What is 'Cost Synergy'

Cost synergy is the savings in operating costs expected after the merger of two companies.

BREAKING DOWN 'Cost Synergy'

The savings in operating costs can take many forms. Often mergers result in the layoffs of some employees who are no longer needed. If two companies have large sales departments and operate in the same regions, it may not be necessary to keep employees from both companies. On the other hand, if the two companies complement each other geographically, layoffs may not be necessary.

Cost synergy may also result from when one of the companies involved in the merger has proprietary technology that would benefit the other company. If one company owns information technology that makes it more efficient than competitors, this will provide the same benefit to the other company in the merger, resulting in cost savings.

Savings may also be gained in the supply chain. One company may have better supply chain relationships, possibly including lower input costs, which would benefit the merger partner. On the other hand, since the new combined company will be larger than either of the two component companies, it may enjoy a better bargaining position with suppliers, resulting in lower input costs.

Cost synergy may also arise from research and development. If one of the merger partners has produced a component that enhances the products of the other and it would otherwise be unavailable, then cost savings result from the second partner not having to develop that component on its own.

RELATED TERMS
  1. Vertical Merger

    A merger between two companies producing different goods or services ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies ...
  3. Form S-4

    The Form S-4 must be submitted to the Securities and Exchange ...
  4. Strategic Buyer

    A strategic buyer acquires another company in the same business ...
  5. Congeneric Merger

    A congeneric merger is a type of merger where two companies are ...
  6. Merger Securities

    A non-cash asset paid to the shareholders of a corporation that ...
Related Articles
  1. Investing

    Do Mergers Save Or Cost Consumers Money?

    A merger or acquisition can actually be beneficial to the customer - find out how, in this article.
  2. Investing

    The Wonderful World Of Mergers

    While acquisitions can be hostile, these varied mergers are always friendly.
  3. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller.
  4. Investing

    AT&T and Time Warner Merger Case: What You Need to Know

    AT&T's win of the antitrust trial over the $85 billion proposed Time Warner merger has huge implications for the future of media.
  5. Insights

    Johnson Controls Completes Inversion Deal (JCI)

    Johnson Controls and Tyco are now one, and the merger has the makings to be a rare success.
  6. Insights

    Big Sell-Off of Pfizer Amid Merger Collapse (PFE, AGN)

    The collapse of the planned merger of Pfizer and Allergan triggered major waves in stock holdings among the country's top hedge funds.
  7. Investing

    Dow-DuPont Deal May Face EU Objections (DOW, DD)

    EU regulators could issue a formal statement of objections next month for the proposed merger between Dow and DuPont.
  8. Investing

    Why Do Some Failed Mergers Result in Break-Up Fees?

    When mergers go bad, there's often a break-up fee involved of as high as 3-5% of the value of the proposed merger.
RELATED FAQS
  1. What is the difference between a merger and an acquisition?

    Learn about the legal differences between a corporate merger and corporate acquisition – terms used when companies are either ... Read Answer >>
  2. How does a merger affect the shareholders?

    Explore the impact of a merger and understand how the process affects shareholders of the newly merged firm in terms of stock ... Read Answer >>
  3. What is the difference between a merger and a takeover?

    In a general sense, mergers and takeovers (or acquisitions) are very similar corporate actions - they combine two previously ... Read Answer >>
  4. Why Do a Reverse Merger Instead of an IPO?

    Reverse mergers are often the most cost-efficient way for private companies to trade publicly. Read Answer >>
  5. In which industries are mergers and acquisitions most common?

    Learn the reasons why the health care, technology, financial services and retail sectors typically involve a high level of ... Read Answer >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center