Cost synergies
M&A / Merger ModelSavings from removing duplication between two combined businesses.
Cost synergies are the credible half of the synergy case: one head office instead of two, one finance function, consolidated procurement with better terms, closed overlapping sites.
They deserve more weight than revenue synergies because they are within the acquirer's control. Closing a duplicate office is a decision, not a hope, and it can be planned before completion and tracked afterwards.
They must be valued properly to mean anything: taxed like any other profit, capitalised at the cost of capital if permanent, and reduced by the one off integration costs required to achieve them. Redundancies, systems migration and advisers are real cash out.
The test that matters is whether their value exceeds the premium paid. The premium is certain and immediate; the synergies are uncertain and in the future, and a deal creates value only when the second is worth more than the first.
Worked example
50 a year of duplicated overhead removed, at a 25% tax rate, is 37.5 after tax.
A permanent saving is a perpetuity, so at an 8% cost of capital it is worth 469. Integration costs of 80 bring the net synergy value to 389.
Against a 250 premium paid, the deal creates 139. Run backwards, recovering the premium plus integration cost needs about 26 a year of permanent after tax savings just to break even.