Many synergies are income statements energies and we start with revenue synergies. This is where two companies get together and it involves selling products to your merger partners' customers.

Unfortunately with revenue synergies, they can be tricky to quantify and even trickier to achieve.

Cannibalization is often underestimated a good example of this was the merger of Daimler and Chrysler.

Instead of being able to sell a Daimler to a Daimler customer and then sell a Chrysler car to them as well. We found that customers decided to just forego one of the cars and buy the other one instead meaning the combined Company still just sold one car to a customer.

How would we put this into our model? Well, it would be a simple addition to sales at the same margin.

So EBIT margin EBITDA margin for instance as the existing businesses' products.

Another income statement Synergy we often see is COGS cost of goods sold. This happens mostly for deals in the same product category and often involves horizontal mergers or acquisitions. A horizontal merger is where you get together with another company that's at the same stage of the value chain. For instance a car manufacturer buying another car manufacturer.

SG&A synergies or selling general and administrative expenses energies. These can happen for any deal but particularly happen for vertical mergers or acquisitions. A vertical merger is when you get together with another company that said a different stage in the value chain for instance a car manufacturer buying one of its suppliers.

How might we incorporate this into one of our models? Well, we would assume that the cost savings would be as a percentage of target company revenue or the combined revenue after getting together with the other company.

As results of your costs reducing your margins would improve it's important to note here that even though we do it as a percentage of revenue. It's not revenue synergies.

It's not going to boost the revenues of either of your companies instead. It's still a cost reduction. It's just our assumption to get to a monetary figure is as a percentage of revenue.

Now how much might we assume for synergies? Well this very much depends on the industry and the deal and the companies involved.

However, you might see 5 to 10% of target sales or 3 to 5% of combined sales, but this is very much dependent on the deal.

Well, we often see COGS and SG&A synergies in models and sometimes revenue synergies. There are many other types of synergies that can occur.

First one here is tax energies, this is when acquiring a target in a low tax jurisdiction.

What does this work? Well when acquirers are able to channel some parts of their business over to the target.

This increases the profits taxed at a lower tax rate.

An example of tax synergies is ABB buying Baldor Electrics.

ABB had lots of past losses Which can normally be carried forward to reduce your future tax Unfortunately, they had no chance of using them within the allotted time frame.

Buying Baldor allowed them to use up the losses.

There are strict restrictions on using tax losses in acquisitions, but they made it work and were willing to pay a high premium for the target to utilize their losses.

We've also got financing synergies a company with low leverage is buying a company with high leverage.

Overall this decreases the whack and increases your EV or Enterprise Value.

There are also other non-income statement synergies that may not immediately affect earnings per share or EPS.

Operating working capital OWC synergies are a great example.

These effect balance sheet items such as inventory and receivables.

For example companies combine to better manage their inventory and good examples of this are retailers or sports apparel companies.

Other non-income statement synergies include capital expenditure or Capex synergies.

This is where combining businesses leads to less need for capex. These reduce outflows on the cash flow statements and result in lower balance sheet assets. This can be particularly useful if inflation is high and capex energies are even more desirable where companies can avoid cash outflows for items that are increasingly expensive.

So we've seen many different types of synergies and financial markets though, they can tend to focus on earnings per share as a performance metric for companies.

But there are many other synergies that can drive a deal and may not immediately affect EPS.

The focus markets on EPS can thus cause some companies to stay private? Where investors aren't constantly looking for EPS impacts of deals.

Therefore even though many Financial models are going to focus on cost energies and how it affects EPS It's always important to make sure that you're including all different types of synergies and how they impact the deal.