Author: Lizzie Meadowcroft, Synergy, Integration & Separation Partner at Cortus Advisory Group

 

Throughout my career, I’ve seen a wide variety of management synergy cases – from a few random numbers jotted down on a piece of paper, to a lonely Excel table lacking any detail, to a fully documented synergy case aligned to the City Code requirements. Depending on the nature of the deal, the focus on synergies isn’t always there and when it is, the focus is usually on the easy to identify cost synergies.

 

Going back to basics, a synergy can only be called a synergy when the benefit is realised from the combination of two or more companies. It can’t be achieved in the absence of a transaction.

 

Synergies are often referred to as an art and not a science. Whilst they might be mathematical in nature, there is far more to think about than the numbers alone.

 

Here are seven key considerations you should make when developing your synergy case:

 

1. Take the time to develop the financial and people/organisation baselines for the combined companies. Synergies should be assessed looking at the enlarged organisation, not just on what you can take out of one side. Remember, they can only be achieved because you have a combination in the first place. You also need to ensure the baselines are fully addressable for synergies, stripping out the impact of any inflight programmes or areas where no synergy can be assumed.

 

2. Ground your synergy case in your deal rationale and integration principles. The biggest synergy case isn’t always the best synergy case. It needs to be grounded in operational reality. How will you actually integrate the businesses, how quickly and how transformational will your integration be? This will drive where you can achieve synergies and which areas should be left standalone.

 

3. Develop a robust synergy case considering all types of synergy. You should have both a base case (management case/bank case) and a stretch case. Don’t just focus on cost synergies such as removal of duplication. Consider revenue synergies, working capital and financing benefits too.

 

4. Think about implementation and determine the one-off costs required to deliver the synergy case and integration objectives. Consider whether you should add a contingency into your one-off costs case to address any unknowns that may arise during the integration programme.

 

5. Phase your synergy case and consider this from both an in-year synergy delivery basis as well as on a run rate basis.

 

6. Ensure you have clearly articulated all your assumptions and sources. This means that whoever picks up ownership for synergy delivery later in the timeline can be clear on how you arrived at the original synergy case.

 

7. Be clear on who should be involved in the development of the synergy case. Board and operational management should be involved throughout and formally sign off the case once it is finalised. Think about who will own the case once the deal is complete and who will be accountable for delivery. Ensure these individuals are bought in from the start.

 

So, now you’ve developed your synergy case, and the deal is complete, what happens next?
In my experience, focus turns to integration and achieving some quick wins. But what doesn’t often happen is the tracking of synergy delivery post deal. Without this, how can you update the Board on the realisation of the envisaged deal value and measure the overall success of the integration programme?

 

In practice, I often find that Management say the integration has been a success because the combined business has seen both top and bottom-line growth. But, if you haven’t tracked the synergy realisation, you could be leaving value on the table. Revenue synergies, particularly cross-selling, is another area which can appear to be an obvious opportunity and yet I often see little progress being made to implement. For example, sales teams perhaps finding it easier to pursue new customers than work collaboratively to cross-sell to existing customers or, aren’t renumerated to act any differently than they did before.

 

Current deals are being driven by the “bolt-on acquisition” with many organisations setting out their buy and build strategy and numerous sector-led roll ups dominating the deal headlines. If you have an exit in mind, buyers are going to ask about your historical acquisitions, how you have integrated them and whether you have delivered on the value case. As always, it pays to start with the end in mind. Be prepared now – track your synergies as you realise them and ensure you have the evidence you need to prove your successful bolt-on/buy and build strategy on exit.

 

Cortus Advisory Group’s senior team is highly experienced in supporting clients to successfully buy businesses – from identifying strategic buyside opportunities, guiding them through the acquisition process (including due diligence) right through to identifying synergies and executing an integration.

To find out more about how we can support you, please contact Lizzie Meadowcroft at lmeadowcroft@cortusadvisory.co.uk