Types of Synergies

The different sources of synergies​

What are synergies?

A synergy is any effect that increases the value of a merged firm above the combined value of the two separate firms. Synergies may arise in M&A transactions for several reasons, such as cost savings due to operational efficiencies or revenue upside due to more productive use of assets. Below is a non-exhaustive list of potential types of synergies that a company may face.

 

types of synergies in M&A

Synergies are covered in more detail in our free Corporate Finance 101 course.

 

Types of synergies – cost savings

Here is a list of cost saving synergies that can be achieved when two companies merge:

  • Shared Information Technology: Each company may have proprietary access to information technology that would allow for operational efficiencies if applied or used in the other firm.
  • Supply Chain Efficiencies: Similarly, to information technology, if either company has access to better supply chain relationships, there may be cost savings that the merged firm can take advantage of.
  • Improved Sales and Marketing: Better distribution sales and marketing channels may allow the merged firm to save on costs that were being expensed by each individual firm when they were separate.
  • Research and Development: Either firm may have had access to research and development efforts that, when applied to their counterpart firm, allow for better development or room to cut costs in production without sacrificing quality. For example, one firm may have been developing a cheaper alloy that could be used in the production of an automobile the other firm produces.
  • Patents: If the acquirer used to pay the target firm a fee for access to its patent, a merge may transfer the right of that patent to the acquirer, thus eliminating that expense.

 

Synergies are covered in more detail in our free Corporate Finance 101 course.

 

Types of synergies – revenue upside

Here is a list of revenue enhancing synergies that can be achieved when two companies merge:

  • Patents: Similarly, to the cost saving effect of a patent, access to patents or other IP may allow the merged firm to create more competitive products that produce higher revenue.
  • Complementary products: Both individual firms may have been producing complementary products pre-merger. These products can now be bundle in such a way to produce higher sales to their customers.
  • Complementary geographies and customers: Merging two firms with varying geographies and customers may allow the merged firm to take advantage of the increased demographic access, producing higher revenue.

 

Additional M&A resources

This has been a guide to types of synergies in M&A transactions.  To learn more, see these additional relevant resources below: