Business Synergies and It’s types

Edited by Vinay Pandya

Synergies and its types :

According to the Oxford Dictionary, “Synergies is an interaction or corporation of two or more organizations, substances, etc, which will produce a combined effect which is greater than the sum of their separate effects.” The synergies can happen between two companies via mergers and acquisitions. In addition to merging with another company, a company can also create synergy by combining products or markets, such as when one company cross-sells another company’s products to increase revenues. The example of synergies explained by the way of explaining an acquisition of two different companies such as:

  1. Netflix Acquisition of Millarworld: – When Netflix acquired Millarworld a comic book publishing house that has created iconic characters and stories like Old Man Logan, Kingsman, and Kick-Ass and many comics. This gives Netflix exclusive rights to run the stories on its platform which will generate the revenue which means there is a revenue synergy between the two companies. In the 13 years of Millarworld’s existence, the company has produced character world franchises which have generated $913 million in box office revenue over the last nine years, on a combined production budget of $214 million. The owner of Millarworld i.e. Mark Millar is a legendary creator who has worked for Marvel as well as DC comics that will bring in his expertise to create a world of Netflix originals to help them generate more revenue as well as brand image.
  1. Reliance acquiring Hathway and Den:-  Reliance acquired Hathway and Den in 2018 at a price of Rs. 5230 Crores. Hathway enjoys over 52 per cent share of the total cable broadband market in India with 7.7 lakh subscribers, and has the ability to reach 5.5 million homes. DEN, on the other hand, claims to have the ability to reach 9.7 lakh homes but currently has around 106,000 broadband subscribers. The acquisition gives Reliance access to 24 million existing cable connected homes of these companies across 750 cities, thereby covering around half of its target to connect 50 million homes across 1,100 Indian cities which will enable them to spread their operations which will bring operational synergy. Reliance also has an opportunity to install optic fiber for  high speed internet in the stated cities which will help the companies to better serve their customers. Operations of both the companies will be affected as reliance will get the wide-spread market and Hathway and Den will get the technology. The synergy between the companies in the acquisition is ‘Operational synergy’.

Cost synergy is the savings in operating costs expected after the merger of two companies. Cost synergies are cost reductions due to the increased efficiencies in the combined company. Cost synergy is one of three major synergy types, with the other two being revenue and financial synergies. Here are two examples for Cost Synergy:

3. When LKQ acquired Keystone – LKQ could distribute aftermarket parts through its existing distribution network. LKQ was able to eliminate significant costs associated with delivery trucks, fuel, insurance and delivery drivers. LKQ was also able combine warehouses and eliminate redundant storage expenses. Redundant management overhead was eliminated as well, further reducing expenses. As a result of the LKQ – Keystone acquisition, LKQ’s overall cost of doing business dropped while its sales increased. This is often referred to as developing economies of scale.  In collision repair another example of cost synergies is when a larger group is able to negotiate lower prices or improved payment terms with vendors such as paint companies because they buying more products and services. 

4. Adani and Holcim Deal

Adani Group on May 16, 2022 acquired Holcim’s stake in Ambuja Cements and ACC in a $10.5 billion deal, making it the second-biggest cement producer in India. Ambuja and ACC have a combined capacity to produce at least 70 million tonnes of cement annually, second to UltraTech Cement’s 120 million tonnes capacity. This will also be the largest-ever acquisition for Adani Group. India is the world’s second-largest cement market and yet has less than half of the global average per capita cement consumption. When we combine this demand pattern of cement with Adani’s several existing businesses adjacencies which include the Adani Group’s ports and logistics business, energy business, and real estate business, it can be viewed that Adani group are well positioned to build a uniquely integrated and differentiated business model that will be competitive and hard to match.