0.2. What is corporate synergy? Discuss its relevance with others.
Ans. Corporate Synergy: Corporate synergy occurs when corporations interact congruently. A corporate synergy refers to a financial benefit that a corporation expects to realise when it merges with or acquires another corporation. This type of synergy is a nearly ubiquitous feature of a corporate acquisition and is a negotiating point between the buyer and seller that impacts the final price both parties agree to. There are distinct types of corporate synergies:
Marketing: A marketing synergy refers to the use of information campaigns, studies and scientific discovery or experiments for research and development. This promotes the sale of products for varied use or off market sales as well as development of marketing tools and in several cases exaggeration of effects. It is also often a meaningless buzzword used by corporate leader.
Revenue: A revenue synergy refers to the opportunity of a combined corporate entity to generate more revenue that its two predecessor stand-alone 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 salesperson generates for the company.
In media revenue, synergy is the promotion and sale of a product throughout the various subsidiaries of a media conglomerate e.g. films, soundtracks, or video games.
Financial: Financial synergy gained by the combined firm is a result of number of benefits which flow to the entity as a consequence of acquisition and merger. These benefits may be:
1. Cash Slack: This is when a firm having number of cash extensive projects acquires the firm which is cash-rich, thus enabling the new combined firm to enjoy the profits from investing the cash of one firm in the projects of other.
2. Debt Capacity: If the two firms have no or little capacity to carry debt before combination, it is possible for them to join and gain the capacity to carry the debt through decreased gearing (leverage). Thus creating value for the firm, as debt is thought to be a cheaper source of finance.
3. Tax Benefits: It is possible that one firm has unused tax benefits which might be utilised against the profits of the other after combination thus resulting in less tax being paid. However, this greatly depends on the tax law of the country.
Management: Synergy in terms of management and in relation to team working refers to the combined efforts of individuals as participants of the team. The condition thus exists when the organization’s parts interact to produce a joint effect that is greater than the sum of the parts acting alone. Positive or negative synergies can exist. In these case, positive synergy has positive effects such as improved efficiency in operations, greater exploitation of opportunities and improved utilization of resources. Negative synergy on the other hand has negative effects on production in the firm with effects such as reduced efficiency of operations, underutilization of resources and disequilibrium with the external environment.
Cost: 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.
Computers: Synergy can also be defined as the combination of human strengths and computer strengths, such as advanced chess. Computers can process data much more quickly than humans, but lack the ability to respond meaningfully to arbitrary stimuli.