Synergy
Synergy is a familiar word in the mergers and acquisitions
world. If two companies are thought to have synergy, this refers to the
potential ability of the two organizations to be more successful when merged
than they were apart (the whole is greater than the sum of the parts). This
usually translates into:
-
Growth in revenues through a newly created or strengthened
product or service (hard to achieve).
-
Cost reductions in core operating processes through
economies of scale (easier to achieve).
-
Financial synergies such as lowering the cost of capital
(cost of borrowing, flotation costs).
However, there may be other gains. Some acquisitions can be
motivated by the belief that the acquiring company has better management skills,
and can therefore manage the acquired company’s assets and employees more
successfully in the long term and more profitably.
Mergers and acquisitions can also be about strengthening
quite specific areas, such as boosting research capability, or strengthening the
distribution network.