Synergies

What are synergies?

Synergies (combination effects) describe, in the context of a company acquisition, the additional earnings and savings that arise only from bringing two companies together and that neither of them could achieve alone. The value of the combined company then exceeds the sum of the individual values. The word comes from Greek and means working together; the term synergy effects is used synonymously. Capturing or realising synergies means actually implementing these effects after the combination.

Two bakeries on the same street need only one bakery kitchen and one set of bookkeeping after a merger; the saved costs did not exist for either of them before. Synergies determine the most a buyer can pay and are therefore a main argument in the purchase price negotiation. They arise at the buyer, not at the company being sold: only the buyer can merge administrations, pool purchasing volumes or take the product into its own sales organisation. The synergy calculation is needed in valuation from the buyer's perspective, in due diligence and in integration planning. The seller also needs it, to assess the room for manoeuvre of the other side.

Types of synergies

Cost synergies

Cost synergies arise from the elimination of duplicate functions and structures: joint administration, accounting and HR departments, merged locations and IT systems, better purchasing terms through larger volumes, shared logistics or production. They can be quantified comparatively precisely because they start from existing cost items. Whether they materialise depends above all on implementation, for example on notice periods, rental agreements and system changeovers.

Revenue synergies

Revenue synergies arise when the combined company sells more than both parts alone. Sources are the sale of products to the other party's customers (cross-selling), new markets and sales channels, product bundles or better prices. They are harder to predict because they depend on the behaviour of customers and the sales organisation. Buyers therefore include them at a discount or leave them out of the purchase price altogether.

Financial and tax synergies

These include more favourable financing terms for the larger entity and tax effects. The room for manoeuvre is limited under German tax law: if a buyer acquires more than 50% of the shares in a corporation, its unused tax loss carry-forwards are in principle forfeited under Section 8c of the German Corporate Income Tax Act (KStG). Exceptions exist, among other cases, to the extent that hidden reserves are present, and, on application, for continued business operations under Section 8d KStG. Whether losses remain usable is clarified by the tax adviser before they enter a synergy calculation.

Negative synergies

The opposite is negative synergies (also dis-synergies): disadvantages that arise only from the combination. These include customers who do not want to work with a competitor and termination rights in contracts with change-of-control clauses (change of control). Added to these are the departure of key people, higher costs from group standards and duplicate costs during the transition period. A complete synergy calculation deducts them.

Valuation of synergies

Buyers derive each synergy individually: which cost item or revenue stream, which measure, from when and to what extent. For the ramp-up period, synergies are assumed to take effect gradually, and revenue synergies receive a discount for their uncertainty. Set against them are the one-off integration costs, for example for severance payments, system migration, advisory fees, site closures and duplicate structures during the changeover. After tax and discounted at the cost of capital, that is, the return required by the providers of funds, the result is the net value of the synergies, which enters the DCF valuation from the buyer's perspective.

German valuation practice under the IDW S 1 standard of the Institute of Public Auditors in Germany (IDW) distinguishes between genuine and non-genuine synergies. Non-genuine synergies can be realised with almost any partner. In an objectified enterprise value, a standardised value without the perspective of a particular buyer, they are taken into account to the extent that the underlying measures have been initiated or documented in the business concept. Genuine synergies presuppose a particular buyer and enter only into that buyer's subjective limit price, that is, the highest price that this particular buyer can pay (business valuation).

Improvements that the target company could implement even without a buyer, such as an overdue price increase or more efficient purchasing, are not synergies in the narrower sense. They belong in the stand-alone plan and therefore in the value that the seller can claim.

How synergies are shared in the purchase price

The valuations produce a negotiating range. Its lower limit is the stand-alone value of the company or the seller's best alternative, its upper limit the buyer's limit price: stand-alone value plus the net value of the synergies. Buyers are reluctant to pay for synergies that they must first realise themselves at their own effort and risk.

How much a buyer gives up depends above all on competition. If several buyers bid with similar synergies, part of them passes to the seller through the price; strategic buyers therefore regularly belong on the long list in an auction process. Further factors are the uniqueness of the target company, the buyer's alternatives, for example building the business itself, and the quality of information. A seller who can quantify a buyer's synergies concretely negotiates differently from one who only refers to them in general terms.

There is no generally valid share of their synergies that buyers give up. Synergies whose occurrence is uncertain are partly reflected through an earn-out; this presupposes that their contribution can still be measured after the integration.

Synergies in due diligence and integration

The buyer tests its synergy assumptions in due diligence, but between competitors this runs into competition law limits. Competitively sensitive information such as prices, margins or customer terms may only be exchanged to a limited extent before closing. Ring-fenced working groups (clean teams), whose results go to the buyer only in summarised form, are widely used for this. If the acquisition is subject to merger control, Section 41 of the German Act against Restraints of Competition (GWB) prohibits closing before clearance; integration measures may be prepared until then, but not implemented.

