October 21, 2014  
 
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Mergers and Acquisitions

 

The Role of Synergy in Mergers and Acquisitions

The word "synergy" seems to come up a lot in conversations about mergers and acquisitions. But is it just hype or is there really something to be said for the synergy that drives M&A activity? We take a look at this magical force that powers everything from mega-deals to small company acquisitions.

Synergy. Sounds mysterious, doesn't it?
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It's a word that gets bantered around a lot during mergers and acquisitions and it actually does have some mysterious connotations, even for the people who use it to convince shareholders that a business consolidation really is a good idea.

But before you write the term "synergy" off as nonsensical, business speak, consider the possibility that there might actually be something to it. In practical usage, synergy describes the cost efficiencies that occur when two companies consolidate into one company through a merger or acquisition.

Synergy doesn't happen automatically and there a lot of cases in which company leadership overstates its benefits as a way of sealing the deal. But even so, there are a lot of benefits that can potentially happen through the role of synergy in mergers and acquisitions.

  • Workforce efficiencies. Labor is the most expensive budget item in most businesses. In theory, consolidations make it possible to reduce the company's workforce based on redundancies and other factors. But to deliver real results, the company needs to carefully restructure workflows to handle increased business volume.
  • Combined technologies. An acquisition or merger typically results in the consolidation of the companies' proprietary technologies and expertise. In fact, acquisitions are frequently motivated by the desire to obtain a unique technology that is owned by a smaller business. Yet true synergy only occurs when the consolidated technologies result in a strategic marketplace advantage.
  • Scale efficiencies. Consolidation introduces the possibility of increased purchasing power and spending efficiencies that were previously beyond the reach of the individual companies. The new company can negotiate better terms based on its increased purchasing volume and weed out systemic inefficiencies rooted in duplications of services and/or capital assets.
  • Market expansion. One of the most frequently cited synergistic advantages of an M&A scenario is increased market penetration. The idea is that the combined efforts of the two companies will create a corporate powerhouse that will dominate the marketplace, easily displacing lesser brands and competitors. Sometime that happens and sometimes it doesn't. But one thing is for sure: You won't reap market synergies unless you approach the merger with a carefully structured marketing strategy that considers the strengths and weaknesses of both companies.

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