Synergy

What is Synergy?

Companies use synergy as a way to stay competitive in their industries. But what is synergy? And why is it so important? In simple terms, it refers to the combined benefits that result from collaboration between companies or individuals. 

Synergism can be achieved through various means, like:

• Mergers
• Acquisitions
• Partnerships
• Joint Ventures 

When two or more parties work together, they can achieve far more than they could alone, resulting in the following:

• Expanded market reach 
• Increased efficiency
• Growth
• Innovation
• Cost savings
• New revenue streams

A good example is Disney's acquisition of Pixar in 2006. Pixar was known for its innovative computer-animated films (like Toy Story & Finding Nemo), and Disney was able to expand on that capability to create successful films like Frozen & The Lion King.

However, achieving synergism has its challenges and risks. Many factors can stop a collaboration from being successful, like:

• Culture clashes
• Integration difficulties
• Financial risks, such as unforeseen costs 

As such, companies must carefully assess the feasibility and potential risks before implementing any such initiatives. This article will provide anyone interested in finance and business valuable insights into how synergy can be leveraged for success in today's competitive business world.

Understanding Synergy

Synergy in business & finance refers to the idea that companies working together can do more than individually. It can create value that would only be possible with collaboration. 

Companies can achieve the following:

• Economies of scale
• Cost reductions
• Access to markets by working together

This collaboration can lead to the following:

• Increased innovation
• Improved operational efficiency
• Better use of resources

In business, synergism can be achieved through:

• Mergers
• Acquisitions
• Joint ventures
• Partnerships

All these collaboration methods allow companies to work together to achieve a competitive advantage. For example, a technology company may acquire a software firm to access its expertise and expand its offerings. 

Similarly, a clothing retailer may partner with a logistics company to improve their supply chain and reduce costs.

A single company can also achieve synergy by aligning departments and teams toward a common goal. This can involve breaking down silos and improving communication, collaboration, and knowledge-sharing.

Companies can achieve their goals more effectively and efficiently and position themselves for long-term success by understanding and leveraging synergism.

Types of Synergy

Synergy can take different forms depending on the context and objectives of the collaboration. For example, three common synergism types in finance and business are operational, financial, and managerial.

1. Operational Synergism

This refers to the ability of companies to achieve greater efficiency and effectiveness by combining their operational capabilities. This can involve sharing resources, reducing redundant activities, and improving processes. 

For example, a merger between companies in the same industry could consolidate manufacturing plants, reducing supply chain costs and streamlining distribution networks. 

This would help reduce overall costs and increase the productivity of the new company.

2. Financial Synergism

This refers to the ability of companies to achieve financial benefits through collaboration. This can involve accessing new funding sources, reducing borrowing costs, and increasing cash flow. 

For example, a large company acquiring a smaller company could access its cash reserves or use its assets as collateral for borrowing. 

This would help reduce financing costs and increase the parent company's financial flexibility.

3. Managerial Synergism

This refers to the ability of companies to improve their management capabilities by working together. This can involve sharing knowledge and expertise, improving decision-making processes, and increasing innovation. 

For example, a merger between two companies could combine R&D, share managerial practices, and leverage each other's strengths. 

This would help the management's decision-making skills and lead to the creation of innovative products and services.

Creating Synergy

Corporate synergism requires careful planning, collaboration, and execution. There are multiple strategies that companies can use. 

Only some collaborations will be successful, so companies should carefully evaluate the opportunity and their recommended method of attaining synergy before committing to one.

Here are some possible manners in which a company can realize synergetic benefits. 

1. Mergers and Acquisitions

Mergers and Acquisitions (or M&A) help companies access new markets, expand their offerings, and improve operational efficiency. 

Companies must carefully evaluate potential targets and conduct thorough due diligence before deciding for this initiative to succeed.

2. Partnerships

Partnerships help companies share resources, knowledge, and expertise, achieving greater efficiency and innovation. 

These can take different forms:

• Joint ventures
• Licensing agreements
• Strategic alliances

For a collaboration like this to be successful, each company should do two main things:

• Establish clear goals and expectations
• Define the roles & responsibilities of each partner

3. Joint Ventures

Joint ventures are a specific type of partnership in which two or more companies create a separate legal entity for a specific goal or project. These help companies achieve synergies by combining their strengths and resources and sharing risks and rewards. 

It's important for companies to do the following for a joint venture to be successful:

• Establish a clear governance structure
• Define the ownership and management rights of each partner
• Set clear goals and expectations

To identify potential synergism opportunities, companies should assess their strengths and weaknesses and look for complementary capabilities in other companies. 

Companies should also consider the market conditions, regulatory environment, and cultural fit of potential partners. Finally, companies should thoroughly analyze the collaboration's feasibility and potential benefits once potential opportunities are identified.

Measuring Synergy

Measuring the success of synergetic initiatives is essential to evaluate their effectiveness and determine whether they have achieved their goals. Multiple metrics can be evaluated to determine how successful companies are in realizing the benefits of synergism:

1. Cost Savings

Cost savings can result from reducing redundant activities, consolidating operations, and improving processes. 

For example, if two companies merge, consolidating their manufacturing plants, they could share resources and eliminate redundancies, reducing overall costs.

Comparing the pre-merger & post-merger cost savings of each company can provide a metric to evaluate how successful the merger synergism is.

