Acquisitions that involve combining two entities are justified on the premise that they will create synergies. A common problem of M&A deals is that only a small fraction of the planned synergies ever materialize, if at all. The most prevalent issues include the following:
- Over-optimistic synergy planning assumptions
- Poor strategic rationale behind the synergy plan
- Lack of proper hand-off from the due diligence team
- Unsupported initiatives to synergy capture
We provide the quantitative assessment of the potential synergies that the buyer can expect, knowledge that is fundamental to confirming the strategic rationale of the deal. We use two different approaches to size synergy:
Top-down synergy sizing: A preliminary step that looks beyond the perspective of due diligence to wider sources of synergy. Identification of synergy opportunities that considers cost, revenue, and capital opportunities. Prioritization based on balancing size, timing, resources, and efforts.
Bottom-up synergy sizing: Refinement of high-priority opportunities for a detailed bottom-up estimation of synergies. The analysis identifies components of synergy and their interaction to estimate the time and resources needed to capture the opportunity.