Synergy Works Both Ways: 3 Possibilities

By Tom Schramski, PhD, CMAA

Volume 2 Issue 10, May 12, 2015

unnamedA couple of months ago, a prospective buyer was considering making an offer for one of our opportunities, a profitable healthcare company with a good track record of service quality and great upside for development with increased cash investment.  After their review, they told me the following:  they were not going to make an offer because their overhead expense was significantly higher than that of the seller and, thus, it would not be as profitable when they took over.

We discussed the possibility of synergistic value that could result from using their existing management structure, but they responded that they “just couldn’t make it work.”  My conclusion was that the acquisition would have to be ridiculously profitable or at death’s doorstep for any transaction to make sense for this potential acquirer.

 

Most often we look at the purchase of any product or service as something that will prove its worth by improving our condition as we see it.  In the purchase of a business, the buyer is focused on how the acquisition can improve the bottom line while hopefully gaining synergistic value within the context of operations as they see it(i.e. reducing acquiree administrative employees).  The problem with the buyer analysis it that it is often one-sided.

Here are a few possibilities for buyers to consider:

  • There is typically no need to rush to absorb most acquisitions into the buyer’s operational structure.  Taking some time can prove of benefit for the buyer in carefully analyzing how the new business functions and how best to accomplish an operational and cultural integration.
  • The buyer may consider operating the new business as an autonomous “experiment” in the best sense of that word.  What is happening in the business and what are keys to their evident success?
  • Could the acquired business have something to teach the buyer?  We generally think of the buyer as being superior to the acquiree because they have more cash and they have qualified to complete the transaction.  But bigger and wealthier does not necessarily equal better in terms of lean operation.

It’s worthwhile for a buyer to consider that there may be additional synergistic value by taking time to thoughtfully assess the success of an acquired entity.  It’s also fair game for the seller to suggest this possibility as part of the negotiation and due diligence processes.