Cost Synergy

When companies merge, they often perform many of the same activities. Combining them can remove duplication and reduce costs.

Common sources of cost synergies include merging head offices and support functions, such as finance, legal and human resources; closing overlapping branches, factories or warehouses; combining purchasing to negotiate lower prices from suppliers; consolidating IT systems; and reducing overlapping marketing or sales teams.

For example, two banks that merge might expect to save 200 million a year by closing branches in the same towns and combining their technology platforms.

Cost synergies are generally considered more achievable than revenue synergies, because companies have more control over their own costs than over customer behaviour. Even so, they often take several years to realize fully, and achieving them usually involves one-off integration costs, such as redundancy payments and system migration expenses.

Analysts assess the credibility of announced cost synergies by examining the overlap between the businesses, the timetable and the expected integration costs. Overestimating synergies is a common reason acquisitions fail to deliver value.