Loading the player...

What is 'Synergy'

Synergy is 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 (M&A). Synergy, or the potential financial benefit achieved through the combining of companies, is often a driving force behind a merger.

BREAKING DOWN 'Synergy'

Mergers and acquisitions (M&A) 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.

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.

For example, when 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.

In addition to merging with another company, a company may also attempt to create synergy by combining products or markets. For example, a retail business that sells clothes may decide to cross-sell products by offering accessories, such as jewelry or belts, to increase revenue. A company can also achieve synergy by setting up cross-disciplinary work groups, in which each member of the team brings with him or her a unique skill set or experience. For example, a product development team may consist of marketers, analysts, and R&D experts. This team formation could result in increased capacity and work flow and, ultimately, a better product than all the team members could produce if they work separately.

Synergy can also be negative. Negative synergy is derived when the value of the combined entities is less than the value of each entity if it operated alone. This could result if the merged firms experience problems caused by vastly different leadership styles and company cultures.

Synergy is reflected on a company's balance sheet through its goodwill account. Goodwill is an intangible asset that represents the portion of the business value that cannot be attributed to other business assets. Synergies may not necessarily have a monetary value, but could reduce the costs of sales and increase profit margin or future growth. In order for a synergy to have an effect on value, it must produce higher cash flows from existing assets, higher expected growth rates, longer growth period, or lower cost of capital.

 

 

 

RELATED TERMS
  1. Strategic Buyer

    A strategic buyer acquires another company in the same business ...
  2. Merger Of Equals

    A merger of equals is when two firms of about the same size come ...
  3. Conglomerate Merger

    A merger between firms that are involved in totally unrelated ...
  4. Co-insurance Effect

    A theory on corporate debt that posits that the likelihood of ...
  5. Acquisition Premium

    An acquisition premium is the difference between the estimated ...
  6. Consolidation Phase

    Consolidation phase is a stage in the industry life cycle where ...
Related Articles
  1. Financial Advisor

    Acquire a career in mergers

    This exciting sector demands a lot from its advisors. Are you up for it?
  2. Investing

    Accretion / Dilution Analysis: A Merger Mystery

    This analysis tool is an effective way to value mergers and acquisitions. The deal's on the table, but should you sign the papers?
  3. Small Business

    What Merger And Acquisition Firms Do

    The merger or acquisition process can be intimidating. This is why merger and acquisition firms step in to facilitate the process.
  4. Small Business

    The Basics Of Mergers And Acquisitions

    Learn what corporate restructuring is, why companies do it and why it sometimes doesn't work.
  5. Investing

    How Mergers and Acquisitions Can Affect A Company

    M&A can have a profound effect on a company’s growth prospects and outlook, but with a significant degree of risk.
  6. Investing

    Johnson Controls, Tyco Move Forward With Merger Plans

    The boards of both companies have unanimously recommended that shareholders vote "for" the matters specified in the joint proxy statement.
  7. Insights

    General Electric to Merge Oil and Gas Business With Baker Hughes (GE, BHI)

    General Electric is looking to capitalize on the recovery in the energy market.
  8. Investing

    A Guide to Spotting a Reverse Merger

    A reverse merger is a type of corporate action that can be profitable for investors who know what to look for.
RELATED FAQS
  1. Why do companies merge with or acquire other companies?

    The reasons for company mergers and acquisitions include synergy, diversification, growth, improving competition, and supply ... Read Answer >>
  2. 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 >>
  3. How does a merger affect the customer?

    Learn how a merger may affect customers of the industry. The effects of mergers may be positive or negative, but there's ... Read Answer >>
  4. What is a stock-for-stock merger and how does this corporate action affect existing ...

    First, let's be clear about what we mean by a stock-for-stock merger. When a merger or acquisition is conducted, there are ... Read Answer >>
Hot Definitions
  1. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  2. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  3. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  4. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  6. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
Trading Center