M&A Deals - Buyer Motivation - Synergy
What is the primary motivation for the acquisition of another firm? The answer can vary significantly depending on the buyer’s strategies and the structure of the business. Most of the time, M&A transactions are utilized in order to achieve synergies between two companies. Synergy can be realized through multiple sources including operating economies, differential efficiency, financial economies, tax effects, and increased market share. Each of these sources can lead to cost reductions or revenue growth synergies. If done properly, the acquiring company will be more cost effective and will enhance its opportunities for growth.
Cost synergies can be achieved through economies of scale and economies of scope between the two firms. The newly combined company should be able to reduce fixed costs as more units will be produced at a lower cost. The average total cost of production will also decrease as the company spreads costs across its now expanded product line. Furthermore, as the new company removes duplicate departments or operations, the overhead expenses will be reduced thereby increasing profit margin. Revenue synergies can be achieved by selling new products through existing distribution channels which creates new opportunities for growth. Another way revenue synergies can be reached is by utilizing the acquired firm’s technology or geographic reach to improve the acquiring company’s existing products or services or the delivery thereof.
Both revenue and cost synergies can ultimately be realized as a result of differential efficiency. This is the concept whereby the targets firm’s assets will be better utilized because the acquiring firm has a more efficient management team. During the process of an M&A transaction, this is usually a key buyer motivation as it will greatly benefit the shareholders of the acquiring company and some of that potential value can be paid to the shareholders of the company being acquired. Of course, the more value that can be paid to the shareholders of the target company, the more likely they are to agree to being acquired.
It is critical that the investment bank assisting the buying company understand the buyer’s motivation in an M&A transaction. This will help in the process of selecting target firms and valuing acquisition targets based on the potential synergies. A team of highly skilled and experienced M&A advisors will be crucial in assisting buyers in this regard. Similarly, an experienced M&A firm would be able to assist the target or selling company to realize the full value for their company.
