What is Cost Synergy?

Cost synergy is a term that is often utilized in association with the merger of two or more companies. As it relates to mergers, cost synergy has to do with the difference in operating costs once the merger is complete. The idea is to determine the amount of savings that the newly merged entity enjoys by combining operations at various facilities, and streamlining operational processes as a means of more efficiently using the resources of the former separate entities. This term is often used to call attention to a significant amount of savings in operational costs, while at the same time putting the most positive spin on the fact that the merger will result in the elimination of jobs and possibly the closing of some facilities.

Cost synergy is typically achieved by identifying the most successful and efficient processes of each company involved in the merger, and finding ways to capitalize on those processes. This generally means that some functions that were once handled in one location owned by one of the firms may be moved to a location inherited from one of the other firms. Sometimes known as streamlining, the idea is to increase the overall efficiency of the production process, making it possible to reduce costs and increase the newly created company’s bottom line.

One of the effects of this type of streamlining to generate a positive cost synergy is that the combined work force of the merging companies is often reduced. This may come about due to the closing of facilities that basically perform the same functions, and centralizing those functions at one location. At other times, the adoption of new procedures may mean that certain tasks can be performed with less labor, making it necessary to eliminate some job positions. Changes of this type not only affect laborers, but can also mean reductions in the number of supervisors and other types of mid-level managers.

It is not unusual for terms like cost synergy to be used in press releases or even internal communications when there are plans to streamline some aspect of the business operation. By attempting to focus more on the positive aspect of improving the financial stability of the company, and less on the fact that jobs are being eliminated, the company presents the changes as ultimately in the best interests of the long-term financial stability of the company. There is usually some implication that all employees who remain with the company will enjoy a higher level of job security, at least until the next round of job cuts takes place.