Synergistic acquisitions explained

Grounded within the theory that the whole is greater than the sum of the individual parts, synergistic acquisitions are one of the most common forms of company sale.

In the tough economic climate of recent years, synergistic acquisitions have become an increasingingly popular growth strategy. Synergy, which represents the potential added value from merging two organizations, can be split into two primary categories; operational synergies and financial.

Operational synergies enable firms to develop both turnover and growth and can be split into four primary categories.

  1. Combined operational strengths. Companies can benefit hugely from complementing their own strengths with organizations whose strengths may lie elsewhere. For example, a company with a strong products or services would benefit from acquiring an organization with a strong marketing department in order to maximize their products or services market awareness and impact.
  2. Increased pricing power. Benefitting from reduced competition levels and increased market share, companies who make synergistic acquisitions can gain higher margins and operating income.
  3. Economies of scale. Due to increased operation levels, the combined companies can benefit from enhanced economies of scale.
  4. New or current market growth. Acquiring companies who operate within a different industry or sector grants the buyer a foothold in the market, benefitting from a pre-established brand and distribution network.

Financial synergies can benefit organizations primarily due to increased cash flows and reduced costs of capital. The following are examples of how organizations can benefit from financial synergies:

  • Increased debt capacity. When firms combine, they benefit from more stable earnings and cash flow. Increased financial predictability enables greater access to capital also creating tax benefits for the combined organization.
  • Tax benefits. The merged organization can benefit from taking advantage of tax legislation or alternatively from using net operating losses to shelter turnover. A profitable company acquiring a company which may be losing money can utilize the overall net operating losses to reduce tax burdens. Also, companies who, following an acquisition, are able to increase depreciation charges can reduce taxes and increase value.
  • Optimized output. Companies with excess cash and limited project opportunities can benefit hugely from the acquisition of other firms who are struggling with excess demand. Increasing output capacity enables the combined organization to take full advantage of demand and any excess cash the acquiring party may have. 

Evidently, in certain situations a combination of two organizations can create more value than the sum of the two parts thus highlighting the attractiveness of a synergistic acquisition. The right combination should see the combined company grow at an increased rate and become more profitable than prior to the acquisition.

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