Synergy in Merger & Acquisitions

Synergy means that the final outcome of a system is greater than the sum of its constituent parts. It helps in unleashing the greatest powers within the people by emphasizing on principle-centered leadership. New heights (results) are achieved through proper synergy. The highest form of synergy focuses on the motive of win/win aspects of both or all its stakeholders. This is true in every aspect of human life e.g. social, political, business, international relations.
We can draw this analogy to the world of business. Corporate synergy refers to the financial benefit that both the acquiring company and the target company will accrue when it merges or acquires another corporation. There are 2 distinct of synergies which takes places in business:
a) In terms of Increased Revenue ( Soft synergy): through cross-selling & complementary matching of strength and weakness.
b) In terms of Cost advantage (Hard Synergy): by eliminating redundancies in administration, production and logistics.

Recent observations in Mergers & Acquisitions as an Economic Phenomenon:
Reports have shown that that there has been a significant proportion of M&A failures over last five decades since the waves of mergers (MAE grounds) started. The actual success rate could be something like 50 % but some studies are very alarming:
1) “Millman and Grey show that …83% of mergers produce no benefit whatsoever to shareholders
2) Sirower finds 60-70% of acquisitions failing to produce positive returns.”

According to the synergy theory, applicable for M&A, is that it “expects that there is really “something out there” which enables the merged entity to create shareholders value”. Technically it could be frames as the ability of merged companies to generate higher shareholders wealth than the standalone entities. In economic terms, it suggests to further limit competitors’ ability to input and output markets and looking for increasing the responsiveness. So, looking for synergy can be compared with the quest for the Holy Grail.

 

Drivers of Synergy in M&A:













The strategic relatedness of synergy issues can be looked as:
Whether an acquisition decision is related or in cross-sector. If acquisition is in a related sector, then how it related to the present organizational- vertical or horizontal. This is diagrametically represented as:














The Cornerstones of synergy in M&A are:
1) Strategy : For financing and revenue enhancement.
2) Operational Implementation: Detailed Corporate planning is required for joint contracts acquiring.
3) System Integration: unless proper planning is done, it can be a very significant limiting factor of many well-planned acquisitions.
4) Control & Culture: Have increasingly become the most CRITICAL SUCCESS FACTOR.


The challenges of Synergy is to make people cooperate mainly in lower management levels by creating a “ Code of Joint Working”.




 
References:
1) Stephen R.Covey (1989). The 7 Habits of Highly Effective People.
2) Retrieved September 7,2008 from http://en.wikipedia.org/wiki/Synergy
3) Retrieved September 8,2008 from nb.vse.cz/~pichanic/cesp363/synergy.ppt