Synergy

What it means

Synergy is the extra value created by combining two companies or activities that neither would achieve on its own. Put simply, the whole is worth more than the sum of its parts, for example thanks to savings, better use of capacity or new sales opportunities.

Cost synergies come from joint purchasing and from merging administration, IT systems, premises or logistics. Revenue synergies come from cross-selling products to the other company's customers, entering new markets or a stronger position in price negotiations.

Synergies are a frequent argument in acquisitions and mergers. The buyer is willing to pay more than the target's stand-alone value because it expects to generate additional profits after the combination. In the accounts this difference often appears as goodwill.

How it works in practice

When valuing a target, it helps to separate its stand-alone value from the value of synergies. The buyer should not pay the seller the full value of expected synergies up front, since the buyer bears the risk of achieving them and realising them costs time and money.

Synergies do not happen by themselves. They have to be planned and managed during post-merger integration: specific measures, owners, deadlines and measurable targets must be set. In accounting and payroll services this might mean, for example, unifying software and procedures.

Revenue synergies often rely on cross-selling, for example when an accounting firm that has combined with a payroll company offers clients of both a complete service package. They are usually harder and slower to achieve than cost savings.

What to watch out for

Synergies are often overestimated in deals, while integration costs, the departure of key people and customer losses during the change are underestimated. A conservative estimate and sensitivity analysis help avoid overpaying for an acquisition.

If the expected synergies fail to materialise, goodwill may be impaired, resulting in a loss in the accounts. Regularly comparing plan with actuals after the acquisition allows timely intervention and adjustment of the integration plan.