Question

How a operational synergy, managerial synergy and market power, financial synergy enhance the value of company

Answer 1

Synergy basically means coming together, a firm can decide to pool its resources in terms of its operations, finances, markets etc. to gain a better control and achieve efficiency within the market in an effective way. Different types of synergies and their effect on value of company are laid down as follows:

• Operational synergy: Under this, the firm will merge operations of two or more of its business with an aim to achieve efficiency, as it is said 'whole is more than sum of its parts'. If two parts of a company is merged together to achieve efficiency than it leads to operational synergy. A company would perform this for the purpose of gaining economies of scale, higher pricing power, better product line and a combination of enhanced marketing strategies. Due to these operational efficiencies, the overall value of the firm gets increased in the longer run.
• Managerial synergy: If the managerial synergy is achieved by a firm, then it will lead to managerial effectiveness for the firm. It will allow individuals in the organization to have more creative ideas, the risk appetite will increase sharply and innovations in the organization will increase, thus value of the company will increase overtime.
• Financial synergy: If, for example, a small subsidiary of big company will go to borrow a loan, the bank will certainly charge a higher rate of interest which will result in higher cost of capital for the company, on the other hand if the small firm is merged with big firm and then loan is taken, the same can be get a far lower rate of interest due to size of the business, therefore financial synergy reduces the cost of capital of the firm in longer run and enhances its market value overtime.
• Market power: It is the ability of a firm to have control on the market prices of its goods and services in which the company can increase the prices without having effect on its sales and volume. This can be achieved through merger of subsidiaries and other parts of the companies together to create a market leadership. This will enhance the value of firm over period of time.