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How to Think About Synergies

Most discussions on PMI focus on achieving cost synergies—and with good reason. A PMI can change the fundamental cost structure of a business by marrying the strengths of each company in the merger or acquisition.

Such synergies are usually critical to paying for the deal and realizing its near-term value in the capital markets. Since cost synergies are usually communicated to investors and are relatively easy to estimate, they are often factored into the price of the stock once investors are confident that the deal will close.

However, achieving cost synergies shouldn’t come at the expense of potential revenue synergies that can add to the top line over the medium and long term. Revenue synergies are much harder to capture than cost synergies, but they are equally—if not more—important for both financial and organizational reasons.

In order to continue to create shareholder value, an acquirer has to deliver synergies above and beyond expected cost savings. A PMI offers a unique occasion to identify and pursue new opportunities for growth—for example, by cross-selling products, bringing existing products and services into new channels or geographies, or leveraging an improved cost structure to target new customer segments.

In addition, when a PMI is put into the context of a credible and compelling growth story, that story can be an excellent catalyst for employee engagement and motivation. If people in the organization are convinced that the PMI is a step on the way to an exciting future, they are generally more willing to accept the tough decisions that are necessary to get there.

Optimizing Functional Synergies

A merger’s full value often goes unrealized because acquirers tend to view the core business functions through the narrow lens of cost synergies. To unlock the full long-term potential of a merger, acquirers need to think laterally and treat integration not as an isolated functional exercise but as a strategic opportunity to reformulate each function’s role. This will allow each function to play a full and complementary part in optimizing the combined entity’s long-term growth.

Some key functions to consider include:

Information Technology

Research and Development

Procurement

Production and Networks

Sales and Marketing

Most companies have different financial, operational, and sales processes, which can lead to different levels of working capital efficiency. By attacking this directly and making it a priority, companies can often find an unforeseen cash influx as a result of their planning.

Chris Barrett
Director
Dallas
Postmerger Integration
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