M&A
Synergies
Synergies in mergers and acquisitions
Definition
Synergies are the cost savings and additional revenue a buyer expects to gain by combining two businesses, over and above what the two would earn separately, usually quoted in deal announcements as an annual run-rate figure reached a few years after completion. Cost synergies come from removing duplication: one head office, one technology platform, one set of supplier contracts, pooled marketing buying. Revenue synergies come from selling more: cross-selling products to each other's customers or taking brands and content into new markets.
In gambling deals, platform consolidation is often the largest single source of cost savings and also the riskiest, because migrating customers between platforms can disrupt trading. Investors give more weight to cost synergies than revenue synergies because cost savings are more within management's control. In UK public takeovers, a quantified synergy figure is a "quantified financial benefits statement" under Rule 28 of the Takeover Code and must be reported on by accountants and financial advisers.
Key takeaways
- Synergies are the extra value created by combining two companies: cost savings from removing duplication and extra revenue from cross-selling.
- Deal announcements quote synergies as an annual run-rate reached over several years, alongside the one-off cost of achieving them.
- Cost synergies are valued more highly than revenue synergies because they depend less on customer behaviour.
- Under the UK Takeover Code, quantified synergy claims must disclose their basis, timing, costs and any expected disbenefits.
Formula
NPV of synergies = Sum over years t of [S(t) x (1 - tax rate) - C(t)] / (1 + r)^t where S(t) = pre-tax synergies realised in year t, C(t) = one-off integration costs in year t, r = discount rate
Run-rate synergies are the annual figure once integration is complete, not the amount realised in year one. The integration costs, the phasing and any revenue lost along the way (dis-synergies) matter as much as the headline run-rate.
Worked example
The phasing and cost figures below come from the October 2019 announcement of the Flutter and The Stars Group combination; the valuation step is illustrative.
- Target pre-tax cost synergies: £140m a year
- Phasing: £25m, £115m and £140m in the three 12-month periods after completion
- One-off cash implementation costs: about £180m, in the first two years
Across the first three years the savings total 25 + 115 + 140 = £280m against £180m of costs, so the deal is only modestly ahead on synergies by the end of year three. The value lies in the recurring £140m from year four onwards. Capitalised at an illustrative multiple of 8x, a £140m annual saving would be worth about £1.1bn before tax, which is the kind of figure buyers use to justify a takeover premium.
Why it matters
Synergies are usually what pays for the premium in a takeover. A buyer offering 30% over the target's share price is betting that combined costs fall and combined revenue rises by enough to recover that premium, so the synergy number in an announcement is the buyer's thesis in one figure. In gambling M&A, the 2019 Flutter and Stars Group announcement is a typical template: it expected savings primarily from removing duplication in corporate functions, procurement efficiencies, integrating technology functions and marketing economies of scale.
For B2B suppliers, those categories are a warning. "Procurement efficiencies" and technology integration mean the combined group will consolidate onto fewer platforms, feeds, content aggregators and payment providers, and renegotiate the rest on volume. A supplier serving one side of a merger can lose the contract at the migration stage or win the whole estate.
Synergy delivery is also where deals disappoint. Platform migrations slip, customers churn when brands are merged, regulators impose conditions, and integration costs overrun. Analysts therefore track realised synergies against the announced schedule and compare post-deal adjusted EBITDA with the pro forma promise. The iGaming M&A course covers how synergy cases are built and tested.
Synergies vs Revenue synergies
| Synergies | Revenue synergies |
|---|---|
| Cost synergies come from removing duplicated costs: head offices, platforms, supplier contracts, marketing. They are largely within management's control and are the figure most buyers quantify. | Revenue synergies come from selling more after the deal, such as cross-selling products or launching brands in new markets. They depend on customers and competitors, so they are often described rather than quantified. |
Markets usually credit cost synergies and discount revenue synergies. A deal whose case rests mainly on revenue synergies needs more scrutiny of the assumptions.
The bottom line
Synergies are the buyer's estimate of what a combination adds: savings first, extra revenue second. Judge them by their phasing, their cost to achieve and the track record of integration, not by the run-rate headline.
Sources
- Flutter and The Stars Group all-share combination (announcement, 2 October 2019) - US Securities and Exchange Commission (EDGAR)
- Rule 28.6: Disclosure requirements for quantified financial benefits statements - The Takeover Panel
Frequently asked questions
What are synergies in a merger?
Synergies are the financial benefits expected from combining two companies that neither could achieve alone. They are usually split into cost synergies, from cutting duplicated functions, systems and supplier spend, and revenue synergies, from cross-selling and entering new markets. Buyers publish a target annual figure to justify the price they are paying.
What is the difference between cost synergies and revenue synergies?
Cost synergies are savings: one head office instead of two, one technology platform, better supplier terms, combined marketing. Revenue synergies are extra sales, such as offering one company's products to the other's customers. Cost synergies are easier to plan and measure, so investors usually value them more highly than revenue synergies, which depend on customer behaviour.
What does run-rate synergies mean?
Run-rate synergies are the annual level of savings or extra revenue once integration is complete, typically two or three years after a deal closes. The amount actually realised in the first year is usually much lower. Announcements often give the phasing year by year and the one-off cost of achieving the run-rate, and both matter when valuing the claim.
Why do synergies often fall short?
Integration is harder than the spreadsheet. Technology migrations take longer than planned, merged brands lose customers, key staff leave, regulators attach conditions to approvals and one-off costs overrun. Some combinations also create dis-synergies, such as revenue lost when a supplier or partner walks away. Tracking realised synergies against the announced schedule is how analysts test a deal.