Redundant management overhead was eliminated as well, further reducing expenses. LKQ was also able combine warehouses and eliminate redundant storage expenses. LKQ was able to eliminate significant costs associated with delivery trucks, fuel, insurance and delivery drivers. When LKQ acquired Keystone, LKQ could distribute aftermarket parts through its existing distribution network. Again, take the LKQ – Keystone deal as an example. Conversely, a savvy buyer can often easily justify paying a substantial premium confident that the increase in revenues post close will offset the additional consideration provided to the seller.Ĭost synergies refer to the opportunity, as a result of an acquisition, for the combined company to reduce costs more than the two companies would be able to do individually. A savvy seller can command a substantial premium when the revenue synergy that the selling company provides is unique to the buyer. Revenue synergies can create very attractive economics for both buyer and seller. Similarly, when a major consolidator acquires a smaller competitor, the consolidator often is able to leverage existing client relations to drive more sales into the new location than the stand-alone operator was able to on its own. However, in the combined company, LKQ could leverage its existing distribution network and sales force to sell more aftermarket parts into the industry than Keystone could sell as a stand-alone organization. Keystone sold primarily aftermarket parts. Prior to LKQ’s acquisition of Keystone, LKQ sold primarily used parts. There are three common types of synergies: revenue, cost, and financial.Ī revenue synergy is when, as a result of an acquisition, the combined company is able to generate more sales than the two companies would be able to separately. Synergies are advantages that come about through the integration of two companies that, individually, the two companies would be unable to achieve. When considering growth by acquisition, a lot of time is spent identifying and quantifying synergies. Prolonged increases in interest rates may have an impact on valuations over the medium term but likely not a significant impact immediately. Consolidation in the entire automotive aftermarket industry will likely continue due to both components. There is a financial component that drives consolidation but there is a strategic component as well. While a low rate environment certainly provides incentive to companies to grow through mergers and acquisitions, good deals are good deals in both high and low interest rate environments. For instance, an acquiring company may have to incur additional costs in the target company to bolster the management team or implement systems to meet the standards of the acquirer.Īlthough financial synergies are usually experienced by strategic buyers, a financial buyer may be willing to pay a premium for the acquisition of a mid-market business due to the benefits associated with a more efficient capital structure and lower cost of financing.Last week we spoke about the impact of interest rates on consolidation. While financial synergies are often used with a positive connotation, these synergies can also be negative in some situations. When evaluating a merger or acquisition, the positive synergies usually produce a successful result. In addition, financial synergies can result in the following benefits post acquisition: Lower costs through streamlined operations.Increased revenues through a larger customer base.Examples of positive financial synergies include:
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |