Synergies
Definition
Synergies are the incremental value or earnings a combined company can generate beyond what the two standalone businesses would achieve. Cost synergies come from eliminating duplicate overhead, headcount, facilities, and procurement savings; revenue synergies come from cross-selling, expanded distribution, or pricing power.
Cost synergies are viewed as far more credible and achievable than revenue synergies, so bankers and investors typically credit them more heavily. In a merger model, synergies are added pre-tax to combined operating income (net of any costs to achieve them), then taxed, and flow through to pro forma EPS and accretion/dilution.
Synergies also justify control premiums: the maximum price an acquirer can rationally pay is the target's standalone (intrinsic) value plus the present value of synergies. Paying away more than the PV of synergies transfers all the deal value to the seller's shareholders.
Why interviewers ask
Interviewers test whether you can distinguish cost from revenue synergies, explain which are more credible, and tie synergies to how much premium an acquirer can afford. A classic follow-up: "How do synergies affect accretion/dilution?" or "Why might a deal that looks dilutive still make sense?"
Related terms
Interviews don't test definitions — they test recall under pressure.
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