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Theorethical Framework
The theoretical framework has been divided into sub categories to organize and sort the in-formation, and starts out with describing synergies in general terms and ends with more specific information.
Different Types of Synergies
The concept of synergies states that the sum should be larger than its parts; 1 + 1 = 3. In other words, the two organizations together should be more worth than the two entities’ stand alone values. Sirower (1997) defines synergies as “increases in competiveness and resulting cash flows beyond what the two companies are expected to accomplish independently”. The word synergy originates from the Greek word ‘sunergos’, meaning that “separate parts works together”, and un-like what is expected from today’s M&A synergies, the original denotation focus more on the relationships between the two parts than the actual results (Sevenius, 2003). Consider-ing the potential upsides and results of synergies, it is to no surprise that synergies often work as main incentives in M&As where the arguments mostly involve the financial gains achieved by efficiency improvements at different levels in the organizations. However, the talk about potential synergies is little worth unless the plans are realized and integrated in the organizations (Zollo & Sing, 2004).
The concept of synergies is all about creating added value by sharing resources and acquire benefits that otherwise would not have been possible to achieve, or possible to achieve but at a higher cost. As synergies can be found and used all over the organizations, synergies do take many different forms depending on the type of M&A and the organizations’ business-es. Several attempts have been done to classify synergies and an abundance of categoriza-tions exists. Sevenius (2003) has classified them as followed:
-Cost synergies – synergies decreasing the costs. Often related to economies of scale, such as administrative costs and overhead costs (Sevenius, 2003). Resources and competences that do not use its full capacity (100 %) or do not work effectively can be better utilized if combined with new, additional or related activities that ex-tend the usage thanks to decreased average costs (Johnson et al., 2004).
-Revenue synergies – synergies increasing the revenues. Often related to economies of scope, for example extensions of customers and products (Sevenius, 2003), and cross selling or bundling (Schriber, 2009).
-Financial synergies – synergies related to decreased costs of capital through lowered risks, better cash flows and increased financial margins (Sevenius, 2003).
-Market synergies – synergies related to higher margins achieved through increased ne-gotiation capabilities towards suppliers and customers (Sevenius, 2003).
The categorization above gives a good indication of where synergies occur and how finan-cials can be saved or gained. In reality the actual synergies often belongs to more than one of the four alternatives as many of them overlap and are not entirely independent. None-theless, many researchers use a categorization even more simplified, where synergies are re-ferred to as either revenue synergies (creating revenue enhancements) or cost synergies (creating cost savings) (Harding & Rovert, 2004; Early, 2004). In order to encourage facili-tated understandings and avoid misinterpretations this study will mainly use these two con-cepts in further discussions.
Once classified the synergies, the next step is to explore what hides behind the concepts of revenue and cost synergies respectively. In order to obtain a better understanding of what synergies are and which different forms they can take, some common examples are pre-sented below.
-Efficiency gains – economies of scale and economies of scope can be seen as overall advantages where the purposes are to increase efficiencies (Johnson et al., 2004).
-Entry speed gains – in growing markets where the pace is high, organizations find it hard to attain the resources and knowledge in the same speed as the market de-mands; resources must be acquired, people needs education and required end products take several years to develop. By acquiring other firms these essentials can be obtained faster by the usage of short cuts such as M&As (Johnson et al., 2004).
-Competitive gains – in slow, static and mature markets where competition is estab-lished the cost of expansion and building from the scratch is not always worth its money. Especially if it is hard for the organization to strengthen the current posi-tion by simply adding additional resources. If the extra cost of adding more re-sources cannot be counterbalanced by the benefits it will bring, needs to go beyond usual methods occur. To acquire these resources through M&As are in many cases seen as the only option to get away from this stuck-in-the-middle position (Johnson et al., 2004)
-Consolidation gains – especially in fragmented industries where there exists an absence of specialization and ‘all does everything’, competitive advantages can be gained or strengthened through increased focused on core capabilities and niche areas (John-son et al., 2004).
-Resource gains – resources that cannot be attained at all, or acquired at a higher cost, can be acceded through M&As. A typical example of this is research and develop-ment, where it normally takes several years to access knowledge by building up needed expertise and educate employees (Johnson et al., 2004).
-Knowledge and learning curve gains – transformation of knowledge such as routines, in-formation flows and best practices are more specified resource gains (Johnson et al., 2004). The exchange of knowledge contribute with opportunities to learn more and to learn faster, owing to increased cooperation possibilities or improved trans-formation (De Wit & Meyer, 2005).
-Gains of stretched corporate parenting capabilities – in situations where M&As are not mo-tivated by business similarities between organizations, the motivations involve exist-ing competences or capabilities possible to use in new areas although no common operative resources exist. In such cases, it is rather the skills at the corporate level creating synergies between diverse business units (Johnson et al., 2004).
-Gains of increased market size and succeeded market share – by forwarding the organiza-tion’s market position not only customers can be won from competitors, the syner-gies can also expand the whole market pie. In addition, an alignment of business units creates increased possibilities to offer the customers a broader product base in the same or similar market, thus contributing with a more complete market offer (Johnson et al., 2004).
-Gains of resource sharing – by sharing resources, for example by using one machine in-stead of using two machines, cost savings are done. Resources used by several business units at the same time, reused or shifted back and forward also create cost savings (Johnson et al., 2004).
-Price pressure gains – competitive advantages are gained through price pressures ena-bled through different forms of economies of scope decreasing the average costs (Johnson et al., 2004).
-Transaction cost gains – costs associated with transactions in relation to customers, suppliers and other closely related stakeholders can be avoided or decreased through the internalization and the shortened distance of these (De Wit & Meyer, 2005).
-Bargaining power gains – the gains of bargaining power increases with size since larger volumes are used. The bargaining power is mainly applicable in negotiations with external stakeholders (De Wit & Meyer, 2005).
Whereas few organizations see possible gains in all of the above mentioned areas, several of the mentioned synergies as well as combinations and overlaps of these are used as moti-vations for M&As (De Wit & Meyer, 2005).
Motives for Growth
Today’s organizations experience constant results pressures from its surroundings, and es-pecially from its shareholders. The shareholders want to see progresses, and they are not satisfied with anything else than increased returns on investments. Increased returns on in-vestments in turn imply that the organizations must grow. The growth is considered to be a key factor for successful enterprising and hopefully brings improved results and increased wealth (Schriber, 2009).
Broadly speaking, organizations face two alternatives for growth; they can either grow or-ganically, or grow through M&As. When organizations grow organically they grow from own buoyancy, using current resources and capabilities to increase revenues. Depending on market conditions and company specific prerequisites organic growth works to a smaller or larger extent. Organic growth alone is not always sufficient to meet the shareholders’ high expectations and add the demanded value they are expecting. This is especially true in more mature industries where the possibilities to grow organically are limited. In these situations M&As and synergies become topical (Schriber, 2009). Few organizations uses M&As as a pure growth strategy only seeing the possible market expansions, other aspects such as knowledge acquisition and economies of scale etc. are also often important and considered as well (Johnson et al., 2004). If comparing organic growth with that of M&As, the ad-vantages with M&As include faster access to new resources in organizations already up and running bringing positive changes in competitive environments and opens up possibilities for quick wins. This is especially true in markets where acquiring these kinds of resources take long time, and when the resources are hard and expensive to obtain (Schriber, 2009).
Given the information above, it can be concluded that the overall goal of any M&A activity is to reach increased growth. How the growth in M&As will be achieved differs from or-ganization to organization and depends very much on which motivations acting as the strongest thrusts. However, synergies are always involved because of the possibilities to apply them in diverse areas. In the table below, the strongest motives for M&As are listed; potential synergies between two organizations can be found in any or all of these areas de-pending on the organizations’ natures. Market shares, sales and distribution, cost savings, technology and production facility can thus be said to have two things in common; growth and synergies (Sevenius, 2003).
Porter’s Value Chain
Once clarified what synergies are and why they are sought, the next step is to clarify where and how synergies arise. The value chain is equal to the different value adding activities and processes linking together and seeking to develop organizations’ main functions, leading to the actual end products and customer offers. Every organization’s value chain is unique and contributes to the creation of competitive advantages distinguishing it from other companies. The value chain consists of different activities further divided into primary ac-tivities (from creation of products to after sales support) and secondary activities (activities facilitating the primary activities).
The primary activities are:
-Inbound logistics – activities related to handling and monitoring of supply
-Operations – activities associated with production
-Outbound logistics – distribution of products to the final customer
-Marketing and sales – customer focused activities linked to attracting and gaining sales
-Service – activities intended to improve or maintain customer experiences, such as installation or after sales services
The support activities are:
-Procurement – activities related to purchasing and maintenance
-Technology development – research and development improving and generating current and new products
-Firm infrastructure – activities connected to administration, planning and control
(De Wi & Meyer, 2005)
The value chain’s broadened base, called the value system, also includes the value chains of the organizations’ suppliers, distributors and customers, thus consisting of several value chains linked together making up a whole network of relations and interdependencies. Any problem along the organizations’ value chain can cause severe difficulties affecting either input or output of products, and for that reason it is of large interest for organizations to streamline and optimize these processes. An analysis of the organization’s value chain and value system will provide information on existing gaps and potential synergies. It is either in direct relation to different activities or in linkages between these activities that synergies can be unhidden (Lynch, 2006). People involved in the actual M&A processes might not have sufficient knowledge needed to discover and evaluate all potential synergies, and for that reason it is invaluable to obtain advice from people working in the organization, both because they have the most knowledge concerning processes and because they will realize the found synergies in the end (Early, 2004).
Different Mergers & Acquistions
This section explains how M&As are classified differently depending on where in the value systems the or-ganizations are connected. Once straighten out, this will give an understanding for how synergies in M&As differs dependently on M&A type.
1 Introduction
1.1 Background
1.2 Problem
1.3 Purpose
1.4 Research Questions
2 Method
2.1 Qualitative Method
2.2 Primary and Secondary Data
2.3 Collection of Data
2.4 Interviews and Analysis of Data
2.5 Literature Search
2.6 Research Approach
2.7 Delimitations and Limitations
2.8 Validity and Reliability
2.9 Criticism of Method
3 Theorethical Framework
3.1 Different Types of Synergies
3.2 Motives for Growth
3.3 Porter’s Value Chain
3.4 Different Mergers & Acquistions
3.5 Problems Associated with Synergies
3.6 Negative Synergies
3.7 The Integration Phase
3.8 Synergies in Consolidation of Fragmented Industries
4 Empirical Findings
4.1 Addtech
4.2 Indutrade
4.3 Lagercrantz Group
4.4 OEM International
4.5 BE Group
4.6 Latour Industries
5 Analysis
5.1 Walkthrough of Synergy Findings
5.2 Synergies between Independent Subsidiaries
5.3 Synergies where A Partly or Complete Integration is Taking Place
5.4 Conclusion
6 Conclusion
7 Further Research
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Synergies in Mergers and Acquisitions