Question

(CO A) Define financial synergies.

What has historical experience shown regarding the achievement of financial synergies?

Answer 1

Financial synergy , is the advantages that two firms reap out when they combine with each other rather than working independently. Before any mergers and acquisitions happen, it is imperative that the financial synergies are evaluated prior to arriving at any decisions concerning the merger. Financial synergy is the improvement in the performance, in case the mergers happen in reality. The first and foremast arguments that happen, before any mergers happen is weather there is any financial synergies after the two firm come together.

The types of financial synergies are:

• improved customer base
• higher revenue
• reduction in operating costs
• lower costs of capital
• lower taxes

Historical evidence of successful Mergers and Acquisitions: the idea behind synergy is that by combining two companies the financial results are greater than what they could have achieved when operating in isolation . For example when Procter and Gamble acquired Gillette in 2005 , after the inclusion of both of these companies, the growth opportunities improved because of synergies. The company continues to expected cost synergies of approximately $1 to $1.2 billion and expects an increase in the annual sales run-rate of about $750 million by 2008, after these firms came together to form a single company.