What is Timing of Synergies?
When a company is looking to enter into a merger & acquisition deal, the timing of synergies is of extreme importance. It is because M&A deals are essentially time-sensitive because of the volatile nature of financial markets. The market constantly goes through periods of expansion and recession, characterized by economic boom periods and contractions.
Understanding Timing of Synergies
As a consequence of the fluctuating structure of the market, it is vital for companies to make decisions regarding mergers and acquisitions at the appropriate time. Such decisions, when taken at the appropriate time, could be a very profitable opportunity but, if made at a less opportune time, could lead to a very unsuccessful merger and generate losses for the companies involved. Hence, M&A transactions are strongly dependent on the business cycle and are highly time-sensitive.
Generally, lucrative M&A markets show up during periods of expansion or economic boom. During the expansion period, the unemployment rate in the economy is on a decline. Meanwhile, company sales are rising, along with the consumer’s purchasing power, and the stock market is on an upswing.
Hence, M&A transactions entered into during this period are generally very opportune, as, during this time, the synergy market is highly profitable. Companies are willing to invest in other companies as they not only experience a successful sales roundup in the process, but the return on their investment post-merger is likely to be very high as the economy begins to recover from a recessionary period.
Advantages of Well-timed Mergers and Acquisitions
1. Combines resources
Mergers and acquisitions are extremely beneficial to the new combined entity as it combines the resources of both organizations involved and can help achieve the best of both worlds. Combining resources can help the company expand financially, operations-wise, human resource-wise, and can help expand the company to work on a larger scale.
2. Brings about economies of scale
A merger brings along countless cost benefits. Mergers can benefit the company by bringing several cost cuts and achieve economies of scale. The union translates into improved purchasing power for the company, which brings cost cuts for resources and supplies to the table. In addition to that, larger orders bring more discount and rebate benefits to the table and hence, overall, help achieve economies of scale.
3. Improves market reach
Mergers can help the companies involved reach new markets that were previously inaccessible to the companies. It enhances the combined company’s market visibility and helps expand its customer base and generate more revenue.
4. Generates more revenue
One of the primary motives behind merging two companies is to combine the resources of the two companies and expand in order to generate more revenue. If a merger deal is entered into at the appropriate time, it can hence turn out to be a very profitable venture.
5. Expands the scale of operation
When companies are looking to expand their scale of operation, synergies are highly beneficial as they can help combine the several resources of the two companies that can help move on to a larger scale of operation.
6. Achieves market domination
When two companies merge, they help both the companies involved expand their market reach and customer base. Synergies can thus help dominate the industry or sector the companies belong to and can help become a major competitor in their specific industry.
Examples of Well-timed Mergers and Acquisitions
1. Procter & Gamble (P&G) and Gillette
The P&G-Gillette deal is an example of a very successful revenue synergy. The two companies were very successful individually in their operations and were the industry leaders of the time. When Proctor & Gamble acquired Gillette in 2005, an increase in the annual sales of about $750 million was reported by 2008. Had the two companies decided to go forward with the deal at a later time, they might not have been able to generate as much profit as they did by acquiring the company during their peak time.
2. Pfizer and Warner-Lambert
In a deal that involved two of the major industry leaders and the fastest growing companies in the pharmaceutical sector, Pfizer Inc. acquired Warner-Lambert in 2000.
A proposed merger was initially announced by Warner-Lambert and American Home Products in November 1999. However, Pfizer saw an opportunity and offered a considerable amount to merge with Warner-Lambert. At that time, Warner-Lambert’s cholesterol drug Lipitor was just introduced and had proved to be extremely profitable. The drug was then jointly marketed by Pfizer and Warner-Lambert.
The deal brought an insurmountable amount of profit and several opportunities for the companies. Had Pfizer not made a decision to merge at the appropriate time, it might not have had the success that it did post-merger, and instead, American Home Products might be the company taking the money.
It is essentially a tedious process to identify and capture maximum value from synergies. They must be rigorously targeted, pursued, and tracked by the right companies, the right process, and, most importantly, at the right time. Only then do M&A opportunities become genuinely successful.
Thank you for reading our guide to Timing of Synergies. CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)® certification program, designed to transform anyone into a world-class financial analyst.
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