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What Synergy Is And How It Works? Advantages Of Synergy In Business

Referencing Styles : MLA | Pages : 1
  • Course Code: MAN6905
  • Course Title: What Synergy Is And How It Works? Advantages Of Synergy In Business
  • University: Griffith University
  • Country: AU

Synergy in Business

Synergy is the perception that the collective worth and presentation of the two organization will be better than the figure of the distinct separable parts. Synergy is a definite term which is most frequently applied in the background of mergers and acquisitions (M&A). Synergy, is also termed as the potential financial benefit which can be achieved with the help of the combination of two companies. It is often a considered as the driving force after a merger.

Mergers and acquisitions (M&A) is used in the companies that is used in the organization with the aim of enhancing the financial presentation of the different companies for the shareholders and the owners. In the Mergers and acquisitions, two different businesses can combine together in order to form a single company which is proficient of creating additional revenue as compared to the previous system. The revenue collected by merging two companies together will be more than either a single company could have been capable to earn it independently. The other option is to create a single company which is competent to remove or rationalize the redundant processes which lead to the reduction in the cost of the company sometimes. Due to the specific principle, the impending synergy is inspected during the process of the M&A that is Mergers and acquisitions. If two companies or industries can merge or combined together in order to generate superior efficiency or the scale of the product, the result which will be obtained from the collaboration is the similar which is referred to as the synergy merge.

From the synergy, the Shareholders of the company will be benefitted. It is expected that if two companies will merge together, the shareholders will benefit if the post-merger share price of the company will increases. The increase of the share price is due to the synergistic effect of the because of the deal. The predictable synergy which can be achieved with the help of the merger of the two companies can be credited to numerous factors, which includes increase in the revenues, cost reduction and the combined technology and the talent.

There are commonly two main types of synergy which can be attained in an M&A process (Mergers and acquisitions (M&A), (1) revenue enhancements and the (2), cost savings.

Cost saving synergy is usually mentioned to as the operational synergy that can be achieved by eradicating the redundant costs, along with that it also aids in attainment of the better bargaining power with the vendors and the suppliers. In addition to these, it also helps in improving the operational efficiencies. Redundant costs of eh synergy commonly share to the personnel, which includes, as not demanding two CEOs which is required in the case of the two companies. Hence, it aids the organization to eradicate one CEO from the given payroll of the organization. Apart from these benefits, the other benefit which can be conducted by the synergy is the improvement in the bargaining power. The bargaining power of the companies with the suppliers can be enhanced because it is observed that a larger and superior company or the organization which used to provide larger orders that is place order for more amount of the products or the services experiences more leverage and influence and therefore it is stated that the ability of the company to negotiate for the better pricing and along with that better payment terms will be enhanced. Lastly, the operational efficiencies of the company which may be comprehended by the sharing of the best practices of both the companies. The streamlining processing of the both the companies will also be enhanced.

The second type of the synergy is the Revenue enhancements. The revenue enhancement is imitated from the synergy termed as financial synergy. It can be accomplished by the assistance of the different things which includes, cross-selling products to the different customers which are complementary. It also pose more pricing influence with the customers, and along with that it aids in expanding the market of the company. Along with that, it is also or helps to enter into the new markets for the growth of the company or to the new geographical locations that helps in the growth of the company.  

For example, when an organization named as Proctor & Gamble Company attained Gillette in the year 2005, the P&G news announcement quoted that "the upsurges to the growth objectives of the company which are determined by the identified opportunities of the synergy, which has been taken from the combination of the P&G/Gillette. The company endures to presume the cost synergies of the company which is approximately from $1 to around $1.2 billion. The combination of the company aims to increase the run rate of the annual sales by $750 million in the year 2008." The same press release which released the above news, after that the chairman of the P&G company and along with him, the president of the company, and the chief executive of the company who is A.G. Lafley specified that, "…We are both industry leaders on our own, and we will be even stronger and even better together." It is supposed to be the main aim behind the synergy in this case, that is by merging the two organization or the companies, the economic outcome are also greater than before. The achievement of the company is greater than that of achievement, which the company had achieved before the collaboration.

In addition to this, merging or collaborating with another organization or the company. It is expected that the company attempt in order to create the synergy, which can be created by merging products or the markets of the companies. For instance, a retail commercial which sells the clothes that may choose to sell the products by the help of the cross-sell method. In addition, the products and the merchandise by the aid of the offering of the accessories, which includes the jewelries, belts and the other to enhance.

Example of the synergy with respect to the M&A:

The definitive sample of the synergy in the M&A is the combination or the merging of the Kraft and Heinz, which is announced in the year of 2015:

According to the release of the press from the Heinz:

“The momentous potential of the synergy which includes an assessed value of approximately of around $1.5 billion, which is in annual savings cost executed by the companies at the end of year of 2017. The Synergies in the case that is managed with the combination of the two companies will lead to enhanced benefit that come from enlarged scale of the organization which is made by the combination of the two companies,  the allocation of the best performs and the reductions in the cost of the company.”

Articles from a news subsequently follows the deal that is commented about the companies. It is that period or term where the synergy typically includes the closing offices. It also helps in combining the facilities of the manufacturing and along helps in dropping the amount of the warehouses that frequently is considered as the reduction in the number of the staff and also results to the loss of the job. It is supposed that due to this reason, the number of the employees and the other staff who used to work at the Kraft and Heinz Company were starts worrying about the layoff by the company.

At the time, the combined businesses had approximately $28 billion of revenue, so the total synergies (the $1.5 billion in expected cost savings noted in the Heinz press release) represented approximately 5% of that.

From the above mentioned strategies it can be stated that the synergy is always seemed to be positive. However it is, observed that the synergy can also be negative.

Synergies can be undesirable and be negative which is termed as the dis-synergies. It is usually executed or observed in the case of merger or the acquisition, which is poorly implemented.  In some instance, it is assumed that the cost savings of the company if poorly executed turns into a higher costs instead of lower cost which is expected in the case of the positive synergy. It can be executed in the case of the merging if two industries be unsuccessful in order to integrate correctly.

Conferring to a study conducted by a researcher McKinsey, it is stated that the more than 60% of the total transactions which is done fall petite of the quantified synergies that they hoped to achieve in case of the positive synergy. It is observed that some companies did not only achieve their positive synergy which is expected from the M&A, but instead of that essentially experienced dis-synergies.

One part of the motive for the over-optimism that is described as the longing to “sell a deal” in the investors or the market in order to ensure that the products looks striking and eye-catching enough. Common reasons for implementation of the synergy includes, empire building, providing a defense for the larger recompense packages and ego boosting.

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