What is synergy in merger and acquisitions?

Concept of synergy is that the performance and value of combined companies is greater than individual performance and value. Merger is called synergy merger, if companies merge to create higher efficiency.

Factors which contribute to the synergy are revenue, technology, cost reduction and talent. Synergy can also be done in products by cross selling the new products to increase their revenues. Sometimes, synergy can adversely affect, if the merger is poorly executed and has over optimism.

Types

The types of synergies are explained below −

• Revenue synergy − In this synergy, the companies will go for merger and acquisition to increase their sales by selling more products.

Example − Alaska Air’s management increased their revenue synergies at $240million from $175million after merged with virgin America

• Cost synergy − In this synergy, the companies will go for merger and acquisition to reduce their cost.

Example − Abu Dhabi Bank revised their cost synergies to higher to Dh 1 billion from Dh500 million after merged with first gulf bank

• Financial synergy − In this synergy, the companies will merge and acquire to increase their financial advantages.

Important considerations

Synergy is reflected in a goodwill account (intangible asset column) in the balance sheet of a company and always does not have the monetary values.

Roles

The roles of synergy in merger and acquisitions are as follows −

• Restructures the efficiencies of the company’s workforce.

• By consolidating, the technologies give an advantage in the market.

• Increases scale of efficiency.

• Increase purchasing and spending power.

• Can negotiate for better terms.

• Expand their market.