The key question about synergy is not whether itcan be
valuedbuthowitshouldbevalued.Afterall,firmsthatare
willingtopaylargeamountsforsynergyhavetobeableto
estimateavalueforthatsynergy.Inthissection,weconsider
how best to value different types of synergy and the
sensitivity of this value to various assumptions.
Valuing Operating Synergies
There isa potential foroperating synergy, in one form or
another, in many takeovers. Some disagreement exists,
however,overwhethersynergycanbevaluedand,ifso,what
that value should be. One school of thought argues that
synergyistoonebuloustobevaluedandthatanysystematic
attempt to do so requires so many assumptions that it is
pointless.Ifthisistrue,afirmshouldnotbewillingtopay
largepremiumsforsynergyifitcannotattachavaluetoit.
Theotherschoolofthoughtisthatwehavetomakeourbest
estimate of how much value synergy will create in any
acquisitionbeforewedecide howmuchto payforit,even
thoughitrequiresassumptionsaboutanuncertainfuture.We
come down firmly on the side of the second school.
Although valuingsynergyrequiresustomakeassumptions
aboutfuturecashflowsandgrowth,thelackofprecisionin
the processdoes not meanwe cannot obtain a reasonable
estimate of value. Thus we maintain that synergy can be
valued by answering two fundamental questions.
1.Whatformisthesynergyexpectedtotake?Willitreduce
costs as a percentage of sales and increase profit margins
(e.g., whenthere areeconomiesof scale)?Will itincrease
futuregrowth(e.g.,whenthereisincreasedmarketpower)or