220 Part 2: Strategic Actions: Strategy Formulation
sometimes influence executives to pay a large premium which, in turn, may result in tak-
ing on too much debt to acquire a target. Executives need to be aware of these possibilities
and challenge themselves to engage in rational decision making only when dealing with
an acquisition strategy.7-3d Inability to Achieve Synergy
Derived from synergos, a Greek word that means “working together,” synergy exists when
the value created by units working together exceeds the value that those units could cre-
ate working independently (see Chapter 6). That is, synergy exists when assets are worth
more when used in conjunction with each other than when they are used separately.
For shareholders, synergy generates gains in their wealth that they could not duplicate
or exceed through their own portfolio diversification decisions.^61 Synergy is created by
the efficiencies derived from economies of scale and economies of scope and by sharing
resources (e.g., human capital and knowledge) across the businesses in the newly created
firm’s portfolio.^62
A firm develops a competitive advantage through an acquisition strategy only when
a transaction generates private synergy. Private synergy is created when combining and
integrating the acquiring and acquired firms’ assets yield capabilities and core competen-
cies that could not be developed by combining and integrating either firm’s assets with
another company. Private synergy is possible when firms’ assets are complementary in
unique ways; that is, the unique type of asset complementarity is not always possible
simply by combining two companies’ sets of assets with each other.^63 Although difficult to
create, the attractiveness of private synergy is that because of its uniqueness, it is difficult
for competitors to understand and imitate, meaning that a competitive advantage results
for the firms able to create it.
It is possible that Southwest Airlines’ acquisition of AirTran has created private syn-
ergy. Among other outcomes, this acquisition added 21 cities to Southwest’s network;
7 of these are international locations. Previous to the acquisition, Southwest serviced
only U.S. cities. In commenting about the results of this transaction, an observer said
that “Southwest has done a commendable job integrating AirTran. Southwest smoothly
absorbed AirTran’s Atlanta operations, making them similar to the rest of its focus cities,
rather than remaining a hub.”^64 Very importantly, as a firm using the cost leadership
strategy, Southwest’s integrated cost structure still allows it to have lower costs than its
rivals, including JetBlue. The lowest cost position is the firm’s competitive advantage.
Early financial results are also impressive in that, following the acquisition, Southwest’s
profit grew from $178 million in 2011 to $421 million in 2012, $754 million in 2013, and
$946 million in 2014. Thus, the evidence suggests that the acquiring firm, Southwest, and
the acquired firm, AirTran, were able to create private synergy by combing the two firms.
A firm’s ability to account for costs that are necessary to create anticipated revenue
and cost-based synergies affects its efforts to create private synergy. Firms experience
several expenses when seeking to create private synergy through acquisitions. Called
transaction costs, these expenses are incurred when firms use acquisition strategies to
create synergy.^65 Transaction costs may be direct or indirect. Direct costs include legal
fees and charges from investment bankers who complete due diligence for the acquiring
firm. Indirect costs include managerial time to evaluate target firms and then to complete
negotiations, as well as the loss of key managers and employees following an acquisition.^66
After acquiring Canadian-based Wheels Group Inc., Radiant Logistics’ earnings were
affected by short-term, nonrecurring transaction costs associated with the acquisition. As
a mid-size freight forwarder based in the United States, Radiant acquired Wheels in order
to extend its “geographic reach and customer bases by consolidating operators in a frag-
mented market.”^67 Company officials expected the newly formed firm to quickly return