REVENUE SYNERGIES VS. COST SYNERGIES 4
RevenueSynergies vs. Cost Synergies
Revenuevs. Cost Synergies
Theexistence of synergies is usually the justification for horizontalmerging between firms. Some of companies merge because they want toestablish a revenue synergy while others merge to create a costsynergy. A revenue synergy refers to the fusion of distinctattributes of the merging companies to generate a significant revenuegrowth (Rigby& Bilodeau, 2013). For example, a company with a strongdistribution network can merge with a firm with another company thathas products with great potential, but questionable ability todistribute them to the market.
Acost synergy, on the other hand, refers to a reduction of costs as aresult of resultant economies of scale or economies of scope afterthe merger. When two companies merge they cause a decrease in thecost per unit for each company due to the increase in the size ofoperations (Lindeberg& Malmlöv, n.d). Manufacturing companies merge in pursuit ofscale economies. They usually have high per unit costs for lowlevels of output due to high fixed costs of operating manufacturingfacilities. Economies of scope derived from a cost synergy means thata firm’s total costs decreases as a result of its increased abilityto provide a range of products or services using one set of inputs. For example, cost reduction occurs when mergers use the sameequipment to produce various products.
Acost synergy is a valid criterion for mergers and acquisitions.First, cost effectiveness is the best source of competitive advantage(Bose,2014). If individual companies in the merger reduce costs, they arelikely to compete favorably in the market. Secondly, a cost synergyworks for both operating firms such as manufacturers and corporatesynergies. It allows for companies whose revenue streams lack aperfect correlation to also merge because there a minimized risk ofbankruptcy for the new combined entity after the merger. A revenuesynergy creates a significant revenue growth. However, the revenuegrowth can is only practically possible if the merging companies havea positive correlation in their revenue streams. Revenueincompatibility increases the risk of bankruptcy.
Bose,S. (2014). Mergers and Acquisitions: A Popular Tool for Financial andOperating Synergy in the Era of Modern Economy. SaiOm Journal of Commerce & Management: A Peer Reviewed NationalJournal (OnlineISSN 2347-7563), 1(6), 23-29.
Lindeberg,J., & Malmlöv, P. (n.d). One Company as Corporate Strategy.
Rigby,D., & Bilodeau, B. (2013). Managementtools & trends 2013.Bain & Company.