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.
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: Similar 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.
Lower Salaries and Wages: The merged companies won’t need two CEOs or two CFOs, etc., and this logic applies down the entire organizational chart.
Patents: If the acquirer used to pay the target firm a fee for access to its patent, a merger may transfer the right of that patent to the acquirer, thus eliminating that expense.
Here is a list of revenue-enhancing synergies that can be achieved when two companies merge:
Patents: Similar 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 bundled in such a way to produce higher sales from 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.
Types of Synergies in M&A Modeling
Below is a screenshot of CFI’s Mergers and Acquisitions Modeling Course. As you can see in the lower right corner of the assumptions section, there are various types of synergies that are incorporated into the model such as revenue enhancements, COGS savings, marketing savings, and G&A savings.
Additionally, you will notice that it takes 3 years for them to reach 100% of their potential impact, as shown in cells H15:H17.