Q&A - What is meant by “synergy” in the context of a business acquisition

A business making an acquisition of another firm often justifies the decision (in part) by the available “synergies” which are expected to occur as a result of putting two businesses together. So what is a synergy?

Synergy can be defined as:

When the whole is greater than the sum of the individual parts

In an acquisition synergy arises in two broad ways:

Many cost saving synergies arise from the greater scale of the enlarged business. If two firms join together, they may be able to use greater bargaining power to negotiate lower prices from suppliers, or to demand better profit margins from their distributors.

Acquisitions nearly always involve the removal or downsizing of duplicated functions in the two businesses. For example, if a publicly-quoted company is taken over by another quoted firm, there is no need for both businesses to keep their full senior management structure. There only needs to be one Chairman, one CEO etc. Take a look at the management of any acquired public company post takeover and you will often seen an exodus of the previous directors.

Revenue synergies (higher sales) are often harder to identify and achieve - but they are an important part of making an acquisition successful. After all, a successful acquisition should mainly be about helping a firm to grow more rapidly rather than simply taking costs out of two businesses put together.