Synergy Valuation in Industrial Software Acquisitions

Abstract: Engaging in M&A is a common corporate strategy and deals are often motivated by synergies, the concept that the value of the combined entities is greater than the sum of their standalone values. However, it is often difficult to capture synergistic value in reality and increasing the probability of a successful acquisition requires a thorough assessment of potential synergistic effects pre-acquisition. In this thesis, we have analyzed the strategic rationale, synergies, and valuation methods used in acquisitions of industrial software companies. Through multiple case studies comprising empirical material from interviews, valuation models and other transaction-related documents, we have studied five bolt-on acquisitions, three of which were completed by subsidiaries of Marrow and the remaining two by an industrial software company under private equity ownership. Main conclusions from the study are: • The foremost strategic rationale and source of synergy is revenue enhancements through acquiring technology and leveraging established sales channels to cross-sell and accelerate market access for the target’s products • A prevalent cost synergy is consolidation and/or renegotiation of contracts with third party software providers whose products are used in industrial software development • Financial synergies are not explicitly estimated nor valued • Valuation is conducted using both the DCF and multiple method with a varying degree of sophistication in the underlying estimations, ranging from a granular bottom-up approach for each line item to a top-down approach based on experience and intuition Lastly, the results indicate that synergies may to a greater extent be a function of the strategic rationale rather than a function of industry. However, acquisitions of industrial software companies seem to be underpinned by the same strategic rationale, namely revenue enhancements through leveraging sales channels and cross-selling. Thus, the corresponding synergies may be comparatively more common in this industry.