Operational Synergies Estimation

Operational Synergies Estimation Methods

In modern economic literature, the synergy of mergers and acquisitions is usually understood as an increase in the efficiency of a newly created enterprise in comparison with the total efficiency of its parts before merging.

What Are the Main Sources of Operational Synergies?

The assessment of the synergy effect based on the income approach is the most common. These methods for assessing the effect of synergy (discounted cash flow method) take into account the manifestation of the synergy effect as an increase in discounted cash flows for shareholders (as a result of an increase in revenue, savings on expenses, income tax, capital investments, investments in working capital).

The main sources of operational synergies are:

  • an increase in income due to the expansion of sales markets, an assortment of goods, and the proposal of new goods.
  • cost reduction by reducing the share of fixed costs (administrative costs, liquidation of similar fixed assets) and variable (sales costs).
  • improvement of processes through the use of more advanced management methods.
  • financial savings by increasing the market value of the company and tax incentives.

Evaluation of the synergy effect based on the cost approach is based on the increase in the value of the enterprise through mergers/acquisitions or through the acquisition of assets from the outside before the emergence of the ability on the basis of the formed property complex to produce profitable products in demand. However, this method of assessing the synergy effect allows only the operational synergy to be taken into account, which underestimates the size of the resulting synergy effect. Based on the fact that a business is bought in a merger/acquisition, and not a set of assets, the cost approach may be of limited use, since intangible assets are not taken into account.

The operational synergies market is unstable and cyclical, but it does not lose its relevance over the years, since each successive stage of development brings new forms and methods of transactions. Many large corporations and financial structures of our time have become such precisely through a series of mergers and acquisitions. They gradually built up their market power and solidified their reputation as a successful business, and they continue to do so today.

The Value and Performance of Two Firms in Mergers and Acquisition Deals

The value and performance of two firms in mergers and acquisitions remain one of the main ways to develop and maintain the competitiveness of companies in developed and emerging markets. In light of the economic instability of recent years, the search for the most effective deals on the domestic market is becoming especially relevant for companies.

Operational synergies in the case of M&A deals are usually understood as the added value created as a result of the merger of the two companies, which opened up new opportunities for the combined company that was not available to companies separately and increased its competitiveness. In the literature, there are two main types of synergy – operational and financial.

Also, according to many authors, the synergistic effects for each specific transaction are individual, and the use of a retrospective valuation method is not effective. Practical studies of this assessment method give a weak characteristic of the explanatory ability of the method and evaluate its effectiveness no more than 40%. Therefore, the author proposes to focus on the assessment of synergistic effects in two ways: discounted cash flow and the method of real options