Features and types of Synergy in Mergers and Acquisition?

Features and types of Synergy in Mergers and Acquisition?

Answer:

Synergy:

            Synergy is two or more things working together in order to create something that is bigger or greater than the sum of their individual efforts.

Example:        When an actor and a great director work together to create a movie that is more                             amazing than would have happened if each had worked separately.

Features of syergy:

1.      Companies can spread their commercial interest.

2.      Increase profit of each seperate medium

3.      Enhances company’s image

4.      influince public opinion

5.      Can reach shrinking audiences with diverse tastes.

6.      Dominant a variety in markets.

7.      Sharing skills between two companies and exploiting strengths.

8.      Companies can merge with a corporation making a loss in order to reduce their tax burden.

9.      Corporate synergies due to mergers result in larger firm size which is perceived

10.  Increase in managerial effectiveness, which is required for the success of a corporation.

Types of Synergy:

            There are two types of synergies in mergers and acquisition.

1.                  Operational Synergies:

                        Operating synergy is when the value and performance of two firms combined is    greater than the sum of the separate firms apart and, as such, allows the firms to increase          their operating income and achieve higher growth. 

Operating synergies can arise from the following:

·         Economies of scale;

·         Greater pricing power and higher margins resulting from greater market share and lower competition;

·         Combination of different functional strengths such as marketing skills and good product line; or

·         Higher levels of growth from new and expanded markets.

            Operating synergies are achieved through horizontal, vertical or conglomerate mergers.    Mergers of firms, which have competencies in different areas such as production,        research and development or marketing and finance, can help achieve operating   efficiencies.

                        Operating synergy is an important reason why strategic buyers sometimes pay       significant premiums. Mid-market business owners that are approached by strategic    buyers should try to quantify the operating synergies that buyers might be able to realize        post acquisition. This can go a long way to obtaining a premium valuation upon exit.

2.                  Financial Synergies:

            Financial synergy is when the combination of two firms together results in greater value than if they were to operate separately. Financial synergies are most often evaluated in the context of mergers and acquisitions. These type of synergies relate to improvement in the financial metric of a combined business such as revenue, debt capacity, cost of capital, profitability, etc.

Synergies related to operational metrics are referred to as operating synergies.

Examples of positive financial synergies include:

·         Increased revenues through a larger customer base

·         Lower costs through streamlined operations

·         Talent and technology harmonies

In addition, financial synergies can result in the following benefits post acquisition:

·         Increased debt capacity

·         Greater cash flows

·         Lower Cost of Capital

·         Tax Benefits

            When evaluating a merger or acquisition, the positive synergies usually produce a successful result. While financial synergies are often used with a positive connotation, these synergies can also be negative in some situations. For instance, an acquiring company may have to incur additional costs in the target company to bolster the management team or implement systems to meet the standards of the acquirer.

            Although financial synergies are usually experienced by strategic buyers, a financial buyer may be willing to pay a premium for the acquisition of a mid-market business due to the benefits associated with a more efficient capital structure and lower cost of financing.

Other synergies:

Ø  Surplus Human Resources: companies with skilled managers and staff can best utilize these resources only if they have problems to solve. The acquisition of inefficient companies is sometimes the only way of using skilled human resources.

Ø  Surplus cash flow: companies with large amounts of surplus cash may see the acquisition of other companies as the only possible application for these funds.

Ø  Market power: horizontal mergers may enable the company to seek a degree of monopoly power, which could increase its profitability.

Ø  Organic growth: growth using mergers and acquisition is speedier than the organic growth.