Closeup of double color pawn amidst other chess pieces on board game

The crudest way to justify acquiring a business and paying good money for it is to cite synergies.

It’s also misleading.

According to Bain & Company, buyers routinely overvalue the synergies to be had from acquisitions to get a deal over the line, resulting in disappointing outcomes.

This is due to a number of reasons including lack of experience, lack of information on a target and lack of accountability post-merger.

Enthusiasm also plays a role.

In the current low growth, low interest rate environment, many financial services businesses are keen to do deals to increase their size and scale, and drive efficiencies.

But as my rugby coach used to warn me: “Enthusiasm minus skill equals injury”.

Enthusiasm can make assets appear more attractive than they are and cause buyers to overplay the synergies to be had.

I liken this state to grocery shopping on an empty stomach. It’s a recipe for buying too much and making impulsive decisions.

Achieving synergies in M&A transactions is an important driver of value, however, Bain & Co estimates that mergers result in scale synergies of just 1-2 per cent of combined revenues.

An analysis of over 800 recent global transactions by Deloitte found synergies ranged between 1-5 per cent of total combined costs.

That’s a far cry from the large synergy benefits being touted in the investor presentations of some financial services transactions.

The data highlights the mismatch between M&A theory and reality.

Theoretically, the merger of two comparable businesses should deliver scale benefits, operational efficiencies and savings through shared offices, resources and people.