Hi there,

Synergies is a very easy concept it basically means when two or more entities are working together the benefits are greater than each working alone - some examples of synergies in the business world include business mergers, combining or creating compatible product lines, and creating cross-disciplinary work groups.

To make it a bit more tangible I'll give some example below:

Business mergers: let's say company A acquires company B; each company already has its own C suite positions, administrative staff, offices, etc. when an acquisition or merger happens and we will end up with a bigger company C some of the positions will be duplicates and we can eliminate them so we will not need to have the CFO from company A and the CFO from company B we just one CFO position so we can get rid of the other - same applies for the administrative staff, offices, and all the other positions so companies will only keep the key aspects of the acquired company.

Combining or creating compatible product lines: here let's assume our client is a company that manufactures premium baby food products, if they decided to create a complimentary baby food product line targeting the middle-income consumer it will be very easy for them to implement as they already have the know-how, the manufacturing plants, the relationships with the suppliers and buyers, etc. so they will be benefitting from all the above as synergies because they wouldn't have the learning curve and huge investments to make.

Feel free to reach out privately - Happy to go over them in detail and give you synergy-focused cases.

Hi there,

Synergies refers to a benefit (financial or otherwise) that you get when putting A and B together.

For example:

• PE firm XYZ has a company portfolio and now adds company B to that portfolio
• Company A was already part of that portfolio and is in the same industry
• Company A & B both have an R&D function which costs 10M USD per year each (20M USD for both) and produce 2 new products per year each (4 new products together)
• By combining the R&D function of company A & B, they can save some costs (cost synergies) and now spend 15M USD per year together
• Combining R&D for A & B also leads to better output (productivity synergies) with 6 products per year together
• The net benefit from the synergy of putting R&D for A & B together is 5M USD in cost savings and 2 extra products

Synergies can take many forms and can happen in a lot of different contexts. 

For now, I hope this simple example helps a bit!

Synergies is about finding value that can arises specifically from combining two entities. It means that if one company is able to use one asset (e.g. higher capacity utilization, better brand), capability (e.g. better procurement, better pricing algorithm) or relationship (e.g. cross-selling) from the other company it can create additional value.

Broadly speaking you can have revenue, cost and capital synergies. But within these you can have a significant number of subcategories (you'll have to consider the multiple sources of revenue/value, the industry / production value chain and sources of cost, and the major assets).

For example, if you combine a pencil company in the US and a EU pen company, you may be able to mutually leverage their customer base to sell pencils in the EU and pens in the US.

But if you combine two pencil companies in the US, you are likely to have the synergies from optimizing logistics, production and overhead costs. Maybe you can even free up some redundant warehouses (operational cost and capital). Or maybe you can have better prices (or procurement) from the additional market power from being a larger company.

Hi there, 

Basically, if I'm a company that owns already several restaurant chains and I'm considering buying another one, I'll experience significant more synergies than if I buy a truck company. Since I know so much about restaurants already, I have the right contacts, the supply chain set up, then it will be much easier and profitable for me than if I were to expand into trucks. 

Best,

Cristian

Building upon the excellent answers provided: synergies are not always easy to grasp as they come in so many different flavors. 

Guiding yourself will simplify the task: e. g. Moving along the supply chain of two companies A and B, you may ask ‚where do they share procurement/ logistics/ …‘. 

As with other case problems, aim to break them down instead of trying to answer the whole problem at once.