When discussing mergers and acquisitions, we often hear the phrase “synergy” (mergers and acquisitions). To put it simply, it refers to the added value that results from an M&A deal. It is reasonable to infer and state that all M&As are conducted only to create synergies. A company’s primary goal is to generate revenue, cost, and financial synergies. In this essay, we’ll talk about Revenue Synergy.
What is Revenue Synergy, and how does it benefit the company?
This kind of synergy implies that the merged company’s revenue will be greater than the sum of the revenue of the two companies before the merger or acquisition. Alternatively, the united firm is able to create more money than the two independent organizations would. For example, when both are working together, their overall income will be higher.
It’s a win-win situation for everyone involved. To justify a large premium, the target firm might argue that it will increase the revenue of the acquirer. Additionally, an astute acquirer might argue that the lower purchase price will be more than covered by the increased sales after the deal.
A simple illustration of this synergy is that Company A earns $10 million in sales, while Company B earns $5 million in revenue. The combined revenue of, say, Company AB is $19 million after a merger or acquisition. In this scenario, the synergy is $4 million in revenue.
Revenue Synergy: Case Studies
One of the best examples of this synergy is Disney’s purchase of Pixar in 2006. Both corporations benefited from this arrangement since it was reasonable. In 2006, Disney’s revenue was about $34 billion. although the company’s sales were about $41 billion in 2011. Disney’s stock price also benefited from the agreement. The S & P 500, on the other hand, fell throughout the same time period.
Many factors were at play in the deal’s revenue synergies:
- Because of Disney’s scale, Pixar was able to produce hit films on a regular basis.
- Pixar benefited greatly from Disney’s extensive distribution network.
- Merchandise based on Pixar characters might be sold at Disney shops across the world.
- Disney’s theme parks gave Pixar’s characters a lot of attention and advertising.
Facebook has made a purchase.
The purchase of Instagram by Facebook is another fantastic and successful example of such a synergy. Instagram’s income was said to be nil at the time of the purchase, according to reports.
Facebook’s management, on the other hand, was certain that the purchase and merging of these two social networks would result in outstanding revenue prospects or synergies. Facebook saw a boost in user engagement after integrating several of Instagram’s features. As a result, Facebook’s income went up as a result of this rise in advertising revenue.
Achieving Revenue Synergies: What Do You Need to Know?
On paper, this kind of synergy seems like a good idea. However, in the actual world, generating revenue synergies is very challenging due to a number of practical issues that must be overcome. Assumptions like cross-selling, new product introductions, effective integration, and market growth all play a role in this synergy.
With regards to revenue synergies, many experts believe that realizing them often takes longer than the process of creating them for cost savings. When it comes to attaining revenue synergy, companies must overcome a variety of obstacles, including the need to set precise goals, develop innovative processes, coordinate these efforts throughout the merged organization, and more.
Practices that aid in the development of synergy
M&A synergies may be created via seven methods that McKinsey conducted extensive research and in-depth interviews with executives to identify. These are the methods that are employed:
- Revenue synergies may only be realized if companies have a comprehensive awareness of their sources. Corporations need to know exactly where revenue synergies may be created ahead of time, in other words.
- It’s critical that business owners and CEOs assume accountability right from the start.
- In order to accurately assess potential revenue streams, businesses must do customer-level research. Customers may be asked about what items they need, how much faith they have in the company, and so on. A corporation may do this study before or after the transaction, or perhaps both.
- The approach for maximizing synergies must take into account the sales team’s competencies and skill set. This might also mean that management should consider how fast the sales force can adapt to the new items or services they are selling.
- In order to encourage such a cooperative effort, it’s critical to use practices like setting clear goals and devising financial incentives.
- In order to achieve such a synergy, it is essential to provide the necessary assistance for the successful execution of a post-acquisition business. As an example, a corporation might bring together leaders from both organizations to establish a joint team/task force. Each company’s stakeholders will have an easier time communicating and working together if this team is in place.
- It is critical to keep tabs on and evaluate post-merger performance in order to ensure revenue synergies. The “leading” and “lagging” KPIs should be measured and tracked by businesses. Leading measurements concentrate on inputs, whereas lagging metrics focus on the outcome that those inputs produce. In addition, these measures must be integrated into a company’s everyday operations.
A Few Words of Advice
Revenue synergies are increasingly important in the business sector because of the increasing relevance of M&A. Creating revenue synergies is essential for increasing shareholder value. Revenue synergies, on the other hand, are more difficult to come by. Revenue synergies need extensive preparation and execution on the parts of both firms.
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