The ability of a buyer to identify and subsequently capture synergies is crucial to the success of a deal. Lenders are increasingly gaining comfort with identified prospective synergies which has created interesting and complex deal structures while increasing the ability to leverage an acquisition. Competition among merger and acquisition (M&A) suitors bidding for viable strategic add-ons is reducing the room for error throughout the diligence process as well as increasing the amount of diligence required. Having a detailed and data-driven understanding of synergies will allow you to make an informed and competitive bid, positioning yourself for a successful deal. More importantly, it will help you avoid a bad deal.

Below are five key points to keep in mind when evaluating synergies:

  1. Clearly identify operational structure required for both parties. Understand how each business operates and what is required within each organization to function. Revenue gains, compensation reductions and operational efficiencies will only succeed if it benefits the combined organization. You can’t fit a square peg in a round hole, so be sure to consider any cultural differences that might take place as well.
  2. Identify major synergy and dis-synergy sources. Recognize the greatest potential sources for synergy and dis-synergy values based on the defined business structure and identified business growth model. Compare common metrics within the target company while looking for any additional synergies (or dis-synergies) that may not be as easily identified. Consider using industry experts to enhance your understanding and reassure your valuation.
  3. Define one-time costs necessary to capture synergies. Identify the necessary resources needed in order to achieve identified synergies. One-time costs can quickly deteriorate any perceived synergistic values from a cash flow perspective. Understand how these one-time costs affect your valuation and potential working capital. Developing a change management plan can be a great way of identifying the number of resources required.
  4. Examine the level of risk associated. Understand the current pain points associated with the organization. Use this to adjust any identified synergies that could be missed due to current challenges. Continue to build off of the identified sources of synergies and determine the level of comfort associated with each category.
  5. Understand historical synergies. If applicable, examine the current organization’s ability to capture synergies in a timely fashion pertaining to previous acquisitions. Interview management to understand the root cause of any uncaptured synergies. Determine if an alternative strategy could be used to harness historically uncaptured synergies. Be sure to discredit any unrealized synergies from your valuation that will likely not be achieved based on historical data. Often times lenders will time fence identified synergies (e.g. must be realized within one year of acquisition date).

A detailed synergy review provides a paramount level of insight regarding a company’s valuation. Being able to understand and create your own pro forma valuation using a detailed analysis can provide an edge over competitors. It will help identify the greatest areas for ROI and provide a strong foothold when developing and implementing an integration plan. To learn more about how RSM can assist you throughout the merger and acquisition process, contact RSM’s management consulting professionals at 800.274.3978 or email us.