Mergers and acquisitions have become increasingly common in today’s fast-paced business world, as companies seek to expand their market presence and improve their competitive advantage. However, the success of these transactions greatly depends on the ability to unlock synergies.
Synergy refers to the combined effect of two or more entities working together that is greater than the sum of their individual efforts. In mergers and acquisitions, there are various types of synergy that can be achieved, each with its own unique benefits and challenges.
Understanding these different types of synergy is crucial for companies looking to maximize the value of their deals and drive sustainable growth in an ever-evolving marketplace.
Types of Synergy in Mergers and Acquisitions
There are the following types of synergy explained below:
When mergers of two organizations take place then three types of synergy can come from three different sources.
1. Operational Synergy
Operational synergies can be obtained by increasing operating profits. Operating profits could be achieved by linking the assets of companies in such a way that they could be used for multiple purposes. Operational synergy can also be achieved through achieving economies of scale arise from merger.
Achieving the economies of scale will divide the fixed cost into more units and fix cost per unit will be minimal providing more room for increased profit margin or decreasing selling price.
With combined operations there will be less competition, high market share and more cost control eventually will increase the operating profit.
Operational synergy can also be achieved through eliminating weakness, e.g. a company with a strong R&D department acquires another with a good distribution channel.
2. Financial synergy
Financial synergy could be in terms of a high return on equity, access to the larger and cheaper amount of capital etc. A combination of firms one with excess cash and the other with high return projects value addition will come from the projects that are taken from excess cash.
Financial synergy could be achieved from better debt capacity as a result of combinations of two firms. Reduction in gearing will also provide financial synergy. Furthermore taxes benefits arise from mergers also create financial synergy. One good example of financial synergy is the merger between Mitsubishi and the bank of Tokyo.
3. Managerial synergy
Managerial synergy could arise by combining management skills. A company with better management skills can help the other loss-making company by providing skilled expertise. Better monitoring and planning, more skilled management and previous experiences will create managerial synergy.
4. Investment synergy
Investment synergy is the result of joint use of the plant, common raw materials inventories, transfer of R&D from one product to another, common tooling and machinery.
5. Sales synergy
These synergies occur when the merged organization can benefit from common distribution channels, sales administration, advertising, sales promotion and warehousing.
ICICI acquired Tobacco Company, ITC. Classic and Anagram Finance to obtain quick access to a well-dispersed distribution network.