Synergies in Mergers and Acquisitions Deals

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Now retired, Reid Hackney most recently served as the vice president and CFO of A’GACI, based in San Antonio, Texas. In this role, Reid Hackney was the primary finance officer behind mergers and acquisitions (M&A) analyses and synergy forecasting.

Synergy is often the driving force behind M&A deals. Synergy simply refers to the potential for financial benefit when two companies come together to form one. Value-adding synergy can be looked at in two different ways: revenue synergies and cost synergies.

Revenue synergies mean that the potential revenues of the new company can be greater than the individual revenues of each of the two merging companies combined. Example of revenue synergies include harmonized marketing strategies, sale of complementary products, and entry into new markets.

Cost synergies mean that the new company will incur far fewer costs than the two companies combined due to reduced headcount, inventory efficiencies, and streamlined redundancies. An example of the two synergies in action is when P&G acquired Gillette in 2005. P&G reported that the acquisition would lead to cost synergies of up to $1.2 billion and revenue synergies of up to $750 million in three years.