Question

3. Is synergy a valid rationale for mergers? Describe several situations that might produce synergistic gains?

refer financial management 16th edition by Brigham and Ehrhardt

please provide the complete answer in a detailed way

Answer 1

First of all lets try to understand what term the synergy is

Synergies in simple terms in mergers and acquisitions is the situation in which the combined company will be worth more than the two companies would be worth if operating separately

Several situations that might produce synergistic gains include:

1. Results in reduced cost: Imagine two firms plan to combine even though there is no expected increase in sales. If the new entity can reduced the combined fixed cost, this can lead to reduction in average cost per unit by spreading the new lower fixed cost over the same number of units.

2. Can result in achieving more rapid growth: External growth is a much faster way for managers to increase revenues than making investments internally. Further it is considered to be less risky to generate growth by way of acquiring resources through a merger with another company as compared with developing them internally.

3. Increase in market share: If a merger occurs in an industry with few competitors, the newly combined company will have more chances to come up with increased market share. For example if a company acquires a key supplier of raw materials, it may lock out competing firms who may rely on the same raw material. By this the firm may be able to achieve increase in market share.

4. Might result in tax benefits: For example two companies where one has large taxable income and the other has accumulated large tax losses being carry forward. By merging with the company that has tax losses, the acquirer can use the losses to reduce its tax liability.

5. Helps in achieving international business goals: International Merger and acquisition deals have become an important way for multinational companies to achieve cross-border business goals such as extending global market power or gaining access to unique capabilities.