Verity Insurance: The Synergy Case, Twelve Months In
Verity Insurance completed a merger in insurance a year ago, creating a $1952 M business in US.
The deal model promised $111 M of annual cost synergies and $51 M of revenue synergies by year 4, against $107 M of one-off integration cost.
Twelve months in, about 40% of the cost synergies have landed. None of the revenue synergies have. Customer overlap between the two businesses turned out to be 11%, higher than diligence assumed. Voluntary attrition in the acquired sales team is running at twice the normal rate.
The CEO has to give the board a revised number.
actual 12m
- customer overlap pct
- 11
- acquired sales attrition
- 2x normal
- cost synergy realised pct
- 40
- revenue synergy realised pct
- 0
deal model
- target year
- 4
- annual cost synergy m
- 111
- annual revenue synergy m
- 51
- one off cost to achieve m
- 107
Advise the CEO. Your answer should provide:
- Analysis — a defensible revised synergy figure, split by type and netted of cost to achieve.
- Risks — the dis-synergies the original model left out.
- Recommendation — what to commit to publicly, and the sequence to get there.
State any assumptions you make.
80 points, 60% to pass.
- recommendation15
- market analysis15
- risk assessment25
- financial analysis25
Reveal suggested structure
Cost synergies are controllable and land; revenue synergies depend on customers and usually do not. Net off cost to achieve and dis-synergies before committing.