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.