DEFINITION of 'Synergy'

The concept that the value and performance of two companies combined will be greater than the sum of the separate individual parts. Synergy is a term that is most commonly used in the context of mergers and acquisitions. Synergy, or the potential financial benefit achieved through the combining of companies, is often a driving force behind a merger. Shareholders will benefit if a company's post-merger share price increases due to the synergistic effect of the deal. The expected synergy achieved through the merger can be attributed to various factors, such as increased revenues, combined talent and technology, or cost reduction.


Loading the player...


Mergers and acquisitions are made with the goal of improving the company's financial performance for the shareholders. Two businesses can merge to form one company that is capable of producing more revenue than either could have been able to independently, or to create one company that is able to eliminate or streamline redundant processes, resulting in significant cost reduction. Because of this principle, the potential synergy is examined during the merger and acquisition process. If two companies can merge to create greater efficiency or scale, the result is what is sometimes referred to as a synergy merge.

For example, when the Proctor & Gamble Company acquired Gillette in 2005, a P&G news release cited that "The increases to the company's growth objectives are driven by the identified synergy opportunities from the P&G/Gillette combination. The company continues to expect cost synergies of approximately $1 to $1.2 billion…and an increase in the annual sales run-rate of about $750 million by 2008." In the same press release, then P&G chairman, president and chief executive A.G. Lafley stated, "…We are both industry leaders on our own, and we will be even stronger and even better together." This is the idea behind synergy - that by combining two companies the financial results are greater than what either could have achieved alone.

  1. Conglomerate

    A company that owns controlling stake in a number of smaller ...
  2. Acquisition

    A corporate action in which a company buys most, if not all, ...
  3. Takeover

    A corporate action where an acquiring company makes a bid for ...
  4. Strategic Buyer

    A type of buyer in an acquisition that has a specific reason ...
  5. Congeneric Merger

    A type of merger where two companies are in the same or related ...
  6. Merger

    The combining of two or more companies, generally by offering ...
Related Articles
  1. Economics

    Explaining Synergy

    Synergy is the concept of combining two or more entities to create something greater than either entity on its own.
  2. Fundamental Analysis

    Mergers And Acquisitions: Understanding Takeovers

    In the dramatic world of M&As, battleground terms meld with bizarre metaphors to form the language of the game.
  3. Investing Basics

    Conglomerates: Cash Cows Or Corporate Chaos?

    Huge companies may not be as infallible as previously assumed. Find out why bigger isn't always better.
  4. Entrepreneurship

    Biggest Merger and Acquisition Disasters

    Find out which companies collapsed after merging.
  5. Options & Futures

    Pinpoint Takeovers First

    Use these seven steps to discover a takeover before the rest of the market catches on.
  6. Options & Futures

    What Makes An M&A Deal Work?

    Do you know why companies merge? Here we'll take a look at three successful company acquisitions and why they succeeded.
  7. Professionals

    Hard and Soft Due Diligence: What's the Difference?

    Learn about the differences between "hard" and "soft" due diligence in a mergers and acquisitions deal (M&A) and why soft diligence is increasingly important.
  8. Investing Basics

    What Does In Specie Mean?

    In specie describes the distribution of an asset in its physical form instead of cash.
  9. Economics

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  10. Stock Analysis

    How UPS Plans to Benefit from Its Coyote Acquisition

    Understand the business models of UPS and Coyote Logistics. Learn about the top four ways in which UPS will benefit from the acquisition of Coyote Logistics.
  1. What business structures expose entrepreneurs to unlimited liability?

    A company that seeks to expand through a horizontal integration can achieve economies of scale, economies of scope, increased ... Read Full Answer >>
  2. Why would a company have a subsidiary in a different sector from its main source ...

    A company would have a subsidiary in a different sector from its main source of business if it is looking to increase its ... Read Full Answer >>
  3. What is considered an accretive acquisition?

    Accretive acquisitions result in a combined entity with higher earnings per share (EPS) than the legacy business of the acquirer. ... Read Full Answer >>
  4. Why should investors pay attention to a corporation's selling, general and administrative ...

    Selling, general and administrative expenses (SG&A) are significant elements of many companies' income statements. These ... Read Full Answer >>
  5. What is a pure play?

    A pure play is a company that invests its resources in only one line of business. As such, this type of stock has a performance ... Read Full Answer >>
  6. Why do companies merge with or acquire other companies?

    Some of the reasons for mergers and acquisitions (M&A) include: 1. Synergy: The most used word in M&A is synergy, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  2. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  3. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  4. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  5. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!