combinedfirm.Asasimpleexample,assumethatfirmAis
cash richand project poor and has a cash balanceof $10
billion.AssumethatfirmBiscashpoorandprojectrichand
would have rejected projects with a collective net present
valueof$1billionbecauseofitscashconstraints.Thevalue
of cash slack in this merger is $1 billion and can be
consideredsynergy.However,thisisbasedontheassumption
thatfailuretoundertaketheseprojectsthisyeartranslatesinto
losing them forever.To theextent that thecash-poor firm
couldhavedeferredundertakingtheseinvestmentstofuture
years,thevalueofsynergywillbethelossinpresentvalues
inwaitingtoundertaketheseinvestmentsratherthaninvest
the entire $1 billion today.
Tax Benefits
Severalpossibletaxbenefitsthataccruefromtakeoversand
quirksinthetaxlawareoftenexploitedbyfirmstoincrease
value. Consider three examples:
1.Ifoneofthefirmshastaxdeductionsthatitcannotuse
becauseitislosingmoney,whereastheotherfirmhasincome
onwhichitpayssignificanttaxes,combiningthetwofirms
canresultintaxbenefitsthatcanbesharedbythetwofirms.
The value of this synergy is the present value of the tax
savings that result from the merger. In making this
assessment, we do have to keep in mind that the tax
authoritieshavetightenedtheconstraints allowingfirms to
offset their gains with an acquired company’s losses.
2.Asecondpotentialbenefitcomesfrombeingabletowrite
upthedepreciableassetsofatarget firmin anacquisition.
This willresultin higher taxsavingsfrom depreciation in