How synergies expand strategic buyer valuations

Strategic buyers can justify higher valuations than financial sponsors because they can create value through integration, not just capital deployment. By combining operations, they unlock cost savings, efficiency gains, and revenue expansion that translate directly into higher combined EBITDA and higher valuations.

Take cost synergies: when a corporate buyer acquires a target, it can fold duplicated functions like finance or HR into an existing shared service center. The result is a leaner overhead structure and a stronger EBITDA profile, often within the first year after closing.

On the revenue side, synergies are, for example, about reach and network leverage. When Alaska Airlines acquired Hawaiian Airlines, part of the thesis was to improve utilization of Hawaiian’s wide-body fleet and leverage Seattle’s feeder network to channel continental U.S. traffic into Pacific routes that Hawaiian, based in the middle of the ocean, could never serve as efficiently on its own.

Synergies aren’t the only source of variation — different valuation methods also create different outcomes.

What are synergies?

For a corporate (strategic) buyer, synergies represent the additional EBITDA effect that arise when combining two businesses — value that goes beyond just summing the two together. It’s what they can build with each other. They typically fall into two categories: cost synergies and revenue synergies.

Cost synergies stem from eliminating duplicate functions and consolidating operations. The idea is to achieve scale efficiency and create centers of excellence for corporate functions such as finance, HR, and IT. Common levers include shared service centers, which allow administrative consolidation, or plug-and-play IT systems, which replace fragmented local solutions with one group-wide platform. The result is a leaner cost base with higher throughput and fewer overhead redundancies.

Revenue synergies come from capturing additional sales opportunities within overlapping customer bases or markets. Rather than diversifying into new product lines, the most credible synergy cases usually follow a “more of the same” logic — expanding reach in familiar products or customer segments.

For example, a cement manufacturer acquiring a local factory in Southern Europe gains immediate access to the same multinational construction clients it already serves elsewhere, now with local delivery capacity.

Similarly, Alaska Airlines’ acquisition of Hawaiian Airlines illustrates a geographic revenue synergy: by merging route networks, Alaska extended its Pacific presence and turned its Seattle hub into a stronger competitor against Delta, American, and United.

How do synergies show up in a business plan?

For a corporate (strategic) buyer, synergies appear in the business plan as incremental EBITDA improvements on top of the target’s standalone forecast. Each synergy lever is modeled as a separate line item with its own assumptions, realization timeline, and one-off costs.

Cost synergy example – shared service center: You review the target’s functions that overlap with your existing shared service center (SSC) — typically finance, HR, or procurement. Then you model how much of that work can realistically be absorbed by your SSC, net of one-time severance or transition expenses. The resulting cost reduction shows up as incremental EBITDA, usually ramping up over the first 12–24 months after closing.

Cost synergy example – IT harmonization: In due diligence, you analyze the target’s IT spend — licenses, systems, maintenance, vendors — and estimate integration costs to migrate onto your group platform. The difference between the target’s standalone IT budget and the post-integration run rate becomes the recurring EBITDA uplift. The key is to include implementation timing and transition costs to keep the plan realistic.

Revenue synergy example – cement factory utilization: Suppose you acquire a cement factory in Southern Europe that’s operating at 50 % capacity. Your existing clients up north already use similar products and need supply in that region. By shifting some orders south, you could lift utilization to 70 %, creating incremental revenue that drops through at the target’s EBITDA margin. But assumptions must stay conservative — if you model too steep a ramp-up, the case stops being credible.

Revenue synergy example – network expansion: When Alaska Airlines announced its acquisition of Hawaiian Airlines, one of the key synergy drivers was network optimization — improving wide-body aircraft utilization and strengthening the Seattle hub as a Pacific gateway by channeling feeder traffic from the continental U.S. that Hawaiian’s mid-Pacific base could never fully access. In a business plan, that shows up as incremental revenue from new route connectivity, higher passenger yield, and cargo capacity gains, phased in gradually as integration progresses.

How synergies translate into valuation uplift

Once synergies are embedded in the target’s business plan, they directly flow through to valuation. The revised, combined business plan — now including cost reductions and incremental revenues — replaces the target’s standalone forecast and becomes the new cash-flow base for valuation. When those higher cash flows are discounted using the corporate buyer’s own (typically lower) WACC, the resulting DCF value naturally rises. The valuation uplift is therefore not arbitrary; it’s a mathematical outcome of the improved business plan pushed through a consistent cost of capital.

In practice, this synergy-adjusted DCF produces a higher enterprise value that, when divided by the target’s current EBITDA, appears as a higher multiple. That’s how strategics justify paying above the market or sponsor benchmark: the premium reflects the additional value they can extract post-integration, not overpayment. In short, synergies expand valuation by turning operational potential into higher modeled cash flow — which, under the same discount rate, always translates into a higher price.

Compare that to a standalone PE view

A private equity buyer values the target strictly on its stand-alone business plan, not a combined synergy case. Their diligence focuses on verifying what’s already there — which parts of management’s forecast they believe, which they haircut, and where execution risk could break the plan. Because they’re layering on leverage, they think in downside scenarios, not integration upside. They won’t price in synergies they can’t control or strategic premiums they can’t realize. The result is a deliberately conservative valuation: a leaner, lower business plan that protects returns rather than stretching for potential.

Limits of strategic synergies

Synergies look clean in a model but messy in execution. Every synergy initiative priced into a deal implies flawless delivery — if realization takes longer or costs more, the buyer has effectively overpaid for that portion of value. That’s why disciplined strategics never price in 100 % of their synergy case. They apply probability weights or partial credits to account for timing delays, integration friction, and execution risk.

Common failure points include integration complexity, cultural mismatch, and customer churn, all of which can quietly erode the forecasted benefits. In the cement capacity example, if utilization can theoretically rise from 50 % to 70 %, a prudent buyer might underwrite only a 10 % increase rather than the full 20 %. The best acquirers only value synergies they can operationally control — treating the rest as upside potential, not purchase-price justification.

Where does it leave us?

Synergies explain why strategic buyers can consistently pay more than financial sponsors. They see value not only in the target’s standalone cash flows but also in the incremental EBITDA created by integration — the cost savings, revenue gains, and operational efficiencies that others can’t capture. The valuation uplift ultimately depends on how these initiatives are modeled: what each lever contributes, when it materializes, and how reliably it can be executed.

But there’s a limit to how far you can “synergy yourself to the moon.” The credible synergy case is built on low-hanging fruit — measures that are tangible, near-term, and within management’s control. Even then, seasoned buyers rarely price in more than a portion of those benefits. They’ll underwrite half, maybe a third, to preserve headroom for timing risk and execution drag. In the end, winning a deal isn’t about modeling the biggest synergy number — it’s about pricing just enough to outbid competitors while still being able to deliver what you’ve paid for.