Learn how to identify and realize the best synergies between parent and acquired companies in private equity deals, and create value through acquisitions.

Deal structuring is extremely important in order to successfully realise synergies. If you must keep certain people at the target company in order to successfully execute on the post merger integration plan, make sure there is an earn-out structure or an incentive structure so that both the parent and acquired entity have the same goal post acquisition. Culture should not be underestimated. According to McKinsey, culture is the number one integration risk within M&A and a key reason M&A can fail to deliver full potential.

How can you identify the best synergies between parent and acquired companies?

One of the main goals of private equity (PE) firms is to create value through acquisitions. However, not all deals deliver the expected returns, and one of the key factors that determine the success or failure of a merger is the synergy between the parent and the acquired companies. Synergy refers to the potential benefits that arise from combining two or more businesses, such as cost savings, revenue growth, operational efficiency, or strategic advantages. But how can you identify the best synergies and how can you measure and realize them? In this article, we will explore some of the methods and best practices for finding and capturing synergies in PE deals.

1 Define the synergy drivers

Before you start looking for synergies, it's important to have a clear understanding of the main drivers of value creation for the deal. These strategic objectives and rationales justify the acquisition and guide the integration process. For example, market expansion could be achieved by acquiring a company that operates in a different geography, segment, or channel and leveraging its customer base, distribution network, or brand recognition. Product or service diversification could be accomplished by acquiring a company that offers complementary or adjacent products or services and then cross-selling or bundling them to existing or new customers. Technology or innovation enhancement can be achieved by acquiring a company that has superior or disruptive technology, capabilities, or intellectual property and integrating them into the parent's core business or creating new offerings. Cost reduction or efficiency improvement could be attained by acquiring a company with a lower cost structure, higher margins, or better operational processes and eliminating redundancies, streamlining functions, or optimizing resources.

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Nora Tandberg

CFO at Papirfly
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First we must go to the root of the question, which is, why do we do M&A in the first place? In my experience, M&A can be successful when there is a clear and easily communicable link between the M&A strategy and shareholder value; M&A must build shareholder value. Depending on the business of the parent entity, including factors such as the market, macroeconomics, and ownership structure, there can be a range of desired outcomes from M&A. It could be all about revenue growth, in which case revenue synergies are important, or it could be about driving profitability, in which case cost structure is important. Or it could be something entirely different, e.g. an "aquihire" to acquire certain talent, or financial engineering related.

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2 Assess the synergy potential

Once you have defined the synergy drivers, you need to assess their potential value and feasibility. This involves conducting a thorough due diligence of the target company, as well as a market and competitive analysis, to estimate the revenue and cost synergies, and their timing and risks. To do this, you can use benchmarking to compare the target's performance with that of the parent and industry peers, scenario analysis to create different scenarios based on various assumptions and variables, and sensitivity analysis to test how sensitive the deal value is to changes in key drivers. This will help you identify gaps and opportunities for improvement or alignment, evaluate the impact of each scenario on the deal value and return on investment, and identify the most critical factors and their ranges.

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Nora Tandberg

CFO at Papirfly
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For revenue synergies it is crucial to do a thorough commercial due diligence of the target company, including customer interviews tailored to identifying whether the desired synergy in fact exists. For example, if you acquire a company because you believe your customers could benefit from the products sold by the target company, you must conduct research and interviews of your own customer base to assess the feasibility of the plan i.e. whether your customers will in fact buy the products of the target. A thorough cost base review is required at the due diligence phase if cost synergies are planned. Legal due diligence should include review of both customer and supplier contracts in order to assess the feasibility of synergies planned.

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3 Plan the synergy realization

After you have assessed the synergy potential, you need to plan how to capture and realize it. This involves designing and implementing a post-acquisition integration strategy that aligns with the deal objectives and maximizes the value creation opportunities. To do so, it is important to prioritize the synergies according to their value, feasibility, and urgency, assign clear roles and accountabilities for each synergy, communicate the vision of the deal to stakeholders, and be flexible and adaptable to any changes that may occur. Identifying and capturing synergies is a challenging but rewarding task for PE firms. By following a systematic and disciplined approach, you can increase the chances of finding and realizing the best synergies between the parent and the acquired companies, thus creating lasting value for your portfolio.

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Nora Tandberg

CFO at Papirfly
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The key to synergy realisation is twofold: 1) Start planning for post-merger integration well ahead of deal closing. 100-day plan or post merger integration plan should be ready to go on Day 1 based on M&A strategy considerations and due diligence findings. 2) Allocate an owner of the PMI process from the get-go who is to facilitate the process and hold people to account.

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

Add your perspective

Nora Tandberg

CFO at Papirfly
Report contribution
Deal structuring is extremely important in order to successfully realise synergies. If you must keep certain people at the target company in order to successfully execute on the post merger integration plan, make sure there is an earn-out structure or an incentive structure so that both the parent and acquired entity have the same goal post acquisition. Culture should not be underestimated. According to McKinsey, culture is the number one integration risk within M&A and a key reason M&A can fail to deliver full potential.

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How can you identify the best synergies between parent and acquired companies?

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1 Define the synergy drivers

2 Assess the synergy potential

3 Plan the synergy realization

4 Here’s what else to consider

Private Equity

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