- Thecombined firmmay be ableto earnhigher
returnsonitsinvestmentsthanthefirmswereableto
generate independently, thus increasing the growth
rate. - The combined firm may be able to find more
investments than the firms were able to invest in
independently. The resulting higher reinvestment
rates will increase the growth rate. - The combined firm may be in a much more
powerful competitive position than the individual
firms wererelativeto theirpeergroup.Thepayoff
will be that the combined firm will be able to
maintainexcessreturnsandgrowthforalongertime
period.
Bothcostandgrowthsynergiesmanifestthemselvesashigher
expectedcash flowsin thefuture.Costsynergies, by their
verynature,tendtobebounded—thereis,afterall,onlyso
muchcostthatyoucancut.Growthsynergies,incontrast,are
oftenunboundedandareconstrainedonlybyyourskepticism
about their being delivered.
ILLUSTRATION 15.1: Valuing Cost Synergies
Thefollowingtablesummarizesthefinancialcharacteristics
of two firms that are considering combining in a merger
(dollar amounts in millions).
Acquiring FirmTarget Firm
Beta 0.9 0.9