Synergies
Cost savings or extra revenue from combining businesses that neither could achieve alone. A buyer creates value only if its standalone value plus synergies exceeds the price it pays.
Where you will meet it
Synergies appears in 8 learning outcomes on the CFA syllabus. A few of them:
- Explain how goodwill is accounted for and disclosed
“Goodwill arises only in a business combination: in the simple case of buying all of a company, it is the consideration paid less the fair value of the identifiable net assets acquired (with a non-controlling interest or a previously held stake, those are added to the consideration), so it captures what cannot be separately identified, such as expected synergies and an assembled workforce.”
- Set out the different definitions of value and argue which one fits the valuation of a listed company best
“Investment value is the worth to one particular buyer, and exceeds market value when that buyer expects synergies.”
- Set out the kinds of corporate restructuring and why issuers undertake them
“Common motives include pursuing growth or synergies, gaining capabilities or scale, correcting perceived undervaluation such as a conglomerate discount, responding to activist pressure, sharpening strategic focus and improving returns or cutting costs.”
- Compare the ways a private investor can realise a holding and how each choice affects the value it achieves
“A trade sale to a strategic buyer gives a full cash exit, often at a premium that reflects synergies.”
Practise it
Practise synergies until it is automatic: questions that explain every wrong option.
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