However, history shows that it’s a much better idea to base acquisitions on realistic rather than ambitious synergies. All in all, revenue, cost, and financial are the three most common acquisition synergies examples. The goal of any merged firm is to grow the synergies and hope that they reach their full potential post-close. Similarly, increasing the acquirer’s access to new research and development can allow for advancements in production that yield cost savings. Overall, synergy is the potential financial benefit achieved when two companies merge.
The first section of our findings highlights the elements of synergy in the three acquisitions. Our developed framework is, thereafter used to analyse an extended view on synergy. From a managerial perspective, the study shows the importance of understanding the underlying forces of integration processes.
- Two companies may merge to put together their resources and eliminate redundant processes resulting in cost reduction.
- However, the product development project in Gamma had not reached as far as originally described, which created advantages for Alfa’s competitors and strengthened their market positions.
- Andersen et al. (1957) describe synergy as the superior use of resources to adapt more successfully to a changing environment with increased competitive pressure.
- It can be helpful to know that, for example, consolidation and customisation synergies cost more initially because they entail greater resource modification.
- The process to achieve mergers and acquisitions may involve several steps.
A common illustration of synergy is two integrated units that are to achieve something more than the separate units can (Ansoff, 1965; Campbell and Sommers Luchs, 1998; Sirower, 1997). Synergy is one building block in company strategy (Ansoff, 1965) and during the 1960s and early 1970s, synergy was a motive for corporate strategic development through diversification (Porter, 1985; Rumelt, 1974). Rumelt’s (1974) study on the existence of synergies amongst diversified companies, however, was later criticised by other scholars, including Seth (1990). Although later studies such as Zollo and Meier (2008), conceptualise a distinction between short- and long-term horizons in acquisition performance, synergy as a concept has remained a planning tool to justify an acquisition. The merger of the two companies can give Company A access to the European distribution networks while Company B will gain access to the North American distribution networks.
What Are the Benefits of Synergy?
There are several areas in which companies can accomplish those synergies. At its core, synergy describes a way to work together to produce great results. Though this term was co-opted by corporate executives, it doesn’t refer to mergers and acquisitions as a rule. After all, the term comes from ancient Greek and was used in practice as early as the 1600s. Prior to the acquisition, Alfa had a market share on the North American market of about 5% and organic growth was limited. The best opportunity for growth within the product segment – warehouse trucks – was to expand on the North American market.
- Financial synergies relate to the company’s cost of capital — mergers and acquisitions transactions allow companies to reduce their cost of capital.
- Working with synergy helps organizations increase individual engagement, shorten the onboarding process, and increase performance.
- Connected synergy means that the changes initiated by the integrators generate activities to which the various actors, including the integrated company, adapt over time.
- Also, the merged company may enjoy more tax breaks and pay less tax than the two former companies before the merger.
Apart from combining resources, companies can also create synergies internally. By doing so, they can enhance their processes and improve collective efforts. The hype for corporate synergy in relation to mergers and acquisitions—combined with the potential negative effects when combined action didn’t work out—contributed to the modern-day association with synergy as a buzzword. Corporate synergy describes the expected additional value companies achieve by merging.
Revenue synergy
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Examples of synergy in M&A
“Better” prices owing to increased volumes were reached through negotiations with suppliers. Besides purchasing, insurance costs and the transfer of Alfa’s model for financing customer forklift truck purchases were identified as a synergy early on and were transferred and implemented by Gamma. Gamma had a system for supplier evaluation that was later adopted by Alfa and eventually transferred to Delta. These synergy initiatives were mainly intended to be a transfer of knowledge. Synergy efforts focused on initiatives that were easy and quick to realise, as the ambition to fully integrate the companies was limited.
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The intention of the connected synergy was to handle an internal competitive situation and adjust to customer expectations from the relationship with the integration between Delta-Alfa. This change was an adjustment of the integrated actors’ business practices in their relationship with their customers. The study showed the importance of understanding the underlying forces of integration processes from a practical perspective. A practical implication of our study is the extended view for managers and board members of what to consider as relevant boundaries when discussing potentials for synergy in M&As.
1 Synergies from the integrated firms’ perspective
Thus, the internal drive for synergy through coordinated product development did not turn out as expected and the development of what the market required took longer. As a connected synergy, this example turned out to be advantageous for competitors and a disadvantage for the integrated companies. The integration was limited, but some cooperative arrangements were made. The purchasing units evaluated similarities in components for potential common purchasing agreements.
For example, assume that Company A has established strong distribution networks in North America, while Company B has established distribution networks in Europe. Building collaboration within your team is the best way to boost your product development quality. Synergy is reflected on a company’s balance sheet through its goodwill account.
When team members can be their full selves at work, they can unlock better collaboration and synergy. From freemium to hyper local, these terms are used so often that they essentially lose all meaning. A quick Google search yields list upon list of “the top 100 worst business buzzwords”—and nearly all of the lists include synergy. Kimberlee Leonard has taken her professional experience as an insurance agency owner and financial advisor and translated that into a finance writing career that helps business owners and professionals succeed.