What is Cost synergy in mergers and acquisition?

The word synergy is commonly used in merger and acquisition. Finical benefits are achieved through merger of companies. Concept of synergy is the value and performance of individual companies is less than the value and performance of merged companies. By cross disciplinary workgroups, companies achieve synergies between departments.

The main goal is to improve financial performances. Business merger is to form a business which is capable of producing more revenue than they produce individually. Significant cost reduction can be achieved by streamline their process.

Synergies effectiveness may take time; typically it takes 2 to 3 years. This period is called the “phase in period”. In this period operations efficiency, incremental new revenues and cost savings are absorbed slowly in newly formed businesses or firms.

Cost synergy results in reduction of the cost of the combined company (after merger) than the companies which are able to save individually (before merger). This type of synergy helps in developing the scale of economics by reducing cost and by increasing sales.

Cost synergy reduces the cost due to following reasons −

  • Increase in market channels and develop the market strategies.
  • Client base and information is shared.
  • Salary cuts.
  • Saves time and money by streamlined process.
  • Increase in utilization of capital assets
  • Reduce in services fees.
  • Exchange of practices.
  • Decrease in office and location rent.

For example,

  • Acquisition of Nine Entertainment Co & Fairfax

An IER (Independent Expert Report) prepared for the shareholders of Fairfax. It is identified as cost savings of $50m (at least) and anticipated to fully realize under deal in two years. Cost associated with IT, corporate overhead and media sales.

Under transaction, identifying potential cost synergies is easier than estimating revenue synergies (in some aspects). Though cost structures of both structures are known but still it required careful consideration and two businesses are analyzed and their operating environments (includes both internal and external).

Integration business some incremental expenses like paying redundancies, system integrations, staff training etc. cost synergies always considered on net basis.