What are synergies in M&A? Types of synergies and examples

Synergy is often the main driver behind merger and acquisition transactions. However, according to Deloitte’s survey, only 24% of firms typically achieve at least 80% of their synergy targets. This highlights the challenge of achieving synergies in M&A that many dealmakers face.

In this article, we delve into what M&A synergy is, its types, best practices, and examples to equip you with the required knowledge to easily navigate the complexities of synergies in the M&A process.

What are M&A synergies?

M&A synergy appears when the combined value, resources, market presence, and performance of two companies are greater than the sum of their separate parts. In other words, synergies in M&A are the benefits that are achieved by combining two companies into one (or when one company acquires another).

To better illustrate the synergy concept, consider an example: Company A is valued at $250 million, while Company B is valued at $150 million. After the merger, the value of the companies combined is $500 million (rather than $400 million). It means that a merger created a synergy of $100 million. 

While synergies often bring positive outcomes, it is essential to acknowledge that not all mergers result in beneficial effects. Negative synergies can emerge when the integration process leads to reduced efficiency, diminished performance, or a decrease in overall value compared to the companies operating independently. Factors contributing to negative synergies commonly include cultural clashes, misaligned business strategies, poor integration management, redundancies causing operational conflicts, and challenges in combining technological systems.

In the following sections, we will explore different types of M&A synergies in greater detail.

Types of M&A synergies

Typically, there are three main types of synergies when companies merge: cost synergies, incremental revenue synergies, and financial synergies. Each of these synergy categories contributes distinct strategic financial and tax benefits and involves unique challenges, timelines, and measurement methods:

	Cost synergies	Revenue synergies	Financial synergies
Key objectives	Cost reduction and operational efficiency	Increased revenue streams through market opportunities	Improved financial strength and capital efficiency
Typical sources	🔹 Eliminating redundant workforce and headcount reduction 🔹 Reducing external professional services fees 🔹 Consolidation of redundant facilities (offices, warehouses) 🔹 Negotiating better leverage over suppliers (extended payment terms) 🔹 Optimizing internal processes and operational best-practices	🔹 Increased market share and enhanced brand recognition 🔹 Cross-selling and product bundling opportunities 🔹 Geographic market expansion and new distribution channels 🔹 Pricing power due to reduced competition 🔹 Access to new customer segments and markets	🔹 Enhanced debt capacity and favorable borrowing terms 🔹 Tax optimization through leveraging operating losses and creditsImproved cash flow and liquidity 🔹 Better capital structure and credit rating 🔹 Risk diversification across markets and products
Deal complexity	🔹 Medium (typically predictable and quantifiable but requires detailed execution planning)	🔹 High (more difficult and uncertain; heavily reliant on market conditions and strategic alignment)	🔹 Medium to high (requires financial planning, restructuring, and careful risk assessment)
Timeline	🔹 Short to medium-term (1-2 years post-merger)	🔹 Medium to long-term (2-4 years post-merger)	🔹 Medium-term (1-3 years post-merger)
Common challenges	🔹 Employee morale 🔹 Operational disruptions 🔹 Integration complexity	🔹 Overestimation 🔹 Market cannibalization 🔹 Execution misalignment	🔹 Regulatory barriers 🔹 Complex tax jurisdictions 🔹 Credit rating impacts
Measurement and verification	🔹 Quantitative metrics (cost reports, budgets, financial statements)	🔹 Revenue growth tracking 🔹 Customer retention rates 🔹 Market share analysis	🔹 Credit rating improvements 🔹 Reduced interest rates 🔹 Optimized tax rates

Now let’s delve deeper into each synergy type, exploring their mechanisms, practical considerations, and recent examples from real-world mergers and acquisitions.

Cost synergies

Cost synergies refer to cost reductions or savings achieved by merging two companies, typically through efficiencies, optimization, and the elimination of redundancies. Common approaches to achieving cost synergies include:

• Supply chain optimization (reducing transportation costs, inventory levels)
• Consolidation of sales and marketing departments
• Integration and streamlining of IT systems
• Workforce optimization by eliminating redundant roles
• Consolidation of intellectual property (IP) and patents

Example: Cost synergies happen when a manufacturing firm merges with a logistics company; in this scenario, consolidating warehouses and distribution centers can significantly reduce combined operating expenses.

Accurately estimating these synergies requires detailed pre-merger benchmarking and rigorous project management during integration. While focusing on cost savings, companies must carefully balance reductions with maintaining employee morale and avoiding negative impacts on operations and customer relationships.

A recent real-life case illustrating cost synergies is the 2019 merger of Bristol-Myers Squibb and Celgene, which realized approximately $2.5 billion in annual cost savings by 2022 through combined R&D, streamlined supply chains, and consolidated administrative functions.

Revenue synergies

Revenue synergies involve generating additional revenues from merging two companies, enabling expanded sales opportunities or new offerings not feasible independently. Revenue synergies typically arise through:

• Cross-selling products or services to each other’s customer base
• Market expansion via shared distribution channels and geographic reach
• Developing new offerings leveraging shared intellectual property

Example: Revenue synergies happen when a software provider acquires a complementary service provider that can significantly increase revenue through cross-selling complementary products.

However, revenue synergies tend to be uncertain and require comprehensive market analysis and careful validation to avoid overly optimistic forecasts. Successful realization typically depends on effectively integrating sales teams, aligning incentives, and implementing coherent branding strategies. Companies must also be mindful of potential market cannibalization when launching new or combined products.

Salesforce’s 2021 acquisition of Slack exemplifies revenue synergies, anticipating approximately $1.5 billion in additional annual revenue by 2026 through integrated product offerings and expanded cross-selling opportunities.

Financial synergies

Financial synergies encompass a competitive advantage gained from merging two separate entities, enhancing their overall financial strength and flexibility. Key drivers of financial synergies include:

• Improved capital structure and credit ratings
• Optimized tax efficiencies (leveraging net operating losses, global restructuring)
• Enhanced liquidity and cash flows, increasing investment capabilities
• Diversified risk exposure across products, markets, or regions

Example: A merger between two mid-sized private equity firms can create a larger, financially stronger entity, capable of securing favorable loan terms and reducing borrowing costs. Realizing financial synergies requires careful evaluation of combined debt profiles, refinancing strategies, and potential credit rating changes. Additionally, detailed tax planning and analysis are crucial, especially when considering complex international structures.

Broadcom’s 2022 acquisition of VMware significantly strengthened Broadcom’s capital structure, enhanced financial flexibility, optimized debt management, and achieved tax efficiencies, ultimately delivering improved shareholder value.

Note: Cost, revenue, and financial synergies can also be categorized into hard and soft. Hard synergies typically refer to cost savings, while soft synergies refer to revenue increases and financial synergies.

How to estimate an M&A synergy?

Estimating the synergies in a merger or acquisition is crucial for determining the potential value creation from the deal. 

Synergy estimation can be done through various models and methods. Let’s describe the most common ones:

Discounted cash flow (DCF)

This method estimates the present value of future cash flows generated by the merged entity. Synergies are incorporated by adjusting the cash flow projections to reflect the potential financial benefit from the merger or acquisition.

Calculation example & formula:

Enterprise Value (EV)=t=1∑n​(1+WACC)tFCFt​​

• FCFt: Free cash flows adjusted to include synergy effects at year tt
• WACC: Weighted Average Cost of Capital, reflecting the combined entity’s capital structure
• _t: Period (usually in years)

If projected annual cash flows (with synergies included) for three years post-merger are $20M, $25M, and $30M respectively, and the combined company’s WACC is 8%, the calculation is:

EV=(1+0.08)120​+(1+0.08)225​+(1+0.08)330​

The resulting value represents the present value of all future synergistic cash flows, informing how much the merged company is potentially worth due to the synergies alone.

Multiples method

The multiples approach refers to the utilization of market-driven multiples (like EBITDA, revenue, or earnings) with expected synergies, combining them into the valuation of the target company.

Calculation example & formula:

Enterprise Value=(EBITDATarget​+EBITDASynergies​)×EBITDA Multiple

Example:

The target company’s current EBITDA is $15M, anticipated EBITDA synergies are $3M, and similar recent deals show an EBITDA multiple of 8x. The calculation would be:

EV=(15+3)×8=144M

The final number indicates the market-based valuation of the company, including the impact of estimated synergies. The key is accurately estimating EBITDA synergies to avoid overvaluation.

Company comparable analysis (CCA)

This method involves comparing the target company with similar companies that have undergone similar mergers or acquisitions. Synergies are estimated based on the valuation multiples (such as Price-to-earnings or Price-to-sales) of comparable transactions.

