Synergy is a term that has been used in business for decades. Mergers and acquisitions are often justified by the need to create synergy, which can mean cost savings or increased revenue. But what does it really mean? What different types of synergies exist, and how do they work? This article will explore both hard and soft synergies, as well as some examples of each type.
Definition of synergy
Synergy is beneficial interaction between two or more organizations, substances, or other agents. In business terms, this means that the companies will be able to achieve more by working together than they would be able to achieve separately. In simple words, synergy is the process of two or more organizations coming together to achieve a goal faster, better, and/or cheaper than they could have apart.
Types of synergy in merger acquisitions
There are mainly three types of synergy in merger acquisition 1) cost savings 2) increased revenue, and 3) Financial synergies.
- Cost savings
This kind of synergy involves two companies coming together to reduce costs. One way this can be done is by combining the purchasing power of the companies, which allows for discounts that are not available when working independently. Another cost-saving synergy strategy is by sharing office space and other overhead expenses.
- Increased revenue
Merging with another company can also result in an increase in revenues. This is often the case when companies with complementary products and services come together. It allows companies to capture a larger market and increases the size of their customer base.
- Financial synergies
Financial synergies are seen when two companies merge to take advantage of each other’s financial strength. It may be the case where one company has stable cash flows while the other is under financial distress. They can pool their resources together to create a more stable financial foundation.
Hard Synergy and Soft Synergy
Hard synergy basically refers to cost savings. This means, for example, that a company can save money by joining forces with another. The two companies manage to achieve more by working together than they could have apart.
On the other hand, soft synergy refers to revenue increases. This happens when the business of the two companies combines. The combination of their different products and services leads to a company that can capture a larger market share, as well as serve the needs of more customers than either company could do alone.
Examples of synergy in merger acquisition
Let’s say company A is worth $200m and company B is worth $400m. The combined worth is now estimated at $600m, which means the companies have created synergy. This would not be possible if they had remained separate entities.
The merger of Procter & Gamble Company with Gillette in 2005 was based on the need for synergies. When P&G acquired Gillette, a P&G news release cited that “The company’s growth objectives are increased because of the synergy opportunities from combining P&G and Gillette. The company expects that by 2008, they will have increased their sales by $750 million because of cost synergies.
Conclusion
As you can see synergies are very important for a company. The existence of synergies makes a merger more profitable and it also reduces the risk involved. Because synergy means that the combined worth of two companies is greater than their individual values because they can do more things together than apart.
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