Discuss Synergy with reference to merger

Synergy :

Synergy results from complementary activities. For example, one firm may have a substantial amount of

financial resources while the other has profitable investment opportunities. Likewise, one firm may have a

strong research and development team whereas the other may have a very efficiently organized production

department. Similarly, one firm may have well established brands of its products but lacks marketing

organization and another firm may have a very strong marketing organization. The merged business unit in

all these cases will be more efficient than the individual firms. And, hence, the combined value of the

merged firms is likely to be greater than the sum of the individual entities (units). Symbolically;

Combined value = Stand alone value of acquiring firm, V

a + Stand alone value of acquired target firm,

V

t + Value of synergy, Vat

Normally, the value of synergy is positive and this constitutes the rationale for the merger. In valuing synergy,

costs attached with acquisitions should also be taken into account. These costs primarily consist of costs of

integration and payment made for the acquisition of the target firm, in excess of its value, V

t. Therefore, the

net gain from the merger is equal to the difference between the value of synergy and costs.

Net gain = Value of synergy,
Vat  costs.