What is Synergistic Effect?
Synergistic effect is a dynamic systems concept describing the result of a joint or cooperative effort (Greek syn- “together” + ergy “work”) that exceeds the simple addition of individual acts. Cited human examples include assembly line specialization, symphonic orchestration, choreography, and team sports. Perhaps the most striking instances of synergy involve remarkable, unforeseen outcomes, such as from the chemical binding of hydrogen and oxygen (gases supporting combustion) into water that douses fire!
In the business world, much merger and acquisition (M&A) activity claims to exploit synergistic effects to justify high-priced deals. Such M&A math suggests that paying up 1.5+1.5 for 1+1 will yield a proposed 4.
Deal-making history, however, has produced many twos instead of fours. Why?
Synergistic Effect Example
Synergistic business opportunities can be difficult to identify and execute. Mergers often involve changing an acquired partner in ways that make sense on paper but prove elusive. Change is hard work, requires mutual “buy in” and too often disrupts the positive attributes of the merged firms.
One of the best corporate synergies is Warren Buffett’s Berkshire Hathaway (BH). Buffett has noted in his annual letters that executives tend to be better operators than investors. In other words, business owners know how to run their high-return shops but fail in investing all their business profits for high returns, which is Buffett’s strong point. The BH synergy proposition is simply this: a partnership of great operators, poor investors with a proven capital allocator. Here, the change is major, but with minimal effort or disruption in either partner. Business owners continue to run their operations that they love, and they hand over the cash profits for Buffett to invest – a productive activity he enjoys.
Notice the BH synergistic formula: expert partners take over each other’s weaknesses! Great operators no longer worry about investing, and a great investor like Buffett can focus on allocating profits without concern for the operations. In arithmetic form, executives are +2 operators, -1 investors for a net +1. Buffett is a non-operator -1, investor +2 for a net +1. Simply adding the net effects yields only 1+1 = 2. Synergy math, however, merges a +2 operator (no investment) with a +2 investor (worry-free operation) for 2-1 + -1+2 = 2-0 + 0+2 = 4. Here, net 1+1 = 4!! Specialized strengths precisely counter matching flaws.
A marriage analogy seems helpful. Family operations often require housecleaning as well as budgeting. What if one spouse enjoys cleaning but is financially confused? An ideal partner would love keeping the books while detesting the broom. Here, the alliance results in a sparkling home and a fat bank account, and the only change is that each spouse quits doing an unpleasant task – an easy, enjoyable adjustment!
Marriages can prove unsuccessful when a spouse hopes the other will develop a new attribute, and many corporate mergers assume the same. The best alliances actually allow the partner to drop an activity that the other can perform well. Synergistic effect does not result from simply upscaling, cloning or competing. Synergy best occurs when a required strength precisely counters a matching weakness in a necessary task.
Potential synergy beyond the BH executive operating-investing function might include alliances among businesses in the same field that pair superior R&D and weak marketing in one with another offering an excellent manufacturing process and sales force. Other significant plus-minus business matchups may be identified where objectivity and humility candidly prevail over exaggeration and ‘turf wars’ in the analysis.