Business Synergies

Business synergies are important drivers of value in mergers and acquisitions. They are based on the notion that the two companies when combined are worth more than they are when valued separately.

Understanding business synergies

The term “synergy” has become somewhat of a buzzword in business in recent years, but it can also be used very specifically to describe any factor that increases the value of the resultant company in a merger or acquisition.

Consider this basic example. Two companies, Company A and Company B, have decided to merge.

Before the merger, Company A was worth $250 million and Company B was worth $75 million. Once the merge has been completed, the new company was valued at $400 million and as a result, a synergy of $75 million was created.

Exactly how and where this extra value is created is explained later in this article.

For the buyer in a merger or acquisition, the presence of synergies determines how much they can afford to pay for the other company.

In the above example, it is incumbent on Company A to determine how much extra value can be attributed to Company B when deciding on a purchase price and whether it makes economic sense to move ahead.

Conversely, for the seller, it is important to understand the synergies the buyer is looking to extract and profit from.

Company B could negotiate a higher purchase price than $75 million if it was able to successfully prove the extra value it would bring to Company A.

Three types of business synergies

Let’s now take a look at the three broad types of business synergies.

Revenue synergies

Revenue synergies occur when the two companies in question can sell more products or services than they otherwise could separately. 

When Facebook acquired Instagram in 2012, it did so with the belief that combining the two platforms would create significant revenue synergies.

For example, the integration of Instagram’s photo-sharing features into Facebook would boost user engagement there and increase advertising revenue.

Cost synergies

Cost synergies present a way for the merged company to reduce costs. This can occur in several different ways:

  • Reducing employee headcount because of duplication of roles and responsibilities.
  • Reducing rent via the consolidation of offices.
  • Any cost that is reduced by the exchange of industry best practices.
  • Consolidation of suppliers and/or the ability to negotiate more attractive contracts due to economies of scale or increased purchasing power.
  • Capital cost reduction via more efficient use of transportation or manufacturing facilities.

When Australian broadcaster Nine Entertainment Co. merged with Fairfax in 2018, the former identified $65 million in cost savings that would be realized from synergies in IT, media sales, and corporate overhead.

Financial synergies

Financial synergies relate to the cost of capital. In other words, the costs the company needs to meet to finance its operations.

Smaller companies that borrow money to fund their business activities usually attract a higher interest rate to compensate for the extra risk to the lender.

When the smaller company merges with a larger company, however, the interest rate should reduce to reflect the larger company’s stronger balance sheet or cash flow.

Synergies are thus created when the merged company can make lower repayments on the loan.

Not all synergies benefit from mergers and acquisitions

There are two types of synergies that do not benefit from mergers and acquisitions. 

The two synergy types whose benefits are better realized from a strategic alliance are:

  1. Sequential synergies – where one company completes some of the task and passes it along to another company. For example, a big pharma company may purchase the marketing and distribution rights from a smaller drug manufacturer in return for a share of the profits.
  2. Modular synergies – where two companies pool their resources, manage their resources separately, and pool the results. Commercial airlines and hotel chains often enter into this form of strategic alliance where frequent flyer and other loyalty points are shared.

Key takeaways:

  • Business synergies are important drivers of value in mergers and acquisitions. They are based on the notion that the two companies when combined are worth more than they are when valued separately.
  • The three broad types of business synergies are revenue synergies, cost synergies, and financial synergies. They may appear to be similar at first glance but each has different and specific applications.
  • Not all business synergies will benefit from mergers and acquisitions. The benefits of modular and sequential synergies are better realized with a strategic alliance.

Connected Agile Frameworks

AIOps

aiops
AIOps is the application of artificial intelligence to IT operations. It has become particularly useful for modern IT management in hybridized, distributed, and dynamic environments. AIOps has become a key operational component of modern digital-based organizations, built around software and algorithms.

Agile Methodology

agile-methodology
Agile started as a lightweight development method compared to heavyweight software development, which is the core paradigm of the previous decades of software development. By 2001 the Manifesto for Agile Software Development was born as a set of principles that defined the new paradigm for software development as a continuous iteration. This would also influence the way of doing business.

Agile Project Management

agile-project-management
Agile project management (APM) is a strategy that breaks large projects into smaller, more manageable tasks. In the APM methodology, each project is completed in small sections – often referred to as iterations. Each iteration is completed according to its project life cycle, beginning with the initial design and progressing to testing and then quality assurance.

Agile Modeling

agile-modeling
Agile Modeling (AM) is a methodology for modeling and documenting software-based systems. Agile Modeling is critical to the rapid and continuous delivery of software. It is a collection of values, principles, and practices that guide effective, lightweight software modeling.

Agile Business Analysis

agile-business-analysis
Agile Business Analysis (AgileBA) is certification in the form of guidance and training for business analysts seeking to work in agile environments. To support this shift, AgileBA also helps the business analyst relate Agile projects to a wider organizational mission or strategy. To ensure that analysts have the necessary skills and expertise, AgileBA certification was developed.

Business Model Innovation

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Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.

Continuous Innovation

continuous-innovation
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.

Design Sprint

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A design sprint is a proven five-day process where critical business questions are answered through speedy design and prototyping, focusing on the end-user. A design sprint starts with a weekly challenge that should finish with a prototype, test at the end, and therefore a lesson learned to be iterated.

Design Thinking

design-thinking
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.

DevOps

devops-engineering
DevOps refers to a series of practices performed to perform automated software development processes. It is a conjugation of the term “development” and “operations” to emphasize how functions integrate across IT teams. DevOps strategies promote seamless building, testing, and deployment of products. It aims to bridge a gap between development and operations teams to streamline the development altogether.

Dual Track Agile

dual-track-agile
Product discovery is a critical part of agile methodologies, as its aim is to ensure that products customers love are built. Product discovery involves learning through a raft of methods, including design thinking, lean start-up, and A/B testing to name a few. Dual Track Agile is an agile methodology containing two separate tracks: the “discovery” track and the “delivery” track.

Feature-Driven Development

feature-driven-development
Feature-Driven Development is a pragmatic software process that is client and architecture-centric. Feature-Driven Development (FDD) is an agile software development model that organizes workflow according to which features need to be developed next.

eXtreme Programming

extreme-programming
eXtreme Programming was developed in the late 1990s by Ken Beck, Ron Jeffries, and Ward Cunningham. During this time, the trio was working on the Chrysler Comprehensive Compensation System (C3) to help manage the company payroll system. eXtreme Programming (XP) is a software development methodology. It is designed to improve software quality and the ability of software to adapt to changing customer needs.

Lean vs. Agile

lean-methodology-vs-agile
The Agile methodology has been primarily thought of for software development (and other business disciplines have also adopted it). Lean thinking is a process improvement technique where teams prioritize the value streams to improve it continuously. Both methodologies look at the customer as the key driver to improvement and waste reduction. Both methodologies look at improvement as something continuous.

Lean Startup

startup-company
A startup company is a high-tech business that tries to build a scalable business model in tech-driven industries. A startup company usually follows a lean methodology, where continuous innovation, driven by built-in viral loops is the rule. Thus, driving growth and building network effects as a consequence of this strategy.

Kanban

kanban
Kanban is a lean manufacturing framework first developed by Toyota in the late 1940s. The Kanban framework is a means of visualizing work as it moves through identifying potential bottlenecks. It does that through a process called just-in-time (JIT) manufacturing to optimize engineering processes, speed up manufacturing products, and improve the go-to-market strategy.

Rapid Application Development

rapid-application-development
RAD was first introduced by author and consultant James Martin in 1991. Martin recognized and then took advantage of the endless malleability of software in designing development models. Rapid Application Development (RAD) is a methodology focusing on delivering rapidly through continuous feedback and frequent iterations.

Scaled Agile

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Scaled Agile Lean Development (ScALeD) helps businesses discover a balanced approach to agile transition and scaling questions. The ScALed approach helps businesses successfully respond to change. Inspired by a combination of lean and agile values, ScALed is practitioner-based and can be completed through various agile frameworks and practices.

Spotify Model

spotify-model
The Spotify Model is an autonomous approach to scaling agile, focusing on culture communication, accountability, and quality. The Spotify model was first recognized in 2012 after Henrik Kniberg, and Anders Ivarsson released a white paper detailing how streaming company Spotify approached agility. Therefore, the Spotify model represents an evolution of agile.

Test-Driven Development

test-driven-development
As the name suggests, TDD is a test-driven technique for delivering high-quality software rapidly and sustainably. It is an iterative approach based on the idea that a failing test should be written before any code for a feature or function is written. Test-Driven Development (TDD) is an approach to software development that relies on very short development cycles.

Timeboxing

timeboxing
Timeboxing is a simple yet powerful time-management technique for improving productivity. Timeboxing describes the process of proactively scheduling a block of time to spend on a task in the future. It was first described by author James Martin in a book about agile software development.

Scrum

what-is-scrum
Scrum is a methodology co-created by Ken Schwaber and Jeff Sutherland for effective team collaboration on complex products. Scrum was primarily thought for software development projects to deliver new software capability every 2-4 weeks. It is a sub-group of agile also used in project management to improve startups’ productivity.

Scrum Anti-Patterns

scrum-anti-patterns
Scrum anti-patterns describe any attractive, easy-to-implement solution that ultimately makes a problem worse. Therefore, these are the practice not to follow to prevent issues from emerging. Some classic examples of scrum anti-patterns comprise absent product owners, pre-assigned tickets (making individuals work in isolation), and discounting retrospectives (where review meetings are not useful to really make improvements).

Scrum At Scale

scrum-at-scale
Scrum at Scale (Scrum@Scale) is a framework that Scrum teams use to address complex problems and deliver high-value products. Scrum at Scale was created through a joint venture between the Scrum Alliance and Scrum Inc. The joint venture was overseen by Jeff Sutherland, a co-creator of Scrum and one of the principal authors of the Agile Manifesto.

Read: Business Models Guide

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