Calculation example & formula:

Valuation (including synergies)=Comparable Multiple×Adjusted Financial Metric (Post-Synergy)

If comparable M&A transactions reflect an average P/E multiple of 12x and post-merger expected net income (with synergies) is $10M, the estimated valuation would be:

Valuation=12×10=120M

The valuation relies heavily on selecting appropriate comparable companies and accurately adjusting the target’s financial metrics post-merger to reflect realistic synergy realization.

Precedent transactions analysis (PTA)

PTA involves analyzing past M&A transactions in the same industry. Synergies are estimated based on the premiums paid in previous deals and the resulting value creation.

Calculation example & formula:

Transaction Premium (%)=Pre-Deal Market ValueTransaction Price−Pre-Deal Market Value​×100

If historically similar transactions show an average premium of 25%, and the current target’s pre-deal market value is $80M, the synergy-influenced transaction valuation would be:

Synergy-Adjusted Valuation=80M×(1+0.25)=100M

The calculated premium directly indicates market expectations around synergy-driven value creation, guiding reasonable expectations for current synergy valuations.

Sum-of-the-parts (SOTP) analysis

This method involves valuing each business unit or division of the combined entity separately and then summing them up. Synergies are estimated by identifying overlaps or efficiencies that can be achieved by combining the different parts.

Calculation example & formula:

Total Combined Value=∑(Value of Individual Units)+Synergies from Integration

Company A’s standalone valuation is $60M, and Company B’s standalone valuation is $40M. Expected integration synergies (cost savings, new market entries, shared capabilities) total $15M. Thus:

Total Combined Value=60M+40M+15M=115M

SOTP clearly illustrates how value is created beyond simple aggregation by highlighting specific, measurable synergies across various business units.

💡 Additional read: If you want to learn more about common business valuation methods, explore our dedicated article.

Risks and negative synergies

Despite meticulous planning, mergers and acquisitions (M&A) often fail to achieve their anticipated synergies, leading to negative synergies where the new entity’s value is less than the sum of its parts. Recent studies indicate that approximately 70–75% of M&A deals do not succeed as planned. ​

A recent example is the attempted merger between Albertsons and Kroger, two major U.S. grocery chains. Announced in October 2022, the $24.6 billion deal aimed to create one of the largest supermarket entities in the country. However, the merger faced significant regulatory hurdles due to antitrust concerns. In December 2024, a federal judge blocked the merger, citing potential harm to competition and consumers. Subsequently, Albertsons terminated the agreement and filed a lawsuit against Kroger, alleging breach of contract and seeking a $600 million termination fee along with additional damages. 

As such, several factors can impede the realization of expected synergies in M&A transactions:

• Overestimation of synergies: Companies may overestimate potential benefits during the planning phase, leading to unrealistic expectations and subsequent disappointments when those benefits fail to materialize.​
• Regulatory challenges: Mergers often face scrutiny from regulatory bodies concerned about reduced competition, which can delay or derail deals, as seen in the Albertsons-Kroger case.​
• Cultural clashes: Differences in corporate cultures can lead to conflicts and hinder integration efforts, negatively impacting employee morale and productivity.​
• Integration difficulties: Combining operations, systems, and processes can be complex and time-consuming, leading to disruptions that affect overall performance.​
• Loss of key personnel: Uncertainty during mergers can result in the departure of essential employees, leading to a loss of critical knowledge and skills.​

Addressing these risks requires thorough due diligence, realistic synergy assessments, effective integration planning, and proactive change management to enhance the likelihood of M&A success.​

Best practices for successful M&A synergy

Let’s define the key aspects to consider in the process of achieving anticipated synergies:

• Thorough due diligence. Conduct comprehensive due diligence to assess the compatibility, strengths, weaknesses, and potential synergies between the two entities. Understand each other’s cultures, operations, financials, and market positions. Identify potential risks and opportunities at the early stages of the M&A process to ensure effective decision-making.
• Clear integration strategy. To succeed, you need to have a clear integration strategy that takes all potential risks into account. Define integration priorities, timelines, and KPIs. Assign dedicated integration teams with clear roles and responsibilities to ensure effective execution.
• Transparent communication and change management. Communicate openly with employees, customers, suppliers, and other stakeholders throughout the integration process. You should also be ready to proactively address concerns, manage expectations, and emphasize the shared vision and benefits of the merger or acquisition. Additionally, implement robust change management processes to facilitate smooth transitions and minimize disruption.
• Cultural alignment. To prevent cultural clashes, you need to recognize and address cultural differences between the merging entities at the early stages. For this, invest in cultural integration initiatives, such as leadership workshops, team-building exercises, and cross-functional projects, to build trust, respect, and a sense of belonging.
• Continuous monitoring and optimization. Continuously monitor integration progress and synergy realization against predefined metrics and milestones. Regularly assess the effectiveness of integration efforts and make necessary adjustments to optimize synergies and mitigate risks.

