Synergies
Synergies are the gains a buyer expects from combining two businesses that neither could achieve alone — cost synergies from removing duplicated functions, platforms and offices, and revenue synergies from selling each company's products to the other's customers. They are the justification for paying a premium over a company's standalone value, and the part of the price most often not recovered.
- Also known as
- Synergy, Cost synergies, Revenue synergies
- Used at
- every acquisition case, the premium a buyer justifies to its own board and shareholders, and the announcement that names a number
- Binding
- no — a forecast; but a listed acquirer that announces a synergy target is held to it by the market
- Typical size
- cost synergies of 5–10% of the target's cost base in a horizontal deal; more where the platforms overlap — the 2019 processor mergers announced $500m–900m each (Fiserv–First Data targeted $900m of cost savings)
- Typical timing
- cost synergies within two to three years, at a one-off cost roughly equal to a year's savings; revenue synergies later and less often
- Parties
- the buyer's deal team, which estimates them; the integration team, which has to deliver them; and the seller, which is paid for a share of them in the premium
How synergies work in practice
A buyer values a target on its standalone cash flows, then adds what the combination is worth. Cost synergies are the reliable kind: two payments processors merging need one platform, one compliance function, one data centre, one head office, one sales team per region. Each duplicated cost identified is a line in a model, with a date it stops and a one-off cost to stop it — redundancy, migration, contract exit. Revenue synergies are the hopeful kind: the acquired company's product sold through the acquirer's channels, the acquirer's product sold to the acquired customers. They are usually discounted heavily by anyone who has tried, because customers do not buy on the acquirer's schedule.
The synergy estimate then sets the price. If the target is worth €200m alone and the combination adds €60m of value net of integration cost, the buyer can pay up to €260m and still create value — and will pay somewhere between, because the seller, in a competitive process, is paid for part of the synergies it did not create. The discipline is to pay for the cost synergies, which the buyer controls, and not for the revenue synergies, which the customers do.
In fintech, the largest synergy is often the platform: two processors on one stack, two neobanks on one core. It is also the hardest, because the migration is the moment customers can leave.
Example
A payments group buys a competitor with €40m of revenue, €8m of EBITDA and a €32m cost base. Its integration plan removes €9m of cost by year three: €4m of platform and hosting once the target's customers are migrated, €3m of duplicated compliance, finance and management, €2m of offices and contracts. One-off costs are €10m. The revenue team also claims €5m from cross-selling; the board models it at €1m. At the group's 8× multiple, €9m of cost synergies are worth €72m less the €10m of one-off cost — so the group pays €95m, 11.9× the target's EBITDA and 5.6× the combined, and the deal creates value only if the platform migration keeps 90% of the customers. It keeps 84%, and the synergy case is met a year late.
Common mistakes
- Paying the seller for revenue synergies the buyer's customers have not agreed to. - Announcing a synergy number before the integration plan that delivers it exists. - Counting the platform saving without the customer churn the migration causes. - Forgetting the one-off cost, which usually equals a year of the saving. - Treating synergies as a reason a deal makes sense rather than as a number that must be delivered by named people on dates.