Companies, when going through a merger or an acquisition, have one end goal – to create value and performance that seperately they would not be able to achieve. This additional value generated by combining companies is called synergy. Synergy, to put it simply, is the potential financial benefit achieved through merger and acquisition and is the driving force of any M&A transaction.
Synergy in terms of revenue and market growth is created when two companies have strengths that can be utilized to increase sales of their products. For example, a company that has strong marketing skills merging with a company that has a strong product line would create this type of synergy, as combining their strengths would result in greater revenue than what either could have achieved independently.
Mergers and acquisitions can also allow the companies involved to be more cost-efficient, and thus, more profitable. This is usually the case for two companies in the same business merging. Two steel companies merging would most likely achieve economies of scale, and thus, become more cost-efficient.
Other aspects where synergy can be created include capital optimization, debt capacity, tax benefits, and diversification.