Mand a toolkit synergies

M&A TOOLKIT

Valuation:

Synergies

© 2007-2013 IESIES Development Ltd. All Ltd. Reserved
© 2007-2013 Development Rights All Rights Reserved

The value creation of the deal is the difference between the
price paid and the value of the business bought by the acquirer
DEAL VALUE CREATION
$m 50 800 250
150 750

600
550

Current Market Acquisition Price Paid Value creation Value to Value of Base business
Capitalisation Premium acquirer synergies value

© 2007-2013 IES Development Ltd. All Rights Reserved

Corporates focus on creating value in M&A through synergy;
private equity through buying below true value
WAYS TO CREATE VALUE IN M&A
1) Target is under-valued by owners •Distressed sale
•Stock market imperfect
•Unsophisticated seller Private
Equity
2) Target is under-managed •Poor management incentives focus
•Non-core business
•Wrong CEO

3) Synergy: Reduced costs •Elimination of overlaps
•Economies of scale
•Overheads
•Purchasing Corporate
focus
4) Synergy: Increased revenue •Selling new products to existing customers
•Selling existing products to new customers
•Improved processes

5) Financial Engineering •Reduced cost of capital Private
•Cash tax reduction Equity
focus

You need to build the cashflow positives and negatives into your
synergy model

SYNERGIES TO BUILD INTO YOUR MODEL
• Cost savings

• Revenue synergies (cross-selling)
- Step-change (e.g. take existing product into new
distribution network)
- Long term higher growth (e.g. full solution for customer)

• Cost to realise synergies (e.g. redundancy payments; IT
investment; asset closure; advisor costs; transaction costs)