A type of synergies that results from lowering the cost of capital by combining two or more companies. A company, with good growth or profit-making opportunities but is hampered by lack of capital, may buy another company (the target company) or merge with it so that it can have better access to capital. Typically, large companies, with wide financing resources, tend to acquire smaller companies that have spectacular niche opportunities. A possible rationale for a merger between such companies is that the target’s size and history make its cost of capital too high in a way that would erode most (or much) of the profitability.
January 19, 2023
