If you have ever gone through a merger, acquisition, or even a diversification move by a company, the term “synergy” is likely to one that you have heard mentioned thousands of times. It is the allure of expansion into new areas – the possibility that combining firms together can result in something more than the firms are able to achieve independently. Unfortunately, all to often many envisioned synergies remain just that – paper synergies that exist only in the expansion plans and don’t ultimately materialize. This article explores some of the reasons for the discrepancy between expected and realized benefits.
Synergies: Benefits from operating across different areas
Savings from operating across areas
One of the key benefits associated with expanding the scope of the firm is the possibility of cost savings by reducing duplication. Companies may have multiple overlapping departments that can be removed or downscaled when they are combined into one organization. A lot of support activities, such as HR, IT, or even general management can potentially be streamlined within a combined entity, eliminating some costs.
Revenue opportunities from operating across areas
The other source of benefits from combining multiple different firms or areas within one organization is greater revenue opportunities that come from the greater scope of the operations. Potentially new products can be developed that draw from the technologies of both firms, or the combined firm is able to utilize greater access to distribution channels to cross-sell the goods.
What are paper synergies?
Paper synergies are the supposed benefits used to justify diversification or a merger/acquisition that are not actually realized. They only exist on paper – and when it comes to expanding, the expected benefits don’t actually materialize.
Why don't paper synergies often work out?
Supposed synergies are often a lot easier to spot in advance than they are to achieve when a company attempts to move into another area or integrate an acquired firm. The stories to justify the expansion can appear very convincing, but challenges in integrating can result in these anticipated benefits never occurring. Some of the reasons why integration can be difficult include:
Seeing opportunities to justify what you want
One of the first reasons why synergies often don’t materialize is that often there is no clear benefit for where the expected saving or revenue increase will come from. The justification may be as much as about justifying the acquisition – potentially because of a desire to grow the business – than because of a true expected benefit that comes from operating across areas. If the source of where costs can be reduced or revenue enhanced as a result of the acquisition cannot be clearly explained, the likelihood that such savings or opportunities will materials is substantially reduced.
Underestimating how difficult it will be to achieve the savings
Another reason why many synergies fail to materialize to the extent that they were promised is that there are a lot more challenges at realizing them than was expected. Potentially this can result in higher costs associated with implementing the activity – including the disruption that the integration can have on the overall firm.
Ultimately deciding against integration
A final way that synergies don’t always play out is that the firm ultimately decides against integration, and in turn, supposed benefits are not achieved. Potentially it is much harder to integrate back-end functions than was planned in advance – possibly both operations use a different database system and it is decided that it is not worth the effort to merge the two.
The decision to avoid integrating areas can result in expected benefits never materializing – if you are expecting to have significant savings from reducing duplication, then deciding against the integration immediately eliminates these supposed benefits.