Page 26 - Banking Finance October 2022

ARTICLE

sale of the other company's products. Revenue Synergy such as accounts and finance, tax, HR, administration,
- This can be described as the generation of much higher etc., duplication is avoided or logistics are improved
growth rate and turnover than the individual company's leading to quantum cost saving. Operating synergy
growth rates during independent operations. This comprises of both economies of scale and economies of
scope. Both these components of synergy act as a
includes the market power (brand awareness, increase
important determinant of shareholders wealth creation.
the share of market and attract more customers). The
Efficiency gain can be either from component of synergy
second thing to consider are complementary products-
or from improved managerial practices. Economies of
this leads to increase in sales. Another advantage is it
scale are realized by spreading fixed cost over increasing
reduces the competition.
production levels. Here scale is defined by fixed cost,
Tax Synergy - It involves merging a loss making
such as depreciation of equipment, etc. Utilization of
company with a profitable one so that the profitable
set of skills or an asset specific to production of a given
company can get tax benefits for writing off
or service to produce another product leads to
accumulated losses of the loss making company against
economies of scope. This happens when it is more cost
the profits of the profit making company. It is called as
effective to carry out production of multiple products
reverse merger. Losses can be set off by profits of the
in one firm than producing them in separate firms.
company and on the remaining amount of the profit
company the tax is paid and saved to the extent of
Demerits
setoff. When the entities are separate, indirect taxes
Poor Strategic fit - The two banks may have different
are paid twice, like sales tax, excise duty, service tax
strategies and objectives and they may conflict with
are paid at two levels. If these two companies are single
each other and as a result the M&A activity may fail.
unit then the taxes will be paid only once. So there can
be saving in taxes. Cultural and social differences - If two banks have a
wide differences in culture, then the synergy values can
Diversification - Company buying a firm which does not
be very elusive
belong to its existing line of business is termed as
diversification. Depending upon the business there could Incomplete and Inadequate due diligence - Due
be diversification of risk. This is proved in the capital diligence plays role of watch dog in mergers and
asset pricing model (CAPM), that more company are acquisition process. If the watch dog fails to do its job
added to portfolio it reduces the unsystematic risk, then it leads to some serious problems within the
therefore the whole business will be less risky as mergers and acquisition process.
compared to before. Diversification leads to risk
Poorly Managed Integration - The Integration of two
reduction. If there is economy slow down for some
banks requires a very high level of quality management,
reason the cash flow can be off set and this leads to
if this fails then as result M&A fails
continuous flow of cash, and for survival of business
continuous cash flow is required and this can be Overly Optimistic - If the acquiring bank is too optimistic
achieved through M&A. Benefit - reduces the risk. How
does it matter? This results in cost competitive, because
taxes ultimately form the part of the cost and this
reduces the cost and to create / enhance competitive
advantage- having edge over the other competitors

Technological synergy - Technological changes
encourages M&A activity. By using M&A activity the
firms can acquire new technology and prevent the new
and important technologies from slipping into the hands
of their competitors. Operational benefits - It involves
rationalizing the combined operations in such a manner
that through sharing of facilities such as warehouses,
transportation facilities, software and common services

26 | 2022 | OCTOBER | BANKING FINANCE