February 25, 2020 at 7:02 pm #107326
In your experience, do private companies that want to sell care for companies that bring the most future value or they just focus on deals that bring the most cash? M&A should be focused on company growth and fit, or should be on the dollar value in private sector?February 28, 2020 at 6:42 am #107456
Great question. Should sellers care about synergies?
For strategic buyers, and financial buyers thinking about a future exit, the synergies that are available to be created are part of the foundation for how much of a premium the buyer can afford to pay. So the answer, in my opinion, is both. The absolute dollar value commanded by a target will be a direct result of the synergies that the buyer believes they will be able to capture.March 3, 2020 at 12:15 am #107510
@Korath Wright that is a great answer and I never thought of it that way. Of course, if the future synergy value makes the case for a higher premium to be paid, then it is in the interest of the seller to care about synergies. However, I wonder whether buyers share this information during the transaction process as typically that occurs in such a tightly controlled process and I’m not sure a buyer would even share those because it is not in their interest to do so. hmmm, food for thought.March 8, 2020 at 5:01 pm #107657
Definitively. Sellers are very much interested in what they are selling but as @linalorenzo mentioned asymmetry of information plays a great role. There are situations were buyer and seller fix the transaction price based on the expected benefits for both as it happens in the determination of royalties, where a rough approximation of values created can be made by both parties. But when it comes to value of synergies, the seller might be completely in the darkMay 10, 2020 at 9:44 am #109975
I was on a sell side recently with a Private Company. We had high cash bids from Private Equity firms who would give presentations that made no sense. Then we had some strategics / competitors come in with lower offers that the Sellers felt more comfortable leaving the company with. They want to see the company succeed and prosper. That company though didn’t have a board and all sorts of stakeholders (usual deal where most board members and stake holders want the bid with the most cash) and was 100% family owned.May 11, 2020 at 3:28 am #109997
Paul Gray, MBAParticipant
Synergies will help determine the premium that a willing buyer is ready to pay for a company. That said, if the seller has an awareness of what the potential synergies are for the respective buyers (since this will be different and unique for each) then it will support in the negotiation process and ensure that the best possible price is realized from the transaction. Understanding the synergies will not be an exact science for the seller because of information asymmetry. However, inferences can be drawn by gaining more information about the buyers and making a determination on the potential synergies which can then be used as leverage in the negotiations.May 14, 2020 at 11:27 pm #110109
Yes and no, owners of private companies would likely vary widely in their interest in synergies. Its depends on factors, such as company structure of ownership, what the goals are and the time horizon. For example, if cash flow is an immediate issue, the sellers may only want to liquidate to move to another interest or new business idea. Or if two company founders are in a dispute, they just want to cash out quickly like a divorced couple selling a house. A new generation may not be interested in carrying on family tradition.
On the other hand, a company founder may carry great pride in his business and really want to have a bigger impact — and want his technology to be spread to bigger enterprise customers or governments. Motivations are difficult to measure and likely change under uncertain economic conditions. Maybe family businesses want to merge to compete with the other industry players (wineries?). Just like people are very diverse, private companies are very diverse, so it’s hard to generalize situations which so much additional required context.May 21, 2020 at 4:51 am #110283
I was originally part of a old management consultancy. We were constantly approached by the big 4 and other organisations to buy out. Our leadership team, who have been with the company for 30 years each said no. Till one deal came along. They said no because they wanted to protect the employees and they know the ruthless nature of cost cutting by the big 4. So in this case, it was a clear cultural fit synergy that was on display and not necessarily the dollar amount.May 21, 2020 at 7:47 am #110288
These are all great answers, I think Beckie is right on. So many different factors around the situation – cash flow, retirement, on to the next business idea, bad partners list can go on – and it’s not just about synergy.
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