Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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firmsisfar morelikely tocreateanoligopolywith pricing
power.
1


3.Combinationofdifferentfunctionalstrengths,aswouldbe
thecasewhenafirmwithstrongmarketingskillsacquiresa
firmwithagoodproductline.Thiscanapplytowidevariety
of mergers since functional strengths can be transferable
across businesses.


4.Highergrowthinneworexistingmarkets,arisingfromthe
combinationof thetwofirms. Thiswould be thecase,for
instance, whena U.S. consumer productsfirm acquiresan
emerging market firm with an established distribution
networkandbrandnamerecognition,andusesthesestrengths
to increase sales of both firms’ products.


Operatingsynergiescanaffectmargins,returns,andgrowth,
and through these the value of the firms involved in the
merger or acquisition.


Financial Synergy


With financial synergies, thepayoff cantake the form of
highercashflows,alowercostofcapital(discountrate),or
both. Included in financial synergies are the following:



  • Acombinationofa firmwithexcess cash,orcash
    slack(andlimitedproject opportunities)anda firm
    withhigh-returnprojects(andlimitedcash)canyield
    apayoffin termsofhighervalueforthecombined
    firm.Theincreaseinvaluecomesfromtheprojects
    that can be undertaken with the excess cash that

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