beworth$2billion,butpaying$3billionasapremiumtoget
theacquisitiondonewilldestroy$1billionoftheacquiring
company’s stockholder wealth.
Valuing Operating Synergy in a Discounted Cash Flow
Framework
Ifweacceptthepropositionthatsynergyhasbe valuedby
lookingatthecombinedfirmandbuildingintheeffectsofthe
synergy, we have to also consider which inputs in a
discountedcashflowmodellendthemselvesbesttovaluing
synergy. Looking at the various ways in which operating
synergy can manifest itself, it should be quite clear that
different types of synergy will require changing different
inputs. If we categorize operating synergies into growth
synergies and cost synergies, the inputs that are affected
follow:
- Cost synergies aretheoperating synergies that are
easiesttomodel.One-timecostsavingswillincrease
thecashflowintheperiodofthesavings,andthus
increase thefirmvalueby thepresentvalue ofthe
savings.Continuing cost savingswillhavea much
bigger impact on value by affecting operating
margins(andincome)overthelongterm.Thevalue
will increase by thepresent value of the resulting
higher income (and cash flows) over time. - Growthsynergiesaremorecomplicatedbecausethey
canmanifestthemselvesinsomanydifferentways.
There are at least three different types of growth
synergies: