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 companies of which it is to be comprised, 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.