Studies by leading consulting firms show that most mergers (acquisitions) do not actually increase the wealth of shareholders or even lead to a decrease in this indicator, and it is extremely rare to achieve a synergistic effect and increase the value of the combined business. Identify M&A synergies in the article below.
Assessment of the Synergy Effect in Mergers and Acquisitions of Companies
The development of the economy at the present stage is expressed in its globalization, diversification, and orientation of companies towards expansion and growth. Companies seek to find additional sources of expansion of their activities and ways to consolidate capital in order to use it more efficiently, among which the most popular is mergers (acquisitions).
One of the reasons for the formation of integrated structures, often mentioned when concluding such transactions, is the desire to obtain a synergy effect. From the point of view of management, its appearance creates the preconditions for the growth of efficiency and competitiveness of the company, is the only advantage that is not available for repetition by any of its competitors, and allows you to start the mechanisms for the development of the economic system on the principle of complementary efficiency.
One of the reasons for the formation of integrated structures often referred to in the conclusion of such transactions, is the desire to obtain a synergy effect. Currently, according to experts, about 20% of mergers and acquisitions around the world are concluded in order to achieve a synergy effect since, from the point of view of management, the emergence of a synergy effect creates prerequisites for increasing the company’s efficiency, contributes to the creation of a more competitive enterprise and is the only advantage that is not available for repetition by any of its competitors, it allows you to start the mechanisms for the development of the company.
Four Key Rules for Identifying the M&A Synergies
A developed market is characterized by intensive processes of acquisitions or mergers of companies. The free movement of capital presupposes the existence of this process, the result of which is an increase in the efficiency of capital. All mergers and acquisitions are carried out only when the interested parties see a benefit for themselves.
The leaders of the company, of course, should be more interested in the law of synergy since knowledge of the mechanism of its action can significantly help them. Any organization is characterized by the following elements: productivity, interest, scientific potential, attitude to the external environment, the microclimate in the team, personnel potential, technical potential, development prospects, and image. They determine the potential of the organization, and its ability to operate. The process of significant strengthening or weakening of the potential of the material system is called synergy.
Among four key rules for identifying the M&A synergies are:
- The multiplier method should be modified to take into account the synergy effect in the growth of companies through mergers or acquisitions.
- An industry-average multiplier can only be used if the size of the company being valued is equal to the average size of the company in the industry; in addition, the distribution of companies by size should be uniform.
- One should also take into account the fact that not all acquisitions and mergers are carried out on a voluntary basis.
- According to the emergence property, the combined effect of several factors is always or almost always different from the sum of separate effects.