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The ability of a combination of two firms to be more profitable than the two firms
individually.
In this companies can create great shareholders value than if they are operated
separately.
• Operating synergy
• Financial synergy
Operating synergy
Operating synergy is improved by Economies of scale and Economies of
scope .
Economies of scale :
it means reduction of average cost with increase In volume or
production. Because of fixed overhead expenses such as steel
,pharmaceutical, chemical and aircraft manufacturing .
In that merging of company in same line of business such as horizontal
Merger it eliminates duplication and concentrate a great volume of activity
in a available facility .
In vertical mergers com expands forward towards the customer or
backward towards the source of raw material (suppliers). By acquiring
com control over the distribution and purchasing bring in economies of
scale .
Cont.…..
Economies of scope: