Quick definition: An intended financial consequence of a deal, in which the added value to the buyer is greater than merely the additional revenue or earnings stream of the acquired company.
When one company buys another, the buyer will not only enjoy the revenues it is producing plus the revenues its new asset is producing, but also the revenue or cost synergies at play.
Company ‘X’ buys company ‘Y.’ Company X is expected to see revenue of $5 billion in the next year and Y is expected to see revenue of $1 billion. Revenue for the next year could be at least $6 billion, but there is a synergy. Let’s say combining X and Y’s products in a bundle for customers creates an experience that encourages the customer to more than just X product's price plus Y’s. Combined company’s revenue stream will be greater than $6 billion.
Another synergy? Cost synergies. These often come when one company buys another in the same industry. If that happens, the buyer can remove duplicate expense items, or departments, in the company it is buying because the buyer already has those departments. That is a positive for the company’s profit margin. If the cost synergies are strong enough and aren’t outweighed by other factors, the earnings stream can increase by a larger percentage than the revenue stream will.
Uber (UBER) - Get Report bought Postmates in July. Uber’s Uber Eats revenue was expected in July to hit around $2.5 billion for all of 2020. Postmates’ revenue had been running at an annual rate of around $1 billion. But revenue could be higher than $3.5 billion, since Uber will be taking meaningfully more market share in food delivery and therefore reducing the number of delivery suppliers in the market. Uber could charge a higher price for delivery which would add even more — so long as consumers like the experience they are getting.
Another deal synergy: Nvidia (NVDA) - Get Report just bought Arm holdings and beyond the additive revenue from Arm, Nvidia can combine its technology assets with Arm’s to create cutting edge data center chips that can take market share.