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29THE EFFECTS OF SYNERGY ON MAKING M&A DECISIONS Ma H.T. (Russian Federation) Email: Ma247@scientifictext.ru
Ma Hoai Thu - Master in Economics, FINANCE DEPARTMENT, PLEKHANOV RUSSIAN UNIVERSITY OF ECONOMICS, MOSCOW
Abstract: in the current competitive economic environment, many businesses have used mergers and acquisitions (M&A) as a strategy increasing company value and relieving restructuring pressures. In general, the M&A wave arises from several motives such as the desire to expand business's size, enhance market share, reduce competitors, access and own technologies, diversify and minimize risks, tax benefits, etc. Besides, there is another motive for businesses to come up with merger acquisition strategy is to gain the benefits of synergy. This article aims to study synergy in merger and acquisition and its impact on making M&A strategy decision of the manager. Keywords: synergy, decision making, M&A.
ВЛИЯНИЕ СИНЕРГИИ НА ПРИНЯТИЕ РЕШЕНИЙ M&A Ma Х.^ (Российская Федерация)
Ma Хоай Тху - магистр экономики, финансовый факультет, Российский экономический университет им. Г.В. Плеханова, г. Москва
Аннотация: в нынешней конкурентной экономической среде многие компании использовали слияния и поглощения в качестве стратегии для увеличения стоимости компании и уменьшения давления при реструктуризации. В целом волна слияний и поглощений возникает из-за нескольких мотивов, таких как желание увеличить размер бизнеса, увеличить долю рынка, сократить количество конкурентов, получить доступ к технологиям и владеть ими, диверсифицировать и минимизировать риски, налоговые льготы и т. д. Кроме того, у компаний есть еще один мотив для разработки стратегии слияний и поглощений - получение преимуществ синергии. Данная статья направлена на изучение синергии при слияниях и поглощениях и ее влияние на принятие руководителем стратегических решений в области слияний и поглощений.
Ключевые слова: синергия, принятие решений, M&A.
What is synergy?
The term "synergy" means "to work together" coming from the Greek word "sunergos". Synergy is understood as mutual gains created by two or more elements or individuals. In the M&A field, synergy is defined by Sirower as an increase in competitiveness and cash flows that exceed what two enterprises independently create. Then, the definition of synergy was added - synergy is a kind of creating value through a combination, leading to increase the competitive advantages. Synergy shows up when the capacity is transferred between M&A firms then improving the competitive position of the combined enterprise which leads to enhance the operating result post-acquisition entity.
Damodaran (2012) found that, in some M&A deals, acquirers sometimes paid large premiums over the value of the target enterprises. This is because of the benefits of synergies which is creating more value than both entities could have done individually. Mergers and acquisitions would happen if the combined value is higher than the difference between the purchase price and the value.
The effects of synergy on making M&A decisions of managers
In his Investment Valuation book, Damodaran found that synergy is one of four main reasons explain the large premium paid in several acquisitions besides motives of acquiring mispriced enterprises, minimizing risks, and taking over poorly managed firms. Synergies are created from several sources including cost saving, revenue improvement, processes enhancement, tax benefits, and financial engineering.
In this part, the author studies the impacts of synergies on deciding the M&A of managers through studies sources of synergies.
1. Cost saving
Saving cost seems to be the most common kind of creating synergy and it is easily calculated comparing to the other types. In general, the synergy is created by reducing jobs, facilities, and cutting unnecessary expenses after both firms combining. Moreover, for horizontal mergers and acquisitions, the combined firms can save significant costs from bulk purchases. It can be large if the combined entity merged by two companies operating in the same industry in a country.
Take Vietnamese retail market recent years as an example, the market witnessed continuously numerical of local retailers acquired by several foreign giant retailers. Recognizing the fertile of the market, foreign retailers joined the market by acquiring existing local retail firms. By this M&A strategy, they not only joined the market more quickly but also saved a lot of entering costs such as building new supermarkets and departments, marketing, etc.
2. Sales improvement
Sales improvement can be created from combining different strengths of both the bidding firm and the target firm. Estimating it is not easy. Because it is caused by several external factors beyond far from the control of managers. Many companies exclude revenue enhancements from evaluating value.
However, even though several limitations exist in estimating added revenue caused by merger and acquisition, some believe that it can create synergy value. Sometimes the extensive distribution channels of the bidding firm can help the target firm's products to access new customers more easily and vice versa. For instance, because of expecting sales of the target company can increase significantly by taking advantages of its existing distribution channels, Gillette paid $7 billion in stock to acquire Duracell which is a 20% premium. Particularly, after only one year after the acquisition, Duracell batteries were sold in 25 new foreign countries, leading to enhance revenue dramatically.
