Revenue Synergies: The Key to M&A Success

April 10, 2018

Revenue synergies: the key to M&A success

Mergers and acquisitions often fail to achieve the projected benefits. Even when a deal is deemed an integration success, most companies are unable to fully achieve their synergy targets. Although plenty of playbooks have been developed on the success factors for capturing cost synergies (which are relatively easy to achieve), there is little focus on deliberately planning for revenue synergies. These are more challenging, but are also a worthy pursuit that can deliver up to 35 percent of the total synergy target.

Topline synergies are much more powerful than cost synergies and represent the largest opportunity for management and deal teams. Our example in figure 1 shows how Company A would have to reduce its fixed costs by at least 16% to achieve the same margin impact of a 3% price increase. The math speaks for itself: revenue levers (particularly prices) are much more effective and abundant. You can only remove so many costs from your business before negatively impacting your critical business functions or customer service.

Figure 1

Revenue synergies: the key to M&A success

 

What prevents so many companies from fully tapping into their revenue synergy potential? One of the main pitfalls encountered by management teams is that they underestimate the importance of topline value drivers in the due diligence process. As a result, revenue synergies are not fully understood and get lost in a poor hand-off between the deal team and the integration team. However, this area can be less rigorous when it comes to meeting deal timelines, since many management teams do not publicly commit to revenue synergies.

Management teams often prioritize internal issues such as restructuring the business and addressing employee and change management concerns.  This takes precedence over transforming the top line of their business. In addition, they confuse price opportunities with price increases and shy away from them due to a potentially negative experience with the press. In an effort to minimize disruption to customers during integration, companies also delay changes to pricing or terms and conditions.

Another pitfall is that companies adopt an integrate-then-transform philosophy – largely due to financial incentive structures that reward management teams for rapidly completing the integration. This puts an emphasis on the cost synergies, which require longer lead times and a greater portion of the integration budget. As a result, resources are allocated to the cost side of the synergy equation and the transform part never truly materializes.

And finally, they plan revenue synergies from the top down, ignoring other significant success factors such as the sales team’s ability to cross-sell or communicate the value of new products and services. However, to make headway, revenue synergies must be analyzed and eventually built at a customer-product level.

Our experience shows that focusing effort on revenue synergies can immediately add incremental value to your company, without large investments and the long lead times encountered with cost synergies.

Here are four key factors to succeed with planning and realizing revenue synergies.

  1. Start early, and plan for revenue synergies. Don’t be afraid to bring in clean teams to legally examine pricing topics, and be open to a joint planning approach (independently undertaken within each company) until the results can be easily combined when the deal is closed.
     
  2. Lead with the post-merger commercial strategy instead of the integration strategy. Develop a vision for positioning your combined products within the market, and carefully think about how to enhance or rationalize products and features so that they are in line with market needs. Start by prioritizing the customers and markets you want to address, and plan the integration and supporting infrastructure around achieving those goals.
     
  3. Act fast. Customers are much more willing to accept change (and in most cases expect it) as a consequence of a merger. However, the window of opportunity here is limited, so use this short timeframe wisely. Cross-selling products, harmonizing trade term policies, and addressing product segments with low profitability can significantly boost your profits early on.
     
  4. Create a dedicated commercial team with a strong analytical skillset and deep commercial experience. The ability to manipulate large data sets and derive insights from statistical analysis can quickly highlight opportunities that will immediately capture value and deliver strong results – without having to wait until the integration is fully completed.