what is operating synergy

What Is Operating Synergy

The term “synergy” used to be considered exclusively a word belonging to the field of exact sciences. This term explained the phenomenon of two combined substances producing more effects than each of them separately. Over time, the term also came to be used in a business during mergers and acquisitions. M&A deals were made to achieve these synergies and to work twice as efficiently as if they existed separately. In this article, we will break down what is operating synergy and also look at other types of synergies.

Operational synergy – what is it?

Operational synergy is a phenomenon that merged companies can achieve. If they can successfully integrate, agree on responsibilities, come up with joint business goals, etc., they can achieve improved performance and increase their operating income. Thus, operational synergy is considered achieved when companies either increase their revenues or decrease their costs, although it is much more difficult to achieve the first option. Accordingly, operational synergy is divided into two types: increasing revenues, and decreasing costs.

  • Operational synergy that increases revenues

As already mentioned, this type of merger is much more difficult, and statistics show that almost 70% of merged companies do not achieve the synergy that was originally expected. To achieve increased revenues, the companies must initially be compatible in many nuances, for example, they must complement each other in their strengths, be in the same business. Their success depends on the level of competition in their field and their respective geographic markets, as well as the size of the partner company.

  • Operational synergies that reduce costs

Cost reduction is a simpler way to achieve synergy, it is achieved through economies of scale and lower unit prices. Companies increase the specialization of labor and management, which helps to use equipment more efficiently.

Other types of synergies

Synergy is the main goal that companies want to achieve in mergers and acquisitions, but there are several types of synergies. Depending on their position and goals, companies decide which synergies they want to achieve and make post-merger integration with a focus on achieving a specific effect. So, there are these types of synergies:

  • Marketing Synergy

This synergy refers to the marketing advantages that the combined companies can achieve. So, they will be able to market their products or services, increasing sales revenue. In doing so, the buying company needs to strategically select its salesperson to successfully fill its weaknesses. For example, if the company needs a strong marketing department and is willing to offer some other advantage instead, the deal has a right to life.

  • Revenue synergy

Increased revenue for the combined companies comes from increased product coverage or an increased ability to provide services to sell through a distribution network. Also, the company will have an increased number of sales representatives who can sell twice as many products.

  • Financial synergy

After the merger, the company gets a strong asset base that has also merged from two formerly separate organizations. This helps the new company gain access to debt and it will also be able to save on taxes. Simplified access to lines of credit allow you to use the common assets as collateral, which in turn reduces the ownership percentage of the owners since you’ll be leveraging the loan rather than your capital in subsequent business transactions.

  • Management

The structure of management and employees in a company after a merger, of course, goes through changes. If companies can get the management teams from the two formerly separate organizations to work efficiently, then the company can improve its service.