What is Synergy?

Synergy is the cooperation of two or more substances to produce a combined result more significant than the sum of their individual effects. We can see synergy in nature. For example, animals gather as a group to survive attacks from other animals or plants growing close together, so the roots improve the soil quality.

Synergistic Value

The synergistic value of a business or asset arises from combining two or more assets to create a new asset with a higher value than the sum of the individual assets.

The Synergistic Value reflects the individual investor's expectation of the benefits derived from ownership, perception of risk, and mix of debt and equity to be used when investing. 

In the valuation world, a synergy arises in the case of a merger or acquisition. Suppose two companies had merged into one company. If the combined value of the two firms is higher than the pre-merger value of both firms combined - a synergistic value is created. 

For example, suppose Firm A and firm B had merged into one firm. Suppose also that before the merge, firm A's value was $100M, and the value of firm B was $50M. The value of the merged company will define if a synergistic value was created. If the merged firm has a value of $175M, there is a $25M (175- 150) synergy for this merger. No synergistic value was created if the value is only $125M.

Synergetic value can result from several sources. For example: 

Savings in the workforce costs. Suppose two firms have an HR department. After all, the union of the two companies can save on personnel costs in the human resources department. Instead of having two HR department managers - it will be enough to have one department manager.

Savings in marketing costs: Let's say that firm A is a technology company that has created a specific product suitable for the accounting market. The firm has developed a new product ideal for accountants. Suppose Firm B markets accounting software to accountants. Suppose firm A would like to save on its marketing costs for the accountants' market. In that case, it could purchase firm B, take advantage of the fact that firm B is already in the accountants' market, and thus save the many resources it needs to penetrate the accountants' market.

How do you calculate Synergic Value?

You can calculate the synergistic value by performing three valuations: The first is the value of the purchasing company before the purchase. The second is the value of the acquired company before the purchase. The third calculation is the value of the two companies together.
If the value of the merged company is greater than the sum of the values ​​of the acquiring company and the acquired company, a synergistic value is created.
And in signs - a synergistic value exists if the following equation holds:

V_A+B > V_A + V_B

Where:

V_A+B  is the value of the two companies together

V_A is the value of the purchasing company before the purchase

V_B is the value of the acquired company before the purchase.

Examples of Synergistic Value

In August 2022, Amazon purchased iRobot for $1.7 billion. If you thought why - then the purchase was not intended to vacuum up the dust in Amazon's warehouses but probably for a much deeper reason - synergistic value.

 A few days ago, iRobot published its quarterly results, which included: lower than expected sales to private consumers, and a significant decrease of almost 40% in revenues, due to the significant increase in competition. So with that - iRobot's financial performance is not the reason. The purchase of iRobot may give Amazon entry into the robotic vacuum cleaner market and a vast fleet of cameras already roaming the homes of iRobot customers. This information is worth a lot of money because it will allow Amazon to offer iRobot users the purchase of related products. It may not be what will happen - but this is an excellent example of synergistic value.

How does synergistic value affect building startups?

Synergy value can reduce the chance of startup bankruptcy and the chance of a successful exit. how? If we build a product that can integrate into another company - and create synergistic value for that company, then the chance of a successful exit will increase. We recommend thinking about this point the next time you build a startup.

Conclusion