Synergies in M&A: What Role Does FDD Play?
How synergies are identified, validated and presented in M&A transactions, and what role the FDD team plays in assessing synergy claims.
Synergies are often cited as the primary justification for acquisition premiums. Yet they are also among the most frequently overstated, poorly substantiated and ultimately unrealised benefits in M&A. Understanding how synergies interact with FDD analysis is important for any Transaction Services professional.
What Are Synergies?
Synergies are incremental value created by combining two businesses that could not be achieved by either business operating independently. They come in two main forms:
- Cost synergies: Savings from combining operations — duplicate headcount, overlapping offices, shared IT infrastructure, procurement scale
- Revenue synergies: Additional revenue from cross-selling, expanded distribution or combined product offerings
Cost synergies are generally more predictable and more credible. Revenue synergies are harder to deliver and take longer to materialise.
The FDD Team's Role in Synergy Assessment
FDD advisers are not commercial due diligence providers — they do not independently verify the strategic rationale for a deal. However, they interact with synergies in several important ways:
1. Pro Forma EBITDA Adjustments
Sometimes synergies are included in pro forma EBITDA adjustments. The FDD team must assess whether the underlying costs being "removed" are actually present in the historical cost base and whether the removal is commercially credible.
A pro forma headcount synergy, for example, requires the FDD team to verify that the roles being eliminated actually exist (using the headcount schedule), at the salary level claimed.
2. Shared Costs and Overhead Reallocation
When synergies involve removing shared costs (central functions, shared IT), the FDD team must assess how those costs will be redistributed or truly eliminated. It is not sufficient for management to say "we will save €500k in IT" without a credible implementation plan.
3. Revenue Synergies in NWC and Capex
If revenue synergies require additional investment (new sales headcount, marketing spend, capital expenditure), those costs must be reflected elsewhere in the analysis — not just the top-line benefit.
4. Management's Synergy Claims in the Data Pack
In a VDD, management often presents synergies as part of the adjusted EBITDA. The FDD team must clearly separate:
- Synergies already implemented (and therefore potentially includable in run-rate EBITDA)
- Future synergies (typically excluded from normalised EBITDA in standard FDD)
Most credible FDD advisers explicitly exclude unimplemented synergies from the adjusted EBITDA presented in the QoE report.
Why Synergies Are Treated Conservatively in FDD
FDD advisers are conservative about synergies for good reason:
- Synergy delivery rates in M&A are systematically below management projections
- Implementation costs are frequently underestimated
- One-time costs to achieve synergies (redundancy, system integration, lease break penalties) can be significant
- Revenue synergies in particular often take two to four years longer than projected
The FDD report typically presents synergies separately from the core adjusted EBITDA, with caveats on deliverability.
Conclusion
Synergies are part of the M&A conversation but are treated with appropriate caution in FDD. The analyst who understands where synergies belong — and where they do not — in the QoE report demonstrates genuine deal sophistication.
The Transaction Services Interview Programme (€119.99, one-time) covers synergy treatment in QoE analysis, with worked examples and interview preparation on pro forma adjustments. Start today.