Revenue synergies are typically more challenging to estimate and capture as these synergies are not entirely under the control of acquiring firms. Acquisition announcements often note revenue synergies as one of the strategic rationales for acquisitions, such as expanding to new markets both geographically and through new product offerings and accessing target customers. Not realizing revenue synergies has a significant impact on the bottom line and hence on the value of the acquiring firm.
Many acquiring firms use assumptions about pricing and market share that may contravene overall market growth and competitive realities. It is difficult for an acquirer to know the changes in pricing strategies of its competitors as they respond to the acquisition.
Revenue synergies are harder to estimate but have a more pronounced impact on valuation compare to cost synergies. Furthermore, if the market is not growing, then the only way an acquirer can grow would be to take market shares from their competitors.
So, relying on typically inflated revenue estimates may reduce the reliability of target valuation and benefits of revenue synergies. Additionally, acquiring firms should also consider negative revenue synergies resulting from the loss of focus on their existing businesses as they spend time on integration and achieving expected synergies.
Merging firms may end up losing a fraction of their combined customers. Acquiring firms should consider the sensitivity of their assumptions about pricing and market share and the recovery time of revenue synergies.
Aside from the quantity of sales, post-acquisition pricing strategies may significantly influence realized synergies. Although an acquisition may provide the acquiring firm some control over pricing as it would affect its competitive position, post-merger pricing should not translate in raising prices automatically.
Acquiring firms should focus on the value proposition to their customers and price their products and services accordingly. Merged firms can destroy value by failing to align prices with enhanced benefits to their customers.
Finally, to achieve the projected revenue synergies, the acquiring firm should closely examine the cross-selling opportunities to combined customers. Cross-selling refers to selling products and services sold to one set of customers to another group of customers to realize synergies.
The success of cross-selling varies among firms, but it is typically challenging to achieve. It would require the right skill set for the sales team, extensive training of employees, and a complementary product and service menu.
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Contact us. Shareholders will benefit if a company's post-merger share price increases due to the synergistic effect of the deal. The expected synergy achieved through the merger can be attributed to various factors, such as increased revenues , combined talent and technology, and cost reduction. Lafley stated, "…We are both industry leaders on our own, and we will be even stronger and even better together. In addition to merging with another company, a company may also attempt to create synergy by combining products or markets.
For example, a retail business that sells clothes may decide to cross-sell products by offering accessories, such as jewelry or belts, to increase revenue. A company can also achieve synergy by setting up cross-disciplinary workgroups, in which each member of the team brings with them a unique skill set or experience.
This team formation could result in increased capacity and workflow and, ultimately, a better product than all the team members could produce if they work separately. Synergy can also be negative. Negative synergy is derived when the value of the combined entities is less than the value of each entity if it operated alone. This could result if the merged firms experience problems caused by vastly different leadership styles and corporate cultures. Synergy is reflected on a company's balance sheet through its goodwill account.
Goodwill is an intangible asset that represents the portion of the business value that cannot be attributed to other business assets. Examples of goodwill include a company's brand recognition, proprietary or intellectual property, and good customer relationships. Synergies may not necessarily have a monetary value but could reduce the costs of sales and increase profit margin or future growth.
In order for synergy to have an effect on the value, it must produce higher cash flows from existing assets, higher expected growth rates, longer growth periods, or lower cost of capital. Career Advice. Actively scan device characteristics for identification. Use precise geolocation data.
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