Synergy means joining or cooperation will create more value than separation. Two organizations that work together produce more significant value than their respective values combined. Say, each company’s value is 2, then their synergy can create value greater than 4.
So, 2 + 2 is not equal to 4. But it’s more than 4.
Types of synergy
The term synergy is prevalent in the context of mergers and acquisitions (M&A). Merger or acquisition offers greater value from synergizing two companies. That is why, often, in acquisitions, the acquirer is willing to pay a premium over the target company’s fair value.
In a narrower scope, synergy can also occur at the individual or division level. Companies can create synergies by combining products or markets. For example, toothpaste manufacturers offer toothbrush products to capture a higher value.
Cooperation between a developer with a marketer in developing a web is another example. The marketer develops communicative and exciting messages, while the developer translates them into programs. As a result, they not only create creative content but are also communicative. It makes more and more web visitors.
Why is synergy important?
Synergy is the basis of mergers, acquisitions, or strategic alliances. Such strategic actions create economies of scope by exploiting each party’s resources and capabilities.
Take an example of a merger between a carmaker and a car distributor. The carmaker has the advantage of developing innovative products. Meanwhile, distributors have an extensive and effective network. Hopefully, the combination of the two creates a strong position in the market and results in higher profits.
But, indeed, they are not always successful. Some collaborations of mergers fail because of differences in company culture. That raises many internal conflicts. Failure is also due to strategic differences, in which each party pursued its own interest.
Citing from CNBC, here is a list of successful mergers:
- Disney and Pixar
- Sirius and XM Radio
- Exxon and Mobil
And what failed was:
- New York Central and Pennsylvania Railroads
- Daimler Benz and Chrysler
- Mattel and The Learning Company
- Sears and Kmart
What are the benefits of synergy?
Synergy often involves two entities or parts with complementary resources or capabilities. It then brings mutual benefits, especially when joint work or activities support the same goal.
In general, synergy creates added value and enables higher returns from:
- Cost savings. For example, manufacturers can reduce the cost of building a distribution network by acquiring a distributor.
- Growth opportunities. International companies often collaborate with local companies to seize opportunities for growth. They then formed a joint venture.
- Stronger market position. A company acquires a company that produces complementary products. The acquisition allows it to expand its product offering. As a result, it could generate more income than they can do independently.
- Increased bargaining position. Mergers lead to more significant business size. That improves the bargaining position, not only to suppliers but also to customers.
- Strengthened competence. Take, for example, the formation of a team from the marketing, the production, and the research and development divisions. Team formation increases effectiveness by sharing perceptions and experiences, insights, and knowledge.
- Better decision making. Forming a team with diverse knowledge will produce more ideas, more creative solutions, increased acceptance of decisions by group members
- Financial benefits. Being bigger reduces the cost of capital because, when borrowing money, the company pays a smaller premium than the small company.
Why did the synergy fail?
Even though synergy is ideal, however, it is difficult in practice. Business downsizing and divestment are partly its failure results.
Some reasons such failure are:
- Resistance to change. Mergers, for example, increase uncertainty about the future of core employees. They aren’t sure whether, after the merger, still in the same position or not. If a merger puts its position at risk, they will tend to resist.
- Corporate culture conflicts. It is a classic problem in mergers and acquisitions. Cultural conflicts give rise to disharmony and reduce productivity.
- Slower decision. Decision making needs to pay attention to the interests of each group or entity. The process is usually more time-consuming and more expensive than individual decision making.