Cost synergies in M&A

University essay from Högskolan i Jönköping/Internationella Handelshögskolan; Högskolan i Jönköping/Internationella Handelshögskolan

Author: Daniel Nowak; Robert Nyman; [2007]

Keywords: ;

Abstract:

Background: Today, M&A carried out by European companies stands for a significant share of the total M&A (Gaughan, 2002). One example, is the M&A between two of Europe’s superior truck manufacturers, MAN and Scania. In fact, M&A with Swedish companies have reached a level, close to all time high, during the year of 2006. However, it still prevails an ambiguity whether M&A are followed by success or by failure. An explanation is synergies in general and cost synergies in particular since they are seen as the driving force behind M&A. But still several authors argue that companies fail to understand and later integrate the firm specific resources that actually create the synergies. It can, therefore, be argued that resources play an extremely vital role in M&A and, thus that the resource based view theory would serve as a great analysing tool when seeking to understand the essence of cost-based synergies.

Purpose: The purpose with this study is to describe the emergence of cost-based synergies and to analyze factors that have an impact on the realization of cost-based synergies.

Method: Six companies operating in various businesses and with a thorough M&A experiences have been examined through qualitative semi structured interviews. The empirical findings have been analysed with the support of the theoretical framework.

Conclusions: The extent to which cost-based synergies can be realised depend on various factors and activities. More precise, the size and the type of firm regarding the acquirer and the target firm as well as the target firm’s ownership structure and bidding competition from other firms will have an impact on the search for cost-based synergies. The due diligence has been argued to serve as an important activity, particularly the technical audit, but also as being more associated with legal matters than with cost synergies. Nevertheless, the cost-based synergies that actually were realised can be found in a number of primary and support activities in the firms. Though, most of the synergistic gains have arisen in the areas of production and procurement through various types of economies of scale. More precise, the firms have taken advantage of both the acquirers’ as well as the target firms’ resources and, thus divested and redeployed in both directions. It is also evident that merely eliminating administrative duplications will not result in any major cost synergies. Instead it is the increased purchasing volumes and better utilised resources in production that result in the major cost synergies. However, cost synergies have also been achieved by redeploying resources in order to gain learning curve advantages and by transferring firm specific knowledge between firms in a conglomerate. These various types of synergies will require different integration times. To consolidate sourcing can be realised within a short time frame while eliminating department duplications will take longer time and merging production units will take the longest time. The problems that have occurred when doing this have arisen from cultural clashes and when trying to integrate IT systems. These cost synergies have exclusively been found in horizontal acquisitions, which correlates to the way the synergies have arisen. That is to say, by eliminating and integrating similar resources and activities.

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