Question

Explain how cost synergies benefit the companies involved in a merger or acquisition depending upon the type of synergy being discussed. Also, provide actual examples from the business world today and if you were a CFO of a Fortune 500 company what would you be looking for in prospective targets?

Answer 1

A cost synergy refers to the opportunity of a combined corporate entity to reduce or eliminate expenses associated with running a business. Cost synergies are realized by eliminating positions that are viewed as duplicate within the merged entity.

Cost synergies refer to the opportunity, as a result of an acquisition, for the combined company to reduce costs more than the two companies would be able to do individually. Again, take the LKQ – Keystone deal as an example. When LKQ acquired Keystone, LKQ could distribute aftermarket parts through its existing distribution network. LKQ was able to eliminate significant costs associated with delivery trucks, fuel, insurance and delivery drivers. LKQ was also able combine warehouses and eliminate redundant storage expenses. Redundant management overhead was eliminated as well, further reducing expenses. As a result of the LKQ – Keystone acquisition, LKQ’s overall cost of doing business dropped while its sales increased. This is often referred to as developing economies of scale. In collision repair another example of cost synergies is when a larger group is able to negotiate lower prices or improved payment terms with vendors such as paint companies because they buying more products and services.