Definition - What does Financial Synergy mean?
Financial synergy is when the combination of two firms together results in greater value than if they were to operate separately. Financial synergies are most often evaluated in the context of mergers and acquisitions. These type of synergies relate to improvement in the financial metric of a combined business such as revenue, debt capacity, cost of capital, profitability, etc.
Synergies related to operational metrics are referred to as operating synergies.
Divestopedia explains Financial Synergy
Examples of positive financial synergies include:
- Increased revenues through a larger customer base
- Lower costs through streamlined operations
- Talent and technology harmonies
In addition, financial synergies can result in the following benefits post acquisition:
- Increased debt capacity
- Greater cash flows
- Lower Cost of Capital
- Tax Benefits
Although financial synergies are usually experienced by strategic buyers, a financial buyer may be willing to pay a premium for the acquisition of a mid-market business due to the benefits associated with a more efficient capital structure and lower cost of financing.