The cost of equity may be reduced when a merger or acquisition leads to diversification. In addition, the new company could negotiate higher interest rates and loan terms with the borrower. This strengthens their balance sheet, allowing them to take on additional debt or increase capacity. When two businesses merge, their cash flows, sales, and profits become more stable. For example, if a profitable company buys a company that is not doing well, the former can reduce its tax burden.įurthermore, one firm might reduce its tax burden by using the depreciation costs of another firm. In addition, with improved debt capacity, companies can raise more funds from various financial institutions.Ĭompanies can use current tax regulations to get tax advantages, such as utilizing losses to reduce taxes. Simply put, financial synergy indicates that the combined financial worth of two merged companies is greater than the sum of their separate values.Ĭompanies can use the large operations and market share achieved after merging to increase their revenue, thereby increasing their cash flow. These metrics include lower cost of capital, taxes, increased capital sources, profitability, cash flow, etc. The three synergies are:Ĭombined, companies have a large consumer base, operations, capital, etc., thereby increasing their value.įinancial synergy usually indicates an improvement in the financial metrics of two companies when they merged from when they were separate entities. Synergy can be categorized into three types that can occur in any transaction of mergers or acquisitions in varying degrees. In this article, we will be discussing financial synergy. When two companies merge, the additional value they create is worth more than the value of them separated. It is a term synonymous with the context of mergers and acquisitions. Financial synergy is when two firms merge, and their financial operations improve to a higher degree than when they are functioning as independent organizations.
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