Assume two firms have little geographic overlap in terms of sales and facilities. If they were...

Assume two firms have little geographic overlap in terms of sales and facilities. If they were to merge, how might this affect the potential for synergy?

Expert Solution

Synergy is the increase in the value of the combined firm after the merger. It is due to various factors like similar geographical location, similar machinery available or staff which can be substituted etc, which ultimately gives benefit to the combined firm. Now, if two firms have little geographical overlap in terms of sales and facilities and if they were to merge then obviously there will be less synergy in terms of sales and facilities due to less geographic overlap, as facilities are distributed over the two firms separately and very less can be used by both due to geographical diversification. However other types of synergy can be obtained with this merger like skilled staff help in the area in which they are required, research and development team can work together to find something new for the merged entity. So there are various types of synergies which can be enjoyed by the merged entity even if they are having a little geographical overlap but still they will not be able to enjoy the normal synergy benefit available due to area overlap.

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