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VALUING SYNERGIES IN M&A-Data Revised Jan 2020

1) The document provides financial information about a potential acquisition including capital structures, debt ratings, cost of equity, and synergies. 2) It outlines anticipated operating synergies from cost savings, revenue enhancements, and asset sales that will generate free cash flows over 5 years. 3) Financial modeling calculates the net present value of the cost savings and revenue enhancement synergies, finding total synergistic value of over $1 billion that will increase the combined value of the acquiring companies.

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Aninda Dutta
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82 views7 pages

VALUING SYNERGIES IN M&A-Data Revised Jan 2020

1) The document provides financial information about a potential acquisition including capital structures, debt ratings, cost of equity, and synergies. 2) It outlines anticipated operating synergies from cost savings, revenue enhancements, and asset sales that will generate free cash flows over 5 years. 3) Financial modeling calculates the net present value of the cost savings and revenue enhancement synergies, finding total synergistic value of over $1 billion that will increase the combined value of the acquiring companies.

Uploaded by

Aninda Dutta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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VALUING SYNERGIES IN M&A

Information about Financial Synergies

Particulars Buyer Target


(before) (before) Newco
Total capital of buyer and target, before acquisition 6000 6000
Beta of buyer and targe before acquisition 1 1.5
Adjustment in Newco asset beta because of covariance unanticipated -0.1
by market
Market value weight of buyer in Newco (%) 50%
Market value weight of target in Newco (%) 50%
Risk free rate of retirm 0.05 0.05
Equity market risk premium 0.07 0.07

New rating associated with Newco's target capital structure AA BBB A

Average maturity of debt associate with target captial structre (in years) 7 7 7
Appropriate current pretax yields on debt, at rating 0.08 0.1 0.09
Marginal tax rate for Newco 40% 40% 40%
Targeted weight of debt (%) 25% 45% 35%
Targeted weight of equity (%) 75% 55% 65%

Information about Operating Synergies Year 0 figure Other elevant data


where
applicable
Anticipated cost savings: Rs.50m in Year 1, Rs.100m in the next and 50 100 4%
thereafter to grow @ 4%
Growth rate of FCF, in perpetuity, 2% 2%
Investment to realize cost savings: 0.5b in Year 0, 5% of pre-tax savings -500
to sustain the rate of savings
5%
Realization from sale of redundant asets: 20m in Years 1-2 and 10m in 20 20 10
Year 3
Operating cost/ revenue 45%

Revenue enhancment synergy (RES): 100m in Year 1, 200 in Year 2 and 100 200 4%
therafter to grow at 4%
Growth rate of FCF, in perpetuity, 3% 3%
Investment to achieve RES, 400m in Year 0, and 5% of added revenues -400
each year to fund working captial growth
5%

Realization from sale of redundant asets: 10 m Years 1 and 5m in Year 2 10 5

Number of years for value horizon 5


0 1
1 Pretax cost savings 50.00
2 Post-tax cost savings 30.00
3 Less: Investment necessary to realize the savings -500.00 -2.50
4 Add: realization from sale of redundant assets 20.00
5 Sub total -500.00 47.50
6 Terminal value
7 Free cash flow
8 NPV of cost savings 219.15

Cost of capital 10.06%


2 3 4 5
100.00 104.00 108.16 112.49
60.00 62.40 64.90 67.49
-5.00 -5.20 -5.41 -5.62
20.00 10.00
75.00 67.20 59.49 61.87
782.94
0 1 2 3 4
1 Revenue enhancements 100 200 208 216.32
2 Operating cost to achieve RE 45.00 90.00 93.60 97.34
3 Pre-tax value
4 Post tax value 33.00 66.00 68.64 71.39
5 Less: investment necessary... -400.00 -5.00 -10.00 -10.40 -10.82
6 Add: Realization of disposal of assets 10.00 5.00
7 Sub total -400.00 38.00 61.00 58.24 60.57
8 TV
9 FCF
10 NPV of RES 345.27

Cost of capital 10.06%


5
224.9728
101.24

74.24
-11.25

62.99
866.26
Buyer (Before) Target (Before) B+T (Before)
Cost of Equity
Beta before the acquisition
Unlevered beta
Adjusted unlevered beta for BT
Beta of BT
Risk free rate of return
Risk Premium
Cost of Equity
Cost of debt (post tax)
WACC
Total capital
Cost of capital - absolute amount
Implied present value of financial synergies
BT Impact on Value

10.06%

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