Treating Acquisition Synergies as Real Options

A successful acquisition increases not only the economic capital available to your company, but also the strategic capital available to it. Ideally, the acquiring company and the acquired company together are worth more than the sum of their parts. The additional strategic capital created during an acquisition is commonly termed a synergy or a set of synergies.For the purposes of developing an acquisition strategy, it can be useful to treat acquisition synergies as a real option that the acquiring company would gain during the acquisition. Synergies add measurably to the overall profit gained from an acquisition. By valuing the possible acquisition synergies that would be gained from different acquisitions, an acquiring company can develop a smarter, more circumspect acquisition strategy.Synergies do not spring out of inaction on the part of either company in an acquisition; like other real options, synergies require an investment and come with risks. What these investments and risks will be depend on is the kind of strategic capital you want to gain from your acquisition synergies. Frequently, an acquiring company will have the opportunity to invest in several different synergies as part of the acquisition process. Choosing which synergies to invest in--and which synergies to avoid investing in--is an important decision that will determine what kind of strategic capital your company gains from its acquisitions.  An example of a synergy may be leveraging a distribution channel of one company to sell the others' products or combining intellectual property to launch a new product.Just as investing in synergies can be treated as a real option that comes with risks and benefits, the option not to invest in synergies can be seen as a form of strategic capital. Maximizing the value of an acquisition frequently depends on your company's ability to recognize opportunities for valuable synergies, as well as synergies which would be a less profitable and more risky investment.For a more in-depth discussion of the the strategic value of acquisition synergies, you can refer to "Acquisition Strategy and Real Options" by Mikael Collan and Jani Kinnunen. Their paper includes a defense of valuating synergies as real options as well as a discussion of the strategic effects of an acquired company's non-core assets.Garrison Street is dedicated to helping companies grow through intelligent strategy; contact us to find out more about our services.