Revenue Synergy

Companies often justify acquisitions by pointing to synergies. Cost synergies come from eliminating duplicate costs. Revenue synergies come from selling more together.

Common sources of revenue synergies include cross-selling each company's products to the other's customers, entering new markets using the other company's distribution network, combining technologies to create new products, and gaining stronger pricing power.

For example, a company selling accounting software acquires a payroll software company. It expects revenue synergies by offering payroll software to its large base of accounting customers, and vice versa.

Revenue synergies are usually harder to achieve than cost synergies. They depend on customers' behaviour and competitors' reactions, take longer to materialise and may require investment. Studies suggest acquirers frequently overestimate them. For this reason, analysts and buyers often give revenue synergies less weight than cost synergies when deciding how much to pay. In some cases, customers may even leave after a merger, creating negative revenue synergies.