Synergistic

A combined company benefiting from the merger or union of two individual companies

What does Synergistic mean?

The term synergistic is derived from synergy, which refers to the benefit that results from the merger of two agents who want to achieve something that either of them would not be able to achieve on their own. The term is mostly used in mergers and acquisitions (M&A), where two companies merge to form one company that can generate more revenues or streamline the two companies’ operations and save on costs.

 

Synergistic

 

The potential synergy is considered when two companies are planning to merge, or a large company is planning to acquire its small competitor and increase the efficiency of its operations. The expected synergy is measured in terms of the potential to increase revenues, workforce, and technology, and reduce costs.

 

Types of synergistic effects

Corporate synergy refers to the benefits that two firms are expected to gain when they merge or when one firm acquires another. The synergistic effect of such transactions forms the basis of the negotiations between the seller and the buyer.

The following are the main types of synergies that corporations enjoy:

 

Marketing synergy

Marketing synergy refers to the marketing benefits that two parties in an M&A transaction enjoy when promoting their products and services. Th synergies include information campaigns, marketing tools, scientific research, and development, as well as marketing personnel.

For example, an IT company may acquire a smaller IT company that lacks the infrastructure but has a strong marketing and PR department. The smaller company has qualified personnel, marketing tools and experience in selling their products that can help the larger IT company boost its public image and formulate new marketing strategies to win more customers.

 

Revenue synergy

When two companies merge, they become synergistic and generate more revenues than the two independent companies could generate on their own. The merged company will gain access to more products and services to sell through an extensive distribution network.

The company will also benefit from a large number of sales representatives to sell more products than they previously owned before the merger. Also, the merged company will incur fewer costs on marketing and distribution due to the corporate synergies.

 

Financial synergy

The combined entity also stands to benefit from various financial synergies such as access to debt, tax and cash slack. A merged company achieves a strong asset base inherited from the former companies, which allows the company to access credit facilities and use the assets as collateral. It reduces the level of gearing since the company can use debt rather than equity that reduces the percentage of ownership stakes of the founders/owners.

Also, the merged company will enjoy more tax breaks and pay less tax than the two former companies before the merger. Lastly, when a cash-rich company acquires a cash-starved company, the former can invest in the revenue-generating projects of the latter.

 

Management

When two companies merge, there is a reorganization of the management teams, and they now must work as a team. However, depending on the goals and character of the management team members, the synergistic effect may be positive or negative. When the management teams of both parties to the merger work in harmony, the company will experience better service delivery, proper utilization of resources, improvement in employee motivation, and more opportunities for growing the business.

A merger can also reduce job duplication and multiple levels of management. However, when the team members are in constant conflicts with each other, it can result in decreased quality of products and services, reduced efficiency of operations and poor utilization of resources.

 

Example in Financial Modeling

Below is a screenshot from CFI’s M&A Modeling Course where you can see the synergistic impact of an acquisition.

 

synergistic impact in model

 

Cost synergy

Cost synergy is the expected cost savings on operating expenses from the merger of two companies. Typically, when two companies merge to form one company, the combined company will enjoy synergistic benefits brought by the parties to the merger.

 

Savings on human resources costs

One of the cost benefits is the amount incurred on paying employees’ salaries and wages. The merger process may make some roles redundant, and the company will be forced to lay off employees whose input is no longer needed or whose roles are duplicated. The move will result in costs savings, which will increase the amount of profits for the combined entity.

 

Costs incurred in acquiring technology

When contemplating a merger or acquisition, a company may prefer transacting with a company that owns a superior technology that will benefit it. Such a merger will help the company save on costs that it would’ve used to acquire the technology on its own. The company will also benefit from increased efficiencies and streamline the production process.

 

Distribution network

Companies that operate established distribution networks in specific geographical locations may enter into an M&A transaction with companies with distribution networks in other geographical markets. For example, assume that Company A has established strong distribution networks in Northern America, while Company B has established distribution networks in Europe.

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 America distribution networks. This will result in cost savings since the new entity will be able to distribute more products using the existing networks. The company will also achieve strong bargaining power when sourcing products from suppliers.

 

How are synergistic impacts accounted for?

A combined company can record the amount of synergy resulting from a merger on its goodwill account, as well as in the balance sheet. Goodwill is defined as the value of intangible assets that cannot be attributed to other business assets. It occurs when a company acquires another company, and the goodwill represents the value of expected future growth as a result of the transaction.

The effect of the goodwill must reflect the expected future cash flows, growth rates, revenues and lower cost of capital. The amount of goodwill is recorded on the balance sheet as a non-current asset.

 

Additional resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

M&A Modeling Course

Learn how to model mergers and acquisitions in CFI's M&A Modeling Course! Build an M&A model from scratch the easy way with step-by-step instruction.

This course will teach you how to model synergies, accretion/dilution, pro forma metrics and a complete M&A model. View the course now!