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CS Professional · Strategic Management and Corporate Finance · Managing the Multi-Business Firm and Analyzing Strategic Edge

A group lists four benefits of combining two subsidiaries. Which one is an example of operating (rather than financial) synergy arising from sharing activities?

Using one common distribution network for both subsidiaries' products is operating synergy because it comes from sharing a value-chain activity and gaining scale economies. Lower borrowing cost, tax loss set-off and greater debt capacity are financial synergies.

  1. ALower borrowing cost because the combined entity has a better credit profile
  2. BTax saving from setting off one entity's losses against the other's profit
  3. CUsing one common distribution network for the products of both subsidiariesCorrect
  4. DHigher debt capacity from imperfectly correlated cash flows

Explanation

Operating synergy comes from sharing activities such as distribution, R&D or manufacturing, giving economies of scale or scope. The other three are financial synergies relating to cost of capital, taxation and debt capacity.

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