Key theory concepts Sources of cost synergies Eliminate

Key theory & concepts • Sources of cost synergies: Eliminate duplicated functions & services; better deals from suppliers; higher productivity & efficiency from shared assets • Sources of revenue synergies: Cross-selling to customers of both businesses; access to new distribution; brand extensions; new geographic markets opened up • Opportunity cost: the cost of not taking the next best alternative (the benefit foregone)

Why synergies are so important? • They justify paying more than the standalone value of a target firm • They are the means by which shareholder value is created • They focus management on making a takeover achieve its objectives • They are a means to improve competitiveness and achieve competitive advantage

Are cost synergies enough to justify a takeover? • Depends on the nature of the transaction • Likely to be important where – Transaction involves horizontal integration – Economies of scale are vital to achieve cost leadership – Target is believed to be operating inefficiently (e. g. too many layers in org structure or low productivity) • Likely to be less important where – Takeover is led by a private equity firm (although financial motives remain important) – Target operates in a different market or country – No significant changes proposed to the target business

“Hard” and “Soft” parts to takeover integration Hard • IT and other systems integration • Distribution (conflicts, extension) • Elimination of duplicated activities and costs • Transfer of contracts • Financial reporting and responsibilities Soft • Organisational structure • Management appointments • Communication • Handling different cultures

A successful takeover or merger requires a clear focus on hard issues such as cost reductions and systems integration rather than soft issues such as communication and cultural compatibility. Do you agree?