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What is Revenue synergy in merger and acquisition?
Performance and value of a merged company in more than their individual value and performance is called synergy. Let us see the buyer’s perspective, it influences the maximum price they pay for the company. Let us see the seller’s perspective, favoring a higher purchase price. Important point to keep in mind is that synergies vary from one combination to another business.
Revenue synergy results in generating more sales for a combined company (after merger) than the companies which are able to generate individually (before merger). If a company acquires another company (its competitor), then, both the companies can increase their client base and their combined sales by accessing the new locations rather than doing it individually.
Sellers can ask for a premium, when the seller provides a unique product. Similarly, a buyer can justify the price by getting additional requirements in products. Revenue synergy creates attractive economics for both.
Challenges
The challenges in the revenue synergies are as follows −
- Developing suitable targets.
- Executing workflows.
- Sales strategies.
Benefits
The benefits of revenue synergies are as follows −
- Cross-selling.
- Competition reduced.
- New markets can be accessed.
For example,
- Acquisition of Instagram by Facebook in 2012.
At the time of acquisition, reported revenue of Instagram was zero. Facebook believes combining Facebook and Instagram can create more revenue opportunities.
Some of the opportunities are as follows −
Facebook can use Instagram mobile and picture sharing attributes which increases user engagement and attracts more advertisers.
By incorporating Instagram users into Facebook they can increase the total value of advertising sold.
The most important aspect to consider is their timing. Estimation of revenue synergies is quite challenging in practice. It is important to exercise from both sides and scenario analysis considering various cases.
Sometimes revenue can be lost because of integration. In the above example, if Facebook starts forcing its users to create Instagram accounts then there is a chance of losing its existing users and any loss of revenue would be revenue attribution.
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