Synergy is one term that has emerged as a gamechanger in the last decade. What is synergy? It is a concept that states that the combined value of two separate business entities is greater than individual performance and business value. You must have heard of M&A in businesses. It stands for mergers and acquisitions of two business bodies. M&A is also a form of corporate synergy where two professional organizations officially merge to work together.
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Understanding corporate synergy
Why do you think corporate synergy has become significant all over the globe? The financial benefit through corporate synergy is the fundamental reason, to say the least. There are other reasons as well, including – efficiency, company expansion, operation upscale and many more. M&A of different companies have yielded a positive outcome compared to two independent corporations.
The aim behind the M&A of the two companies is to boost the financial position and performance. A merged company is more capable and efficient compared to two individual bodies. It gives the companies a chance to eliminate or modernize the redundant steps in industrial operations.
An example to help you understand – You can take real-world examples to review the effectiveness of corporate synergy. The Cincinnati-based company, Proctor & Gamble Company, followed the steps of corporate synergy and acquired Gillette company in 2005. The outcome of the synergy was impressive and exhibits the effectiveness of such M&As across different industries. It was anticipated that the overall cost synergy would be around 1 billion dollars. But in reality, there was a boost of 750-million dollars in the annual sales numbers within a span of just three years. The M&A helped in amplifying the financial opportunities for both brands as they could boost their operations to leaps and bounds. **
Newer opportunities for businesses
The opportunities for business expansion, operations and sales grow massively when two large entities unite. Even for small enterprises, the concept of synergy stands steady. It helps eliminate the flaws that earlier created a hurdle in business enhancement. But it all depends on the synergistic impact. Negative synergy can be damaging to both entities taking part in the M&A process. So, it is vital to review and analyze the potential of the company merger.
Being synergistic – What does it mean?
Synergistic is a word derived from the term synergy. In simple words, synergistic refers to the after-effect of the M&A process between two corporate entities. It is used in a positive way indicating those benefits that the two independent companies would have struggled to achieve in the absence of the M&A process. It can be more than just monetary impact and requires an in-depth analysis to determine if the M&A was effective for the companies at all.
The impacts of synergy
One way to easily explain the impact of positive synergy or synergistic would be through this mathematical expression: 2+2=5. Technically, the sum should have been 4. But the merge of the two entities helped in gaining +1, which added to the overall result. Mathematically, it is not possible to prove. But the real-world examples have proved that the combined operations of two companies have fetched an amplified outcome in the long run.
The impact of synergy gets reflected through the goodwill of the company on the balance sheet. The goodwill of a company can be derived from intangible aspects like – brand value, brand recognition, intellectual property, customer relationship and many more. The outcome of M&A does not always have to reflect in terms of cost or business growth. There are other intangible ways through which you can determine the positive or negative impact of M&A on the companies. However, you can also notice the effect in the following measurable aspects through in-depth analysis –
- In marketing: Marketing synergy is the practical benefit that the two companies can enjoy through the M&A process. They can combinedly promote their products and services through strategies that yield a far-fetched outcome. It impacts positively on the brand image and helps improve revenue generation.
- In revenue generation: Revenue synergy is among the crucial aspects of an M&A process. It is the combined revenue outcome resulting from the amalgamation of two companies. The revenue is usually more as the merged entity can find access to an extensive distribution network, boosting the opportunities for revenue generation.
- In finances: M&A between two companies can result in tax benefits. The financial gain is immense, as the combined company can attain a concentrated asset that would have been challenging to gain by acting as two independent corporates. The enlarged tax reductions help the company become asset-rich, leading to better prospects in investment.
- In management: The reorganization of management setup in an M&A procedure is complex. But, in the end, the outcome is exceptional. The reorganized structure allows the management of both companies to work together in harmony and with better efficiency. In fact, it can eliminate redundant activities and poor utilization of company resources.
How corporate synergy proves cost-beneficial?
Cost synergy is the term that indicates the reduction in the overall operational cost as a result of the M&A between two companies. It is cost-beneficial as the efficiency increases of the management team. There can be proper utilization of company resources and management of the combined assetsAssets refer to “all the available properties of every kind or possession of an insurance company that might be used. The companies can upscale their operation without investing too much and organize the existing setup wisely for amplifying the output. It is particularly helpful if the merging happens between two companies with uneven assetsAssets refer to “all the available properties of every kind or possession of an insurance company that might be used and resources. The smaller company can gain hugely and yield a cost-beneficial deal out of the M&A deal. Access to an expanded network can open several windows of opportunities and revenue generation.
Final note – An effective way to amplify business prospects
Synergy in business can be more than M&A. The other ways of synergy that were prominent in the last decade are – franchising, geographical expansions and many more. All these help in multiplying the prospects of two existing businesses. The achievable numbers through corporate synergy are worth appreciating, and thus, the practice of corporate synergy has been a highlight of the 21st-century industrial landscape.
** https://www.sec.gov/Archives/edgar/data/80424/000095015205007960/l16247aexv99w1.htm
