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Using the Financial Synergy Valuation Worksheet And lastly, diversification may reduce the cost of equity, especially if the target is a private or closely held firm. Second, a larger company may be able to incur more debt, reducing its overall cost of capital. In terms of tax benefits, an acquirer may enjoy lower taxes on earnings due to higher depreciation claims or combined operating loss carryforwards. Functional Integration : When a firm with strengths in one functional area acquires another firm with strengths in a different functional area, the potential synergy gains arise from specialization in each respective functional area.įinancial synergies refer to an acquisition that creates tax benefits, increased debt capacity and diversification benefits.

Vertical Integration: Cost savings from controlling the value chain more comprehensively.

Horizontal Integration: Economies of scale, which reduce costs, or from increased market power, which increases profit margins and sales.

Types of operating synergies to value include: Furthermore, operating synergies can result in economies of scale, allowing the acquiring company to save costs in current operations, whether it be through bulk trade discounts from increased buyer power, or cost savings by eliminating redundant business lines. Operating synergies create strategic advantages that result in higher returns on investment and the ability to make more investments and more sustainable excess returns over time.

Synergy can be categorized into two forms: operating synergy and financial synergy.

Learn More on M&A Modeling Course Types of Synergies There are two main types, operating synergy and financial synergy, and this guide will focus on the latter. The primary source of synergy in an acquisition is in the presumption that the target firm controls a specialized resource that becomes more valuable if combined with the acquiring firm’s resources. When a company acquires another business, it is often justified by the argument that the investment will create synergies.