Moreover, it is likely that the larger combined company can attract more revenue than they could have as an individual firm. Take the case of the merger between UFJ Holding and Mitsubishi Tokyo Financial Group combining to be Mitsubishi UFJ Financial Group in Japanese banking system. After the merger, other giant banks pulled the new enterprise in on syndicated loans which neither UFJ Holding nor Mitsubishi Tokyo Financial Group would not have been asked to take part in individually.
3. Process enhancement
Process improvements arise when managers transfer best experiences and leadership skills among acquiring firms and target firms, leading to both boosting sales and lowering cost. The transfer has two-way directions. Some bidding firms make some acquisitions due to a belief that the targets are poorly managed and their experience skills can improve the situation. In contrast, some acquisitions are made because acquires are looking for some competencies that target firms are doing successfully. Due to merger and acquisition, the acquiring companies are also able to receive from the target a source of labor with good skills and lots of experience. At the same time, this is also a chance to filter out and fire ineffective positions.
Take the case of Facebook acquiring Instagram. When the acquisition occurred, the start-up Instagram still did not generate benefit. The acquisition price $1 billion seemed to be too high. Facebook has witnessed a decreasing number of young users because the
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youth has a tendency to use Instagram or Snapchat and are no longer prioritizing Facebook where the increasing number of their parents and friends' parents using Facebook make them feel less comfortable to active on Facebook. Facebook acquiring Instagram with an expectation that its modern and newer services may bring new unique element to younger users. Nowadays, Instagram seems to be a creating revenue engine of Facebook. The eMarketer report estimated that Instagram contributed nearly 30% of Facebook's mobile advertising revenue in 2018.
Understanding conceptually the synergies of saving expense, improving revenue and boosting process is easier than forecasting and valuating them. This is because the synergies take time to be create and it is more complex to estimate after the combination. Information asymmetry is also a difficulty in the valuation. Facebook had similar motives to acquire WhatsApp 2 years after acquiring Instagram. However, the result that WhatsApp create seemed to be not significant. Therefore, managers and boards of directors should be careful in making estimating assumptions for the final decision.
4. Profit taxation
Gordon (2014) documented that recent deals have been driven by increasing opportunities to minimize taxes. Belz, T, Robinson, L., Ruf, M. & Steffens, C. (2017) also pointed that tax avoidance plays as a driver of mergers and acquisitions. To examine the change in the tax avoidance of targets after being acquired, they used unconsolidated operating and financial accounting data for comparing pre- versus post-acquisitions deals in a sample of European M&A deals from 1996 to 2009. According to the study, more tax avoidance within targets post-acquisition increases the cash flow available to acquirers. Beside enhancing a business's after-tax profit, effective tax management might be necessary for a firm looking to prevent a hostile takeover. Acquirers with more efficient tax management can be able to competitively bid for the target firms. In recent years, the number of firms using tax credits and carryover losses to reduce taxes in M&A is quite large, meaning that tax benefits derived from carryover losses contribute an important part in the M&A decision.
5. Financial engineering
This synergy can show up because the acquisition expands the size of the combined firm which then have more predictable cash flows and more stable operating capital. They are more likely to borrow more than each of them could have done individually.
On the other hand, the merger could help the acquired company to borrow at a larger amount without affecting the credit rating of the acquiring firm. This is likely to see in the banking and finance industry because the post-M&A enterprise will have a larger scale and reduce more risks.
CONCLUSION
M&A have made because of numerical reasons. The motives are likely to be expanding company's size, enhancing market share, reducing competitor, diversify and minimize risks. Besides, achieving synergy is also an important motive that companies consider before making M&A decisions. Synergies can be generated from five main sources which are cost reduction, process enhancement, revenue improvement, tax benefits and financial engineering. Although synergy is expected in improving the company's value, it can disappoint the decision-makers when it is overestimated in some particular cases. This is because synergies are affected by several external variables beyond management control such as information asymmetry, consumer behaviors, etc. Therefore, managers and board members should be cautious in making estimating assumptions to avoid overestimating value leading to an unsuccessful post-M&A.
References / Список литературы
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4. West A. & Rudnicki J. A winning formula for deal synergies. McKinsey, 2020.
5. Hamza T., Schaier A. & Thraya M.H. How do takeovers create synergies? Evidence from France. Studies in Business and Economics,2016. 11(1). 54-72.
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