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Synergy Is Very Hard to Achieve

Sony, a large Japanese entertainment and electronics company, for many years struggled to get synergy across its various arms. It has video game consoles, a huge music catalog and access to intellectual property like the Spider Man brand. They also make movies, and now they own comics.

Even though it owns a movie studio in the United States, Sony has experienced the challenge of not being able to get one asset to create value across all of the platforms at once.

For example, let’s say it launched a great Spider Man movie. Theoretically, it should have a soundtrack generating a lot of money in the music catalog, a Spider Man game creating a lot of value in the gaming universe, and a Spider Man comic creating a lot of value in the comic world.

Synergy is hard to achieve, but it’s what companies undertaking an acquisition or merger talk about a lot. You have to understand that the cost side of synergies is relatively easy to calculate. When a CEO says synergies are worth 800 million a year, recurring for five years, and you ask them to break that down, you should be very wary of the numbers on the revenue side. On the cost side, synergies usually relate to reducing redundancies in positions, merging shared offices, eliminating duplicate processes, reducing property portfolios that are no longer needed because you may be retrenching staff, merging staff, exiting countries, etc.

The biggest value won’t come from the cost side of synergies. The insight is that calculating synergies on the revenue side is very hard to do. For example, let’s assume a company bought a comic book and decided to create a movie from the comic book character. They also decide to create a computer game, a music catalog and a theme park. It’s very hard to calculate value objectively when measuring synergy on the revenue side—from a quality and design perspective. Even if you acquire a comic book, how do you know you can make a blockbuster movie from it? The movie industry is a big gamble. You can have the best funding, the best directors and technical talent but the movie may not work. The same applies to video games. A video game studio could have everything it needs, but the game could be a disaster: too complicated, not appealing, glitches in the software.

Synergies on the revenue side are hard to calculate because it ultimately comes down to what is quality and what is design. That’s very hard to spreadsheet out. When you think about synergies, always split them between cost and revenue, and remember that the revenue side is where most of the difficulties take place.

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #13.