Synergy is a concept that allows two or more companies to work together to generate more profit or reduce costs together. These companies believe that it is more beneficial to combine each other than to simply do the same thing alone. The most common usage used in this context is a merger and acquisition (M & A).
Shareholders will benefit if the post-merger stock price of a company rises due to the synergistic effect of the transaction. The expected synergies of the merger can be due to a variety of factors, including increased revenue, a combination of talent and technology, and cost savings.
Mergers and acquisitions (M&A) are conducted to improve the business performance of our shareholders. You can integrate two companies into one that can generate more revenue than you can achieve on its own, or one that can eliminate or streamline redundant processes to achieve one significant cost savings increase.
Based on this principle, the potential for synergies is checked during the M & A process. If two companies can merge for greater efficiency or scalability, a merger sometimes referred to as a synergistic merger occurs.
The cost synergies of mergers and acquisitions (M&A) can result from cost savings as a result of the increased efficiency of the two merged companies. These costs may include redundant insurance, equipment, physical location, etc. It can also result from economies of scale and bulk purchases due to the larger joint scale of the two companies.
Cost synergies can be measured by comparing comparable transactions or by looking at each company in-house. You can perform a bottom-up analysis when you evaluate your business to see how additional assets or operations impact cost savings.
According to csfg.com.au, there are broadly three different types of synergies in M&A transactions to consider.
- Revenue Synergies
A revenue synergy occurs when two companies are combined and as a result can sell more products &/or services in total than they would have otherwise achieved separately.
- Cost Synergies
The second kind of synergy in M&A transactions is cost synergies, which represent the opportunity to reduce overall costs because of combining businesses.
- Financial Synergies
The final type of synergy in M&A transactions is financial synergies, which relate to a company’s cost of capital – the costs the company needs to meet to secure the various funding sources it requires to finance its business. When a smaller company seeks to borrow money, the lender will charge a given interest rate to compensate for the risk attached to the loan.
All things being equal, when the borrower merges with a larger business, the interest rate it will be charged should be lower in recognition of the larger balance sheet and cash flows supporting the loan.
We hope this article will help you understand better synergy in business. Can you name a company that has been doing this synergy M&A?
Author: Mia Patricia | Illustrator: Rizky Sabilurrasyid