Synergies

Concept

Synergies are the incremental value created by combining two companies that neither could achieve alone. They represent the financial benefits—higher revenues or lower costs—that theoretically justify paying a premium over a target's standalone value. In M&A, synergies answer the question: "Why is 1 + 1 = 3?"

Intuition

Synergies exist because duplication exists. Two companies have two CFOs, two headquarters, two procurement departments. Combine them, and you only need one. That's cost synergies—pure arithmetic.

Revenue synergies are trickier. The logic is that Company A's sales force can now sell Company B's products. But customers don't automatically buy more just because ownership changed. That's why cost synergies are "bankable" and revenue synergies are "hopeful."

The real insight: Synergies justify premiums. If you pay 30% over the target's stock price, you need synergies worth at least 30% of the deal value just to break even. This is why synergy analysis is the bridge between "what's the target worth standalone" and "what should we pay."

Components

Interview Script

Synergies are the incremental value created by combining two companies that neither could achieve independently—they're what makes 1 + 1 equal 3. Cost synergies come from eliminating duplication like redundant headquarters or overlapping departments, while revenue synergies assume cross-selling opportunities, though cost synergies are considered far more reliable. The key insight is that synergies justify acquisition premiums—if you're paying a 30% premium, you need synergies worth at least that much just to break even.