💡Additional read: Explore more about the ways of organizing post-merger integrations successfully in our dedicated article.

Examples of successful M&A synergies

Now, let’s briefly review the top three examples of mergers and acquisitions where certain types of synergies were achieved.

1. ExxonMobil’s acquisition of Pioneer Natural Resources

In 2023, ExxonMobil acquired Pioneer Natural Resources for approximately $60 billion, marking one of the largest deals in the energy sector. This strategic move significantly expanded ExxonMobil’s footprint in the Midland and Permian Basins, effectively doubling its presence in these prolific oil-producing regions. The merger aimed to achieve substantial operational synergies, including:

• Enhanced operational efficiency: By consolidating operations, ExxonMobil anticipated reducing drilling and production costs, leveraging shared infrastructure, and optimizing resource management.​
• Increased production capacity: The new entity is expected to boost oil and gas output, capitalizing on Pioneer’s extensive assets and ExxonMobil’s technological expertise.​
• Financial performance: The merger was projected to deliver significant cost savings and revenue enhancements, contributing to improved financial metrics and shareholder value.​

2. Pfizer’s acquisition of Seagen

In 2023, Pfizer acquired Seagen, a leading biotechnology company specializing in targeted cancer therapies, for $43 billion. This acquisition bolstered Pfizer’s oncology portfolio and demonstrated a commitment to innovative cancer treatments. The synergies realized included:​

• Expanded oncology pipeline: Integrating Seagen’s advanced therapies with Pfizer’s existing cancer treatment portfolio enhanced the new entity’s ability to address various cancer types more effectively.​
• Research and Development (R&D) synergies: The merger facilitated collaborative research and development efforts, accelerating the development of novel therapies and improving time-to-market for new drugs.​
• Market reach and distribution: Pfizer’s global distribution network enabled broader access to Seagen’s therapies, increasing market penetration and patient reach.

3. Amazon and Whole Foods

Amazon’s acquisition of Whole Foods took place in 2017. The deal was estimated at $13.7 billion and allowed Amazon to enter the grocery market. 

With this deal companies achieved the following:

• The customer experience at Whole Foods was enhanced thanks to leveraging the e-commerce capabilities of Amazon, including online food ordering and delivery.
• The online presence of Whole Foods has also improved thanks to using Amazon technologies and digital platforms.
• Amazon got a chance to be physically present in the Whole Foods stores, which also helped to access its loyal customer base.

4. Procter & Gamble and Gillette

Procter & Gamble acquired Gillette for $57 billion in 2005. Warren Buffett, once one of the largest Gillette investors called this transaction a “dream deal”. 

Through this merger, companies achieved the following:

• Procter & Gamble and Gillette combined their customer bases and distribution channels, which enabled cross-selling of their products.
• Companies exchanged their talent and expertise, which allowed them to improve their performance.
• A merger enabled companies to expand their international presence.

5. Fairfax and Nine Entertainment

Nine Entertainment Co. acquired Fairfax Media in 2018 for $4 billion. This deal resulted in significant synergy between the two media entities, creating a powerful and diversified media conglomerate in the Australian market. 

Through this transaction, companies achieved the following:

• Nine’s strengths in television broadcasting with Fairfax’s expertise in print and digital media allowed the combined entity to offer a broader range of content across multiple platforms.
• Fairfax’s strong digital presence, including websites and online publications, complemented Nine’s digital strategy, which enabled leverage of Fairfax’s digital expertise to enhance its online offerings.
• Nine got an opportunity to promote its television programs through Fairfax’s newspapers and digital platforms, while Fairfax could leverage Nine’s popular shows to attract subscribers and viewers to its content offerings.

Key takeaways

• Synergies in M&A refer to the concept when the combined value, resources, market presence, and performance of two companies are greater than the sum of their separate parts.
• There are three main types of synergies in M&A: cost synergies, revenue synergies, and financial synergies.
• Cost synergies occur when a merger results in certain cost reductions or cost savings.
• Revenue synergies result in increased revenue for the combined entity as a result of the merger.
• Financial synergies refer to the potential increase in value that results from the combination of two companies, achieved primarily through improved financial performance or efficiency.