What Does Tangible Operating Synergies Mean?
Tangible operating synergies refer to performance advantages of multi-business firms that lead to an increase in efficiency and profitable growth in a measurable way, such as be reducing costs and increaing revenue. Synergies increase the quantum of aggregate prospective free cash flows, reduce the risk of cash flows, and create growth opportunity and strategic advantages. For the purpose of quantification, various sources of synergy can be segregated into tangible operating synergies, intangible operating synergies, and financial synergies, but their effect is cumulative.
Divestopedia Explains Tangible Operating Synergies
Tangible operating synergies are those synergies that are relevant to the operating activities of a firm. These can be easily isolated or identified and are measured in terms of increased revenue earning opportunities and reduction in cost. For example, reduction in head count, reduced marketing costs, and cross-selling of products are all classified as tangible operating synergies.
Operating synergies result in lower costs with higher utilization of facilities and personnel, wider spread of overhead costs, and the ability to reap the advantages of common learning curves. The quantification of tangible operating synergies involves the estimation of incremental discretionary cash flows, which are expected to arise from the realization of synergies in terms of:
- Cost savings
- Changes in operating expenses and working capital requirement
- Incremental revenue opportunities
- Net of associated costs
- Income tax effect
However, while quantifying operating synergies, consideration should be given to the risk inherent in their realization.