Avoiding Synergy Traps

Avoiding the “Synergy Trap”

* Investors are skeptical that acquirers will maintain value of both companies combined while achieving the synergies that management claims will justify the premium paid. The clock starts ticking on the investment as soon as the deal is closed, so synergies must be realized quickly as to not have a negative impact on expected returns.

* Shareholder value at risk is how much of the acquirer’s value is at risk of no post-acquisition synergies are realized. The higher the premium paid, the higher the SVAR. In cash transitions, acquiring shareholders bare all of the risk; in stock transactions, the risk is shared with selling shareholders. Buying with cash shows confidence and discipline, and markedly outperforms stock transactions.

* Two ways to achieve synergies in an acquisition: cost reduction or revenue enhancements. If an acquisition cannot provide a sustainable competitive advantage, then no premium should be expected.

* The Meet the Premium (MTP) line is a way to gauge if a deal should be done. It looks at the combination of cost synergies and revenue synergies needed to be above the line; if the company’s mix puts them above the line and management thinks they can truly achieve this mix then the deal should be pursued. This is something that should be communicated to investors.

* Companies are generally better at reducing costs than increasing revenues, but revenues enhancements should not be put on the back burner. Competitors will attempt to swoop in and tell the combined company’s customers that they are unstable in an effort to steal them away. Also, not focusing on revenues from the start can lead to revenue enhancement initiatives being cut altogether.

* Deals that spread across several capabilities and market accesses will provide opportunities for cost and revenue synergies and will be expected to add value. Knowing where the synergy mix falls on the matrix gives investors a better...