For synergy’s sake [wk62]

The Greek word ‘synergos’ means working together. This is the spirit of the notion of synergy; that is to say, a group working together can create more value than the units would have done working alone. We are into week 2 of a very popular Mergers and Acquisitions module with Scott Moeller, and we have been informed that, unsurprisingly, much M&S activity is driven by growth, but usually it is growth justified by synergy. In corporate strategy, we were taught that there are 6 types of sought-after synergy:

• shared ‘know-how’
• co-ordinated strategy
• shared tangible resources
• vertical integration
• pooled negotiating power
• combined business creation.

For revision and recall purposes, I split these synergies into 2 groups:

• ‘static’ synergies, which are all about sharing assets and benefitting from economies of scope and scale; and
• ‘dynamic’ synergies, which involve improving and creating assets through shared competences.

In week 38, writing about the myth of synergy and the ‘managerial kiss’, I described these as:

• 2+2=3 (subadditive) contributions to the bottom line, or
• 2+2=5 (superadditive) contributions to the top line.

Since then, I have learnt that the reason why most of these synergies do not come about is rooted in our friend the cognitive bias – and more specifically:

• synergy bias – overestimate benefits and underestimate costs
• upside bias – overlook the downside
• parenting bias – a belief that synergy can only be delivered by forcing business units to work together
• skills bias – assumption that organisation has necessary skills.

And this week, I have been informed that in search of synergy, M&A deals can either be:

• a merger or an acquisition – A+B=C or A+B=A
• complementary or supplementary – tackle weakness or build strength
• horizontal or vertical – integration of market and/or supply chain
• strategic or opportunistic – e.g. undervalued stock
• strategic or financial – e.g. to reduce the cost of capital
• friendly or hostile – does the board recommend or resist?

For synergy’s sake! In conclusion, they are easy to perceive, but hard to identify, capture or create. This whole conclusion may indeed be greater than the sum of its parts.