Corporate synergy

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Corporate synergy refers to a financial benefit that a corporation expects to realize when it merges with or acquires another corporation. Corporate synergy occurs when corporations interact congruently.

This type of synergy is a nearly ubiquitous feature of a corporate mergers and acquisitions and is a negotiating point between the buyer and seller that impacts the final price both parties agree to.

There are positive synergies which explains the statement ‘the whole is better than the sum of the 2 parts’ which in this case is that the combined corporation will bring about better results than 2 independent corporations thus why 2+2=5 if it is a positive synergy. However, there are negative synergies that arise due to insufficient due diligence by the corporations involved resulting in 2+2=3 so the company’s would have been better off existing on their own.[1]

There are two distinct types of corporate synergies:

Revenue[edit]

A revenue synergy refers to the opportunity of a combined corporate entity to generate more revenue than its two predecessor standalone companies would be able to generate. For example, if company A sells product X through its sales force, company B sells product Y, and company A decides to buy company B then the new company could use each sales person to sell products X and Y thereby increasing the revenue that each sales person generates for the company.

Cost[edit]

A cost synergy refers to the opportunity of a combined corporate entity to reduce or eliminate expenses associated with running a business. Cost synergies are realized by eliminating positions that are viewed as duplicate within the merged entity. Examples include the headquarters of one of the predecessor companies, certain executives, the human resources department, or other employees of the predecessor companies. This is related to the economic concept of Economies of Scale. This lead to companies sometimes try to reduce costs too much and make that their main goal after merging, which was found in the study from McKinsey, a global consultancy making revenues, and therefore suffer due to neglecting day-to-day activities that will bring in revenue.[2] For example, when Kraft tookover Cadbury, they tried to reduced costs by shutting down a factory that employed 400 staff. This led to greater problems as Cadbury's staff became uncertain about their Job security so this resulted inb Cadbury's staff changing their attitude to work due to the fears that arose.[3]

Advantages of Corporate Synergy[edit]

Managerial synergy[edit]

Increase in managerial effectiveness, which is required for the success of a corporation will result in more innovative ideas that will improve the performance of the corporation as a whole.[4] Synergies therefore result in more creative ideas and people are more likely to take risks due to merging of ideas so there are more innovative solutions brought up compared to working alone (Schemerhorn, Hunt, & Osborn, 1991). Synergy’s thus results in the strength of one corporation complementing the other.[5] Thus is why corporate synergies are able to overcome problems faced by independent firms and are able to reach positions that could take 6 years if these firms existed independently. Subsidiaries are offered the most adavantages [6]

Tax Advantages[edit]

The amount of tax a corporation pays is based on the amount of profits so they could merge with a corporation making a loss in order to reduce their tax burden. However this has been discouraged.

Increase in size[edit]

Corporate synergies due to mergers result in larger firm size which is percieved as more attractive to some investors as well as the fact that a larger firm gives competitive advantage in an industry as higher market share allows firms to be more dominant and able control the market more.[7]

Disadvantages with Corporate Synergy[edit]

Managerial biases conflicts with the aims of synergies, This is because executives view that the advantages that synergies bring along is their job so their thinking is therefore distorted and rather than focusing on the most important aspects. This consists of:

Synergy bias[edit]

Managers consciously or unconsciously underestimate the costs of the synergy and overestimate the benefits so as to give themselves reason for the organization to go ahead with the synergy whether or not its benefits will outweigh the costs, this is because some executive base their achievement in an organization on this and they therefore make it their most important priority. A 2012 survey by Bain & Capital found that overestimating synergies was the second biggest cause of post-deal disappointment.[8]

Parenting bias[edit]

Managers compel the business units to cooperate in the synergy. It encourages executive managers to intervene greatly, which could lead to more harm than good.

Skills bias[edit]

Managers assume that the know-how that is required for the synergy is within the organization and a lot of the time, this is not the case. This bias comes hand in hand with parenting bias because if you intervene to make synergies occur than you going to assume that your corporation has the skills required thereby overlooking the skills gap. This then makes it difficult for a positive synergy to occur and might then make the joint corporation a waste of resources and cause resulting in a negative synergy.

Upside bias[edit]

Executives concentrating on the benefits of the synergy and ignore or overlook their potential drawbacks. “In large part, this upside bias is a natural accompaniment to the synergy bias: if parent managers are inclined to think the best of synergy, they will look for evidence that backs up their position while avoiding evidence to the contrary. “[9]

How to reduce the risks of a Negative Corporate Synergy[edit]

Disaggregate a Synergy program[edit]

Exectutives should set realistic goals for the corporate synergy and breaking them down to be addressed on an individual basis.[10]

Companies should avoid high presssure deals[edit]

This is because rushed agreements are often bad agreements.

Same industry mergers are less risky[edit]

This has been proven to be the case because if two corporations have equal information about what will lead to the succes of the merged corporation, they will both understand the dynamics of the indust and therefore will be able to succeed For example, Travelers/Citicorp and Hewlett-Packard/Compaqmergers were in the same industry so this allowed all the participants of the merger to develop realistic expectations.[11]

References[edit]

  1. ^ "Synergy". Reference for business. 
  2. ^ McClure, Ben. www.investopedia.com http://www.investopedia.com/university/mergers/mergers5.asp |url= missing title (help). 
  3. ^ "Kraft and Cadbury: How is it working out?". BBC NEWS. 8 December 2011. Retrieved 31 October 2014. 
  4. ^ Francis, Abey. "Mergers and Acquisitions – Synergies through Consolidation". www.mbaknol.com. 
  5. ^ Williams, Dmitri (7 June 2010). "Synergy Bias: Conglomerates and Promotion in the News". p. 456. Retrieved 31 October 2014. 
  6. ^ Williamson, Peter J.; Verdin, Paul J. (25 February 1992). "Age, Experience and Corporate Synergy: When Are". British Journal of Management 3: 233. 
  7. ^ "Why Firms Merge And The Problem They Cause". www.articlesalley.com. Retrieved 31 October 2014. 
  8. ^ Miles, Laura; Borchert, Adam; Ramanathan, Alex Egan. "Why Some Merging Companies become Synergy Overachievers". Transaction Advisors. ISSN 2329-9134. 
  9. ^ Micheal, Goold; Andrew, Campbell (Septwember- October 1998). "Desperately seeking synergy". Harvard Business Review: 132–138. Retrieved 31 October 2014.  Check date values in: |date= (help)
  10. ^ Micheal, Goold; Andrew, Campbell (Septwember- October 1998). "Desperately seeking synergy". Harvard Business Review: 132–138. Retrieved 31 October 2014.  Check date values in: |date= (help)
  11. ^ Chatterjee, Sayan. "Why is synergy so difficult in mergers of". Strategy and Leadership 35: 48–49.