019
4 Answers
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Anonymous A asked on Mar 17, 2018

Hi there,

I would like to dig a bit deeper into finding synergies for M&A cases. It can be both, general rules of thumb but also details - or a hint to a good paper. What are good approaches to dig deeper if just the income statement of both companies are given?

Many thanks

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Best answer

Hi Anonymous,

I would always start with a theoretical approach before the actual analysis of the income statement. A potential structure could be the following:

Revenue synergies:

  • Increase price
    • Increase the single price of the product
    • Apply price discrimination
  • Volume increase
    • Increase number of customers (eg marketing or distribution)
    • Increase amount per customer (eg discounts or loyalty program)

Cost synergies

  • Decrease cost per unit (eg renegotiate with supplier)
  • Decrease number of units (eg higher efficiency)


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Here is the categorization for revenue and cost synergies

Revenue Synergies

  • Patents:
  • Complementary products:
  • Complementary geographies and customers

Cost Synergies

  • Shared Information Technology:
  • Supply Chain Efficiencies:
  • Improved Sales and Marketing:
  • Research and Development: E
  • Lower Salaries and Wages:
  • Patents
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For Synergies Calculationyou can use the following structure:

  1. Revenue synergies - here you calculate the synergies in price and quantity (depending on the case it may be new geographies, new products, new distribution channels, bigger share on shelves crosselling opportunities, etc.)
  2. Cost synergies - typically you use a value chain structure tailored to the industry (e.g. supply-production-distribution-marketing-after sales support)
  3. Risks - major risks that can decrease the synergies (tip: don't underestimate the merging companies culture factor)
  4. Total synergies potential in $, adjusted by risk (probability of failure)

You can find a lot of this in P&L and by asking additional questions.

In private equity interviews, the cases will be much more detailed in financial part. Depending on the company you'll need to:

  • Find the relevant information in P&L and Balance sheet
  • Do the simplified valuation using NPV: calculate cash flows and make assumptions about growth rate and discount rate
  • Do the valuation using comps - you'll have to explain which comps you will use and why

Good luck!

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Hey anonymous,

If you get the income statements of both companies you should then try to look for synergies across all the items there (both in revenue and cost). That said, it completely depends case by case, as sometimes the rationale is to boost synergies on revenues (cross sell), some other times on cutting costs (eg, duplicates HR, systems, distribution channels)

The best way to approach this cases is through a critical reasoning of the industry and companies involved so that you can get at least an hypothesis on why they are merging (this should sound natural for you after practicing some of theses cases)



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Francesco gave the best answer


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