When two companies come together in an M&A transaction, the value of the new company is usually greater than the previous valuation of the two organizations individually. In a simple formula, 1 + 1 = >2. This additional amount is called synergy.
Mergers and acquisitions are usually carried out with the aim of improving the financial performance of the companies involved for their shareholders. This can happen because the two companies together are able to generate more revenue than they could produce independently, alone, or because a new company is created that is able to eliminate or simplify processes, resulting in a significant cost reduction.
The potential synergy is evaluated during the M&A process, because, as said, the objective is that the shareholders of the companies are benefited after the agreement due to the “synergistic effect” of the deal.
The expected synergy from the merger can be attributed to a number of factors, such as increased revenue, combination of professional and technology talent, as well as cost savings. Here’s a list of potential types of synergies that a company may encounter:
cost savings
Cost-saving synergies can be achieved when two companies…
- Share information technology: each company can have proprietary access to technologies that enable operational efficiencies if applied or used in the other company.
- Gain supply chain efficiencies: If either company has access to better supply chain relationships, there can be cost savings that the merged company can take advantage of.
- Improve sales and marketing: Better distribution sales and marketing channels can allow the merged company to save on costs that were being incurred by each company when they were separated.
- They expand research and development : one of the companies can have access to research and development efforts that, when applied to the other company that was part of the merger, allow for better growth, or else, generate space to cut production costs without sacrificing quality.
- They reduce salaries : the new company that emerges from the merger will not need two CEOs or two CFOs, for example, and this logic applies to the entire organizational chart, often allowing for savings on payroll.
- Include administrative expenses : some administrative expenses that would be doubled with the merger can be cut from the costs of the new company.
- Share patents: if one company used to pay the other company a fee for accessing a patent, the merger can transfer the right to that patent to the new company, thus eliminating that expense.
revenue expansion
Already here is a list of revenue-enhancing synergies that can be achieved when two companies…
- Share patents: This item, also on the list of cost-saving synergies, can increase the new company’s revenue as access to patents or other intellectual property allows the merged company to create more competitive products that generate revenue taller.
- Share complementary products: Both companies may be producing complementary products before the merger. These products, after the deal, can be grouped in order to boost even greater sales.
- Complement geographies and customers: Merging two companies with different geographies and customers can allow the resulting business to take advantage of increased demographic access, producing greater revenue.
- Eliminate competition: When the merger reduces competition or even eliminates it, there is a possibility that the new company will start charging higher prices in the market.
Is synergy always positive?
Overall, the synergy in mergers and acquisitions is positive. This is because the business idea is that the combined efforts of two or more companies are greater than the efforts of these companies alone. In terms of business, however, while companies aim to achieve synergy by joining forces, the end result may be different.
Negative synergy occurs when the value of the combined companies is less than the value of each of them operating alone. This can happen if the merged companies face problems caused by very different leadership styles and corporate cultures, for example.
It’s worth noting that one of the factors that helps a merger or acquisition be successful is workplace synergy, which is when employees work together to create a more productive experience. This involves several people management processes, such as assertive feedback, clearly defined goals, performance-based compensation and teamwork to solve problems that would be less likely to succeed if analyzed by one person alone.
Mergers and acquisitions are complex operations, which involve a number of factors to be successful. Capturing synergies requires detailed planning and careful evaluation of these different aspects of the business, including not only cost savings and revenue growth, but also the integration of company operations and cultures.
The earning potential with M&A is great, and with the support of subject matter experts it tends to be even greater.
