Inspiring the Added Value of Combined Efforts
Synergy is the concept where the combined value and performance of two companies exceed the sum of the separate individual parts. Predominantly used in the realm of mergers and acquisitions (M&A), synergy exemplifies the financial benefits that arise from the union of two companies.
Key Takeaways
- Synergy is the phenomenon where the collective worth and performance of merging entities surpass the sum of their individual contributions.
- Mergers can lead to synergy by fostering greater efficiency or scale, often termed a synergy merge.
- This mutual benefit stems from increased revenues, combined talent, technological advantages, and reduced costs.
- Synergy isn’t limited to corporate mergers; it can be achieved by integrating products or markets, like cross-selling strategies to boost revenue.
- Companies can cultivate internal synergy through cross-disciplinary workgroups, enhancing productivity and innovation across departments.
Understanding Synergy
Mergers and acquisitions are driven by the goal of enhancing financial performance for shareholders. By merging, two businesses can achieve higher revenue together than they would independently or eliminate redundant processes for significant cost savings.
The potential for synergy is a pivotal aspect of the M&A process. Known as a synergy merge, these mergers aim for greater efficiency and scale. Post-merger, shareholders benefit if share prices rise due to these synergistic effects. Key drivers include increased revenues, pooled talent and technology, and cost reductions.
Types of Synergy
Companies might seek to create synergy not just through mergers but also by integrating products or markets. For example, a clothing retailer may boost revenue by cross-selling accessories like jewelry or belts.
Synergy can sometimes be negative, where the value of combined entities drops below the value of each operating individually. This could happen due to conflicting leadership styles or corporate cultures.
Within the company, synergy can be achieved through cross-disciplinary teams, where members contribute diverse skill sets and experiences. For instance, a product development team comprising marketers, analysts, and R&D experts could collectively outperform individual efforts, leading to superior product quality.
Special Considerations
Synergy manifests on a company’s balance sheet through its goodwill account. Goodwill, an intangible asset, encompasses the value portion not attached to other business assets, like brand recognition, proprietary technology, and strong customer relationships.
While synergies may not always have a cash value, they can lower sales costs and increase profit margins or future growth. Synergistic effects must enhance cash flows from existing assets, elevate growth rates, extend growth periods, or cut down the cost of capital.
Real-World Example
In 2021, Thermo Fisher Scientific, specializing in scientific instruments and consumables, acquired PPD, a clinical research services provider, for $17.4 billion. This acquisition, valued at $47.5 per share, aims to realize $125 million in synergies over three years — with $75 million from cost synergies and $50 million from revenue-based gains.
Questions & Answers
Is Synergy Positive or Negative?
Generally, synergy is positive, implying that combined efforts surpass individual contributions. However, in business, synergy is not always guaranteed; some mergers may fail to achieve the anticipated benefits, rendering the effort unproductive.
What Areas Is Synergy Realized?
Synergies manifest in revenue, cost, and financial domains. Revenue synergies increase revenues, cost synergies reduce expenses, and financial synergies improve overall financial health, such as securing lower debt interest rates.
What Is Workplace Synergy?
Workplace synergy involves employees collaborating to enhance productivity. This can encompass constructive feedback, clear goal-setting, performance-based rewards, and teamwork, aiming to tackle challenges more effectively than individual efforts.
Related Terms: mergers and acquisitions, goodwill, cross-selling, research and development, profit margin, cost of capital, corporate culture.
References
- Pharmaceutical Technology. “Thermo Fisher Acquires Clinical Research Services Provider PPD for $17.4 Billion”.
- ThermoFisher Scientific. “About”.