After closing, integration decides whether the synergies paid for materialise (integration planning). Notice periods, contract terms and system changeovers set the pace; revenue synergies usually take longer.

Worked example: net value of synergies and the buyer's limit price

A software provider for the logistics sector achieves adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation, excluding one-off effects) of EUR 2.5 million. At a multiple of 8, its stand-alone enterprise value is EUR 20.0 million. A strategic buyer from the same sector plans the acquisition. For simplicity, the calculation uses an income tax burden of 30% (corporation tax and trade tax including solidarity surcharge, as at 2026), a cost of capital of 11% and a perpetuity from the first year. A perpetuity is a constant annual amount without a time limit; its present value is the annual amount divided by the cost of capital rate.

• Cost synergies: joint administration EUR 250,000, purchasing of data centre services EUR 150,000, together EUR 400,000 per year
• Revenue synergies: additional contribution margin (revenue less directly attributable costs) from cross-selling of EUR 300,000 per year, included at half because of the uncertainty: EUR 150,000
• Synergies included before tax: 400,000 plus 150,000 = EUR 550,000; after tax 550,000 × 70% = EUR 385,000
• Present value as a perpetuity: EUR 385,000 divided by 11% = EUR 3.5 million
• One-off integration costs: EUR 1.0 million, after tax EUR 0.7 million
• Net value of the synergies: 3.5 minus 0.7 = EUR 2.8 million
• Buyer's limit price: 20.0 plus 2.8 = EUR 22.8 million; negotiating range EUR 20.0 to 22.8 million
• Agreement at EUR 21.4 million: the buyer gives up EUR 1.4 million, half of the net value
• If all synergies take effect only from the second year, their present value falls to 3.5 divided by 1.11 = around EUR 3.15 million and the net value to around EUR 2.45 million

The calculation shows how sensitively the room for manoeuvre reacts to assumptions: a one-year delay costs around EUR 350,000 of synergy value here. Without revenue synergies, the net value would be 400,000 × 70% divided by 11% minus EUR 0.7 million = around EUR 1.85 million. The gradual reduction of corporation tax (Körperschaftsteuer) from 15% to 10% by 2032, decided to begin in 2028, would raise the after-tax synergies somewhat in later years.

Distinctions: synergies, control premium and integration costs

• Control premium: the premium paid for control over a company. Synergies are one possible source of this premium, which also contains the value of the control rights and the competition among bidders.
• Integration costs: one-off expenses needed to capture synergies. They reduce the net value of the synergies and are incurred before them in time.
• Value creation by financial investors: financial investors often increase value through operational improvements, financing and add-on acquisitions. Synergies in the narrower sense arise for them mainly when they combine the company with an existing holding (buy-and-build).

Common mistakes

• Buyer synergies included in the seller's own value. Sellers who include a buyer's synergies in their price expectation demand a value that only this buyer can create and to which there is no entitlement.
• Revenue synergies treated like cost synergies. Anyone who includes both with the same certainty overestimates the value, because revenue synergies depend on customer behaviour.
• Integration costs and ramp-up period left out. Synergies that take full effect only after years and cause expense beforehand are worth considerably less today than their annual amount suggests.
• Negative synergies overlooked. Customer losses, terminations under change-of-control clauses and departures of key people reduce the value of the combination.
• Double counting. Measures that are already in the target company's business plan must not additionally be included as synergies.
• Competition law limits disregarded. An uncontrolled exchange of sensitive data between competitors, or integration steps before clearance, breach competition law.

Frequently asked questions

Is the seller entitled to a share of the synergies?

No. Synergies arise only at the buyer. Whether and to what extent the buyer shares them in the price is the result of the negotiation and depends above all on competition among the interested parties.

Why can strategic buyers often bid more than financial investors?

Because they can realise synergies with their existing business that a financial investor without its own holding in the sector lacks. The position is different if a financial investor combines the company with an existing platform holding.

How should sellers raise synergies in the negotiation?

As a reasoned argument, not as a valuation item. A derivation for each buyer is convincing: which costs fall away at the buyer, which customers it reaches and from when. Without a second interested party, however, the argument remains weak.

Do synergies paid for become visible in the buyer's balance sheet?

Not as a separate item. In an asset deal and in consolidated financial statements, the part of the purchase price that exceeds the revalued net assets goes into goodwill (Geschäfts- oder Firmenwert), and synergies paid for are included in it. In a share deal they appear in the buyer's single-entity financial statements within the acquisition cost of the shareholding.

The Roemer Capital view

Before approaching buyers, Roemer Capital develops a separate synergy hypothesis for each buyer group: which costs fall away at this buyer, which sales channels it opens and which customers it could lose. In doing so, Roemer Capital does not write synergies into the client's valuation but assesses the other side's room for manoeuvre and weights the long list accordingly.

In the negotiation, Roemer Capital brings in this derivation selectively when a buyer states that a higher price cannot be justified. An auction process with several interested parties whose synergies are similar ensures that part of them reaches the seller through the price.