2. Meaning of Synergy
The value of a combined firm is greater than
the value of sum of individual firms.
1 + 1 > 2
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3. Synergy Value
• It is the excess of the merged value over the sum of individual
firms.
• It is the ability of a business combination to be more
profitable than the sum of the profits of individual firms
• Acquiring companies look at target firm for synergy value.
• Acquiring firm also considers expenses while acquiring the
target firm.
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4. Synergy Value Equation
EP)PV(PVPVVS TBAAA
incurredExpensesE
paidPremiumP
firmTargetofValuePresentPV
nacquisitiobeforefirmAcquiringofValuePresentPV
nacquisitioafterfirmAcquiringofValuePresentPV
Where
T
BA
AA
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5. Synergy Value – An example
An acquiring company with a present value of Rs 1,000 Cr is
contemplating to acquire a target company worth Rs 680 Cr
with an expenses of Rs 20 Cr. The post merger value is
expected by the analysts as Rs 1750 Cr. What was the synergy
value in this combination
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EP)PV(PVPVVS TBAAA
6. Synergy Value – An example
An acquiring company with a present value of Rs 1,000 Cr is
contemplating to acquire a target company worth Rs 680 Cr
with an expenses of Rs 20 Cr. The post merger value is
expected by the analysts as Rs 1750 Cr. What was the synergy
value in this combination
EP)PV(PVPVVS TAA
Cr50Rs
20Rs680)Rs1,000(Rs1,750RsVS
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9. Sources of Synergy
Revenue Growth
• Strengthened product
• Integration of channels of distribution
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10. Sources of Synergy
Cost Reduction
• Reduce overlapping costs
• Economies of scale
• Increased bargaining power with suppliers.
• Usage of common assets.
• R&D
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11. Factors Destroying the synergy sources
• Target company employees resistance.
• Poor product quality.
• Change in perception of the customers.
• Environmental issues
• Product liabilities
• Unresolved lawsuit
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12. Synergy Factors / Theories
# Factor Value of A+T T Share
holder’s
gain
A Share
holder’s
gain
1 Pure Synergy Increase Increase Increase
2 Winners Curse Zero Increase Decrease
3 Agency Problem Decrease Increase Decrease
4 Valuation Increase/
Decrease
Increase /
Decrease
Increase /
Decrease
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13. Synergy & Value Creation
• Acquiring poorly managed firm.
• Acquiring undervalued firm.
• Acquiring stressed company.
• Acquiring company with poor IR.
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14. Synergy and Success of a Merger
• Revenue Growth
• Cost Reduction
• Enhanced Efficiency: Managerial, operational,
financial and technological.
• Meeting strategic objectives.
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15. Synergy Value and Swap Ratio
– Problem 1
A company with a market price of Rs 128 is contemplating to
acquire a target company trading at Rs 89. If the acquiring company
offers 0.90 of its share for every one share of the target company, Is
that justified? If yes to whom?
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• Swap ratio based on market price = Rs 89/ Rs 128 = 0.70
• Any proportion greater than 0.70 would benefit the share holders of the target
company
• Target company would generate synergy value of the swap ratio is less than 0.70
16. Synergy Value and Swap Ratio
– Problem 2
A wants to acquire T by
exchanging 0.15 shares for every
one share of target company.
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1) ___ Cr shares have to be issued by A ?
2) Post merger EPS of A is Rs _________.
3) With the given P/E multiple expected price of A is Rs ________.
4) Post merger equivalent EPS of T is Rs______.
A T
EAT in Rs 180 36
No of Shares in Cr 60 18
Market Price in Rs 30 14
17. Synergy Value and Swap Ratio
– Problem 2
A wants to acquire T by
exchanging 0.15 shares for every
one share of target company.
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1) 9 Cr shares have to be issued by A
2) Post merger EPS Of E is Rs 3.13
3) With the given P/E multiple expected price of A is Rs 31.30?
4) Post merger equivalent EPS of T is Rs 0.47.
A T
EAT in Rs 180 36
No of Shares in Cr 60 18
Market Price in Rs 30 14
18. Synergy Value and Swap Ratio
– Problem 2
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A T A Post Merger
EAT in Rs Cr 180 36 216
No of Shares in Cr 60 18 69
Market Price in Rs 30 14 31.30
EPS in Rs 3 2 3.13
P/E 10 7 10
19. Synergy and Success of a Merger
• Revenue Growth
• Cost Reduction
• Enhanced Efficiency: Managerial, operational,
financial and technological.
• Meeting strategic objectives.
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