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Synergy and Forms of Synergy
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Suggest questionDefine synergy. Explain in which forms the synergy prevails.
Synergy refers to the difference between the value of the resulting entity formed by the merger of two firms and the sum of the individual values of the merging firms. Synergy accrues 💡 as revenue increase and cost savings. In other-words
V(AB) is more than V(A) + V(B)
where
- V(AB) = Value of the big entity formed by merging entity A and entity B.
- V(A) = Value of the entity A taken alone.
- V(B) = Value of the entity B taken alone.
Thus when the combined value of the merged entity is more than the individual values of the business entities A and B before merger, then only it can be said that the merger is benefiting through the synergies.
Synergy can take place in the following forms.
- Operating synergy: This is the cost savings that resulted from the economies of scale or increased sales and profits. It results in overall development of the firm.
- Financial Synergy: This due to financial factors like
- Lower tax
- Higher debt capacity
-Better use of surplus cash
When a firm is running in loss 📉 or it has un-absorbed depreciation, it can benefit by merging into a profitable firm 📈. The merger can overcome the losses through its profits. This results in a financial synergy known as tax shield 🛡.
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Define synergy. Explain in which forms the synergy prevails.
Synergy refers to the difference between the value of the resulting entity formed by the merger of two firms and the sum of the individual values of the merging firms. Synergy accrues 💡 as revenue increase and cost savings. In other-words
V(AB) is more than V(A) + V(B)
where
- V(AB) = Value of the big entity formed by merging entity A and entity B.
- V(A) = Value of the entity A taken alone.
- V(B) = Value of the entity B taken alone.
Thus when the combined value of the merged entity is more than the individual values of the business entities A and B before merger, then only it can be said that the merger is benefiting through the synergies.
Synergy can take place in the following forms.
- Operating synergy: This is the cost savings that resulted from the economies of scale or increased sales and profits. It results in overall development of the firm.
- Financial Synergy: This due to financial factors like
- Lower tax
- Higher debt capacity
-Better use of surplus cash
When a firm is running in loss 📉 or it has un-absorbed depreciation, it can benefit by merging into a profitable firm 📈. The merger can overcome the losses through its profits. This results in a financial synergy known as tax shield 🛡.
Additional content on this topic can be found at http://www.eduxir.com/curriculum/cbse/class-xii/entrepreneurship/enterprise-growth-strategies/