Question

Define the three types of synergy that may result from mergers What are the sources of these synergies?

Answer 1

Synergy in Mergers and Acquisitions:Synergy is the concept that allows two or more companies to combine together and either generate more profits or reduce costs together.these companies believe that combining with each other gives them more benefits than being single and doing the same.

Types of synergies and sources:

There are usually three types of synergies in mergers and acquisitions that occur among companies

1) Revenue synergy:

When two companies merge ,they often become synergistic by virtue of generating more revenues than the two independent companies could produce on their own.the merged company may gain access to more products and services to sell through an extensive distribution network.the company will also benefit from a large number of sales representatives to sell more products than they previously owned before merger.also,the merged company will incur fewer costs of marketing and distribution due to corporate synergies.

2) Financial synergy:

the combined entity also stands to benefit from various financial synergies such as access to debt,tax savings,and cash flow.A merged company achieves strong asset base inherited from the former companies which allows the company to access credit facilities and use the combined assets as collateral.it reduces the level of gearing since the company can use debt rather than equity that reduces the percentage of ownership stakes of of the founders or owners.

Also the merged company may enjoy more tax breaks and pay less tax than the former two companies before the merger. lastly,when a cash rich company acquires a cash starved company,the former can invest in the revenue generating projects of the latter.

3) cost synergy:

Cost synergy refers to the opportunity ,as a result of an acquisition,for the combined company to reduce costs more than the two companies would be able to do individually.

Cost reduction is one of the most important benefits of cost synergy.in the case of cost synergy,the rate of revenue may not increase but the costs would definitely get reduced.for example in case of merger the combined company may able to save lot of costs on logistics,storage,marketing expenses,training expenses and also in market research.