thelengthofthegrowthperiod?Synergy,tohaveaneffecton
value, has to influence one of the four inputs into the
valuationprocess—ithastogeneratehighercashflowsfrom
existingassets(costsavingsandeconomiesofscale),higher
expected growth rates (market power, higher growth
potential),longergrowthperiods(fromincreasedcompetitive
advantages), or lower costs of capital (higher debt capacity).
- When will the synergy start affecting cash flows?
Synergies seldom show up instantaneously, but are more
likelytoshowupovertime.Sincethevalueofsynergyisthe
presentvalueofthecash flowscreatedbyit,thelongerit
takes for it to show up, the less its value.
Steps in Valuing Operating Synergy
Onceweanswerthesequestions,wecanestimatethevalueof
synergy in three steps:
- First, we value the firms involved in the merger
independently,by discounting expectedcash flowsto each
firm at the weighted average cost of capital for that firm.
2.Second,weestimatethevalueofthecombinedfirmwith
nosynergy,byaddingthevaluesobtainedforeachfirminthe
first step.
3.Third,webuildtheeffectsofsynergyintoexpectedgrowth
ratesandcashflowsandwerevaluethecombinedfirmwith
synergy.Thedifferencebetweenthevalueofthecombined
firmwithsynergyandthevalueofthecombinedfirmwithout
synergy provides a value for synergy.