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ACCA Strategic Professional · Advanced Financial Management · Valuation for acquisitions and mergers

Which of the following is an example of financial synergy, rather than operating synergy, in an acquisition?

A lower combined cost of capital through greater debt capacity and diversified cash flows is financial synergy. Cost eliminations, cross-selling and economies of scale come from operations, so they are operating synergies rather than effects on financing.

  1. AA reduction in the combined cost of capital because the larger firm has lower risk through diversification of cash flows and greater debt capacityCorrect
  2. BElimination of duplicated head office functions in the combined group
  3. CCross-selling products through the acquirer's distribution network
  4. DSpreading fixed production costs over greater volumes

Explanation

Financial synergy arises from capital structure and cost of capital effects such as increased debt capacity or lower financing costs. The other options are cost savings or revenue enhancements, which are operating synergies.

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