Last updated on June 23rd, 2023 at 08:23 am
INTRODUCTION
In business synergy means a mutually beneficial compatibility of two distinct business entities or elements such as resources or services. It in effect is intended to increase the value and enhance the performance of the two merged firms. From the very beginning the purpose of the M&A is to create synergies that increases the market share, broadens the customer base and enhances the financial strength of the business. The intention of the M&A is to increase the financial benefit of the merged companies. Normally there are three sources of synergies in the merged entities namely: Revenue Synergy, Cost synergy and Financial Synergy.
Revenue Synergies:
Revenue synergy is based on the premise that the two companies that merge can generate higher sales than the sum of their individual sales. Research shows however that capturing revenue synergies takes, on average, a few years longer than capturing cost synergies. Challenges, such as developing appropriate targets and executing new workflow and sales strategies across all functions, makes it more harder to capture the benefits of revenue synergies more quickly. Normally revenue synergies result from: cross-selling, reduction of competition, access to new markets.
Cost Synergies:
These are synergies that create cost savings due to:
Increased marketing strategies, channels and resources: This can result in reducing costs.
Shared information and resources: Access to new research and development, proprietary access to information technology allows for operational efficiencies that result in cost savings.
Streamlined Processes: Streamlining processes makes the new company more efficient thereby saving time and money. Moreover, supply chains become more efficient and the larger entity can usually negotiate a better price with the suppliers.
Improved Sales and Marketing: Better distribution sales and marketing channels may allow the merged firm to save on costs that were being expensed by each individual firm when they were separate.
Lower Salaries: Sometimes layoffs are inevitable in M&A, this results in lower salary costs.
Financial Synergies: This type of synergy includes the improvement of financial metrics such as revenue, debt capacity, cost of capital, profitability, etc. Although they are a bit deceptive there can be tax benefits and loan benefits associated with the combining of two companies.
Patents: If the acquirer used to pay the target firm a fee for access to its patent, a merge may transfer the right of that patent to the acquirer, thus eliminating that expense.
Synergies thus are the driving force behind most mergers and acquisitions. On it depends the success or failure of an M&A. Absence or lack of synergies often results in failure in M&A.
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