Question

What are the primary differences between operating synergy and financial synergy?

Answer 1

Financial synergy is a type of synergies that results from lowering the cost of capital of by combining two or more companies. A company, with good growth or profit-making opportunities but is hampered by lack of capital, may buy another company (the target company) or merge with it so that it can have better access to capital. Typically, large companies, with wide financing resources, tend to acquire smaller companies that have spectacular niche opportunities.

On the other hand, operating synergy is the efficiency gains or operating economies (synergies) that are attained in horizontal mergers or vertical mergers. It reflects the value realized from the additional cash flows generated (or the cash outflows saved) by combining two or more companies. Differently stated, operating synergy refers to the reductions in costs per unit thanks to the increase in a company's operations both in terms of size and scale. In this sense, operating synergy includes both economies of scale and economics of scope.

Operating synergy involves the integration of the combining companies in question after the acquisition transaction has been finalized. The merged companies will be operated as a single unit. In turn, with financial synergy the merged companies will not be operated as a single unit , and no significant operating economies will be expected.