Synergy

A synergy is a combination that has a greater effect than the combined parts. In an investment context, the word is most commonly used to justify acquisitions and mergers.

This most common synergies are:

  • cost synergies — savings, generally through economies of scale.
  • Sales synergies — better reach through a larger sales force or expanded customer base, cross selling one product to buyers of another etc.

Companies may also sometimes generate (or claim to) synergies in other ways, for example, through combining technologies. Cost synergies may come from internal economies of scale or through purchasing (i.e. the better bargaining power of a larger entity). Integration of the businesses may be horizontal or vertical.

It is generally advisable to be sceptical about claimed synergies as they often need to be very large enough to be worth the costs of the acquisitions that they supposedly justify. Most acquisitions leave the shareholders of the acquiring company worse off because the synergies (and other claimed benefits) are not big enough to justify the cost of the acquisition.

It is also worth considering whether there are any diseconomies of scale or other disadvantages to large size (a larger company may have more layers of management, be less nimble, etc.)

Despite sounding like yet another unnecessary management neologism the word does encompass a useful concept. It is respectably derived from the Greek συνεργι (sunergi), which means cooperation.

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