Synergy

Loading the player...

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.

BREAKING DOWN 'Synergy'

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.

RELATED TERMS
  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. Fundamental Analysis

    4 Reasons Small Cap Companies Are Actively Engaged in M&As

    Read about the reasons why smaller-cap companies actively take part in mergers and acquisitions (M&As). In addition to new synergies, they also access new markets.
  2. Stock Analysis

    The Biggest Risks of Investing in EMC Stock

    Read about some of the risks of investing in EMC now that its acquisition by Dell has been announced. There are issues with VMware and the firm itself.
  3. Economics

    Explaining Synergy

    Synergy is the concept of combining two or more entities to create something greater than either entity on its own.
  4. 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.
  5. 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.
  6. Entrepreneurship

    Biggest Merger and Acquisition Disasters

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

    Pinpoint Takeovers First

    Use these seven steps to discover a takeover before the rest of the market catches on.
  8. 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.
  9. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  10. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
RELATED FAQS
  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. 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 >>
  6. 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 >>
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center