firmsisfar morelikely tocreateanoligopolywith pricing
power.
1
3.Combinationofdifferentfunctionalstrengths,aswouldbe
thecasewhenafirmwithstrongmarketingskillsacquiresa
firmwithagoodproductline.Thiscanapplytowidevariety
of mergers since functional strengths can be transferable
across businesses.
4.Highergrowthinneworexistingmarkets,arisingfromthe
combinationof thetwofirms. Thiswould be thecase,for
instance, whena U.S. consumer productsfirm acquiresan
emerging market firm with an established distribution
networkandbrandnamerecognition,andusesthesestrengths
to increase sales of both firms’ products.
Operatingsynergiescanaffectmargins,returns,andgrowth,
and through these the value of the firms involved in the
merger or acquisition.
Financial Synergy
With financial synergies, thepayoff cantake the form of
highercashflows,alowercostofcapital(discountrate),or
both. Included in financial synergies are the following:
- Acombinationofa firmwithexcess cash,orcash
slack(andlimitedproject opportunities)anda firm
withhigh-returnprojects(andlimitedcash)canyield
apayoffin termsofhighervalueforthecombined
firm.Theincreaseinvaluecomesfromtheprojects
that can be undertaken with the excess cash that