Synergy

Synergy is often the main justification for mergers and acquisitions. The idea is that combining businesses allows them to reduce costs, increase revenues or use resources more effectively than they could alone.

For example, if Company A is worth 500 million and Company B is worth 300 million, and together they are expected to be worth 900 million, the expected synergy is 100 million.

Synergies are usually grouped into two types. Cost synergies come from savings, such as closing duplicate offices, combining purchasing to get better prices or reducing overlapping staff. Revenue synergies come from selling more, such as offering each company's products to the other's customers.

Synergies are often overestimated. Integrating two businesses can be difficult, cultures may clash, key staff may leave and expected savings may take longer to achieve or cost more than planned. Cost synergies are generally considered more reliable than revenue synergies.

Buyers often pay a premium over a target's market value because of expected synergies. If the synergies do not materialise, the acquirer may have overpaid, destroying value for its shareholders.