2. Increased Revenue 

Increased revenue can result from accessing new markets, expanding product offerings, and improving customer satisfaction. 

For example, if two companies merge, expanding their product offerings, they could access new customer segments, increasing revenue.

Comparing the pre-merger & post-merger revenue increase of each company can provide a metric to evaluate how successful the merger synergism is.

3. Improved Efficiency

Improved efficiency can result from streamlining processes, reducing cycle times, and improving quality. 

For example, if two companies merge, improving their supply chain processes, they could reduce cycle times and improve delivery times. 

Comparing the pre-merger & post-merger efficiency increase of each company can provide a metric to evaluate how successful the merger synergism is.

Companies should also consider synergy's potential risks and challenges, such as cultural differences, integration challenges, and regulatory barriers.

You can learn more about calculating these metrics by taking the Wall Street Oasis's M&A Modeling Course!

Challenges and Risks of Synergy

While synergetic initiatives can offer companies numerous benefits, achieving them can be challenging and risky. Therefore, companies should be aware of the potential challenges and risks associated with corporate synergism and take steps to mitigate them.

1. Cultural clashes

Cultural differences can lead to conflicts and misunderstandings when two companies merge or collaborate. 

Organizational structures, values, and communication styles can challenge aligning objectives and collaborating effectively. 

To mitigate this risk, companies should invest in cultural integration programs that help employees from different organizations understand each other's values and communication styles.

2. Integration difficulties

Integrating two organizations can be complex and time-consuming, requiring significant resources and coordination. 

Differences in IT systems, supply chain processes, and human resources can create integration difficulties, resulting in delays and disruptions. 

3. Financial risks

These initiatives can carry financial risks, such as overvaluation of assets, unexpected costs, and unfavorable regulatory changes. 

To mitigate this risk, companies should conduct rigorous due diligence before embarking, ensuring that they fully understand the financial and regulatory implications of the collaboration. 

4. Resistance to change

Employees may resist job responsibilities, work processes, and organizational culture changes. 

To mitigate this risk, companies should involve employees in the initiative from the start, clearly communicating the objectives and benefits of the collaboration. 

Companies should also offer training and support to help employees adapt to new work processes and organizational structures.

Synergy Real-World Example

Many real-world examples of companies engaging in mergers, acquisitions, or partnerships to gain some synergetic benefits. Here are some past corporate synergism initiatives: 

1. Disney-Pixar

Disney acquired the company Pixar for $7.4 billion in 2006. This combined Disney's global distribution network & their brand recognition with Pixar's creativity and innovative storytelling. 

This acquisition helped Disney to expand its influence in the animation industry and build new revenue streams through theme park attractions & merchandising. In addition, this Disney-Pixar acquisition resulted in notable projects that made billions of dollars, like "Toy Story 3" and "Finding Dory."

2. ExxonMobil

Exxon merged with Mobil in 1999 to create 'ExxonMobil." This made the new corporate entity the world's largest oil and gas company.

The merger allowed both companies to combine their resources, technologies & expertise, resulting in significant cost savings and increased efficiency. In addition, the ExxonMobil merger helped expand the company's global reach and diversify operations. This merger also helped mitigate the volatility of the oil and gas market.

3. Nestle-Pfizer

Nestle and Pfizer entered a joint venture to create a new company called Nestle Health Science in 2012. 

The joint venture created a new market in nutritional therapy thanks to the synergy of Nestle's expertise in food and nutrition with Pfizer's expertise in pharmaceuticals. 

4. Fiat Chrysler Automobiles

Fiat acquired a controlling stake in Chrysler In 2014. As a result, Fiat and Chrysler renamed the new corporate entity Fiat Chrysler Automobiles (FCA). 

This acquisition allowed the FCA to combine both companies' strengths, resulting in improved efficiency, cost savings, and expanded market share. 

The Fiat Chrysler Automotives acquisition helped them compete more effectively in the global automotive market and launch new products like the Jeep Renegade and the Alfa Romeo Giulia.

These case studies demonstrate the potential benefits of synergism for companies, including expanded market reach, increased efficiency, cost savings, and new revenue streams. 

It's important for companies to carefully plan these initiatives out to mitigate the challenges and risks that come with these kinds of collaborations.

Conclusion

Corporate synergism is crucial to business finance. It refers to the combined benefits of collaboration between companies.

These benefits can be achieved through various means, like:

• Mergers
• Acquisitions
• Partnerships
• Joint Ventures

These initiatives are pursued with the intention of:

• Expanding market reach
• Increasing efficiency
• Cost savings
• Creating new streams of revenue

Attaining corporate synergism requires companies to plan carefully because potential risks come with these collaborations.

Companies need the following for a collaboration to be successful:

1. Identify potential opportunities
2. Assess their feasibility
3. Implement strategies

Real-world examples such as Disney-Pixar, ExxonMobil, Nestle-Pfizer, and Fiat Chrysler Automobiles demonstrate the potential benefits of synergism for companies.

Synergism has become more important than ever in today's fast-paced & competitive business environment. It provides opportunities for companies to expand their operations & remain competitive, making it important for companies to understand the concept of corporate synergism to remain successful.

Researched and Authored by Rohan Rajesh | Linkedin

Reviewed and edited by Parul Gupta | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Corporate Raider
• Creeping Takeover
• Financial Synergy
• Hostile Takeover
• Kamikaze Defense