1.2·6 min read
Why Companies Acquire
Most deals are justified by synergies - extra revenue or cost savings the two companies can capture only by combining.
By the end you can
- ✓Distinguish revenue and cost synergies
- ✓Tell a strategic buyer from a financial sponsor
A buyer pays a over the target's market price, so it needs a reason the combination is worth more than the two companies apart. That extra value is called synergy.
Revenue synergies
- ›Cross-sell into each other's customers
- ›New products or markets
- ›Pricing power from scale
- ›Hardest to deliver - bankers haircut them
Cost synergies
- ›Eliminate duplicate overhead
- ›Close redundant facilities
- ›Buy inputs at larger scale
- ›More credible - usually the bulk of synergy value
Strategic buyer vs. financial sponsor
A strategic buyer is an operating company that can capture . A financial sponsor is a private-equity firm running a leveraged buyout for a financial return. Strategics can usually pay more, because are worth more to them.
Net the synergies
cost money to achieve - severance, integration, system migrations. Models use net (gross benefit minus the cost to realize it), and often phase them in over a few years.
Check yourself
Closing duplicate corporate headquarters after a merger is an example of: