Is it the latest catchphrase or a meaningful expression? In this case, you are not conveying a buzzword, but real information when you speak about Corporate Synergy within an M&A (Mergers and Acquisitions) context. Here, we will explore precisely what it means.
Synergy suggests how combining certain factors will render something else more useful than the discrete parts. Individually, a tire and a rim are value items, but together they are a wheel, which is arguably more valuable. The same principle applies in business when two or more units amalgamate, align resources, coordinate efforts, and/or streamline processes.
Large ABC Company has a worldwide distribution system, but a reasonably narrow focus on household electronics. Smaller DEF Company has developed a sophisticated Household Automation System which takes prevailing advantage of the Internet of Things (IoT).
ABC has nothing like this, but selling it would make them an immense amount of money; DEF sells a low volume locally, and relies on expensive couriers for distribution. Clearly, both of these two companies will benefit if they join forces, and that is the synergy.
When speaking specifically of the corporate variety, many people think of it strictly in terms of finances, and that is seldom the whole story. It is most assuredly an integral part of it, because if there were no cost savings or profit increases, there would be no point to the merger or acquisition.
Consider, on the other hand, a generic computer motherboard manufacturing company. They create their product line by using microchips from several manufacturers. Conceivably they could begin manufacturing their own microchips but the startup costs, staffing, and infrastructure would be prohibitively expensive.
Merging with an existing chip manufacturing company would give them access to the infrastructure, but more importantly, to the research and development department, along with the expertise of their scientists. Of course, it’s likely going to increase the bottom line as an endpoint, but the real synergy here is an enhanced product line and enhanced capability for both companies.
Is it Always Companies?
No, of course not; and that is why we used the word “units” above. Integrating departments, offices, regional architectures, or international divisions of the same or different companies, can also have significant benefits.
Imagine a Nordic furniture manufacturer with a complete product line merging with an African furniture manufacturer, also with a complete product line. Both styles will be popular across all of the other continents. The North American market is certainly one of the most eclectic in the world. The newly merged company has access to both customer bases and their distinctive product lines will appeal where the other might not.
If two divisions are buying very similar raw materials to create their products, blending their Purchasing departments can give them more leverage to pay less for their raw stock. As is often the case, one department will take over all functions and the other will be closed. Redundant employees will be eliminated, and all of these aspects combined will ultimately save money.
Improved Talent & Skills
Blending two existing units also blends talent pools. This new insight often leads to solutions to longstanding problems experienced by the individual units, or even significant innovation resulting in new products or services. This increases value for stakeholders.
Variety Through Consolidation
A North American division merging with the European or Asian division will undoubtedly have different products. They may be similar, but complementary. As a simple example consider the internationally well-known Kit Kat chocolate bar.
Invented in 1935 in England, as a chocolate-coated crisp wafer, there are well over 300 different varieties of Kit Kat chocolate bar sold around the world. There are probably 200 different varieties available just in Japan alone. Around the world they include baked potato, corn, maple, wasabi, strawberry, ginger ale, banana, shrimp, soya sauce, fruit parfait, innumerable varieties of cheesecake, brandy & orange, Muscat of Alexandria (grape), and watermelon.
Why you’ve never seen more than traditional Kit Kat chocolate in North America (except perhaps the orange variety at Halloween), is because the marketers don’t think it would sell. And this brings up a very important point which we’ll discuss below.
What is the Downside?
We have already touched on a couple of the downsides. When two units are blended all employees are going to be threatened by the possibility of being deemed redundant. Merging can take months or even years, and during that time, the constant threat can take its toll on employee morale.
“The desire for reinvention seems to arise most often when companies hear the siren call of synergy and start to expand beyond their core businesses”—James Surowieck, Business/Finance Journalist
It’s almost as complicated as Brexit and detaching from the European Union. Who is going to be responsible for what? Would it be better to keep employee-X or employee-Y?
Letting a Cost Accountant decide to eliminate an excellent manager because his counterpart is less expensive, is almost certainly a terrible idea. You could end up with a mass of demotivated employees, in fear that they are next, or who have lost faith in their department’s capability through the loss of that charismatic manager.
When you buy a company it costs money. The purchasing company will go into debt and then try to recover the money from the new acquisition. It could take months or even years to break even, let alone show a profit. Servicing that debt means you’ll have significantly less money for miscellaneous expenditures.
Sometimes it’s stubbornness; but, in almost every case, it’s a lack of good communication. People are already fearful about maintaining their jobs. Pushing them out of their comfort zones, obligating them to learn new techniques to accomplish something they’re already good at, can make them dig in their heels and resist.
CxOs often feel that their job is to fiddle; to create synergy at all costs; to increase efficiency; and, most importantly, create profit for the shareholders and value for the stakeholders. The problem is that you must always take an ultimately informed and educated approach.
Forcing North American sellers to market a wasabi or shrimp flavored Kit Kat bar via an order from Head Office “to increase market penetration” is extremely likely to result in financial losses. The CxO behind that order probably lacked the local distributors understanding of their market.
Assuming that synergy is always good, that it is a target that must be achieved, is not necessary accurate. The costs can far outweigh the perceived benefits, particularly if negatives are being ignored in favor of selected facts that support a biased idea. Chronic overestimation of returns is responsible for virtually all M&A failures or poor returns.
One of the best things a CxO can do is think, plan, and research. CxOs must suppress that desire to “do something—anything” simply to feel useful. This is clearly a situation where relying on “gut instinct” is not the answer.
The incredible tools we presently have at our disposal eliminate the need for gut instinct. More importantly, we now have so much information available that no one person is even capable of “doing it all” anymore.
Don’t become overly consumed by your own optimism; don’t buy into your own publicity hype. The tendency and temptation to overestimate the benefits of the deal can be overwhelming.
The financiers are really pretty smart; they know that you’re either overestimating, or perhaps did not complete your own financial homework on the situation.
If you make a point of telling them the truth and supporting your facts with a clearly designed road map — showing them exactly how you plan to achieve your targets — they’re going to be considerably more forthcoming now and in the future. Even if you change companies, the next time you encounter these financiers, you’ll be remembered for your forthright business sense and reliable numbers… and isn’t that worth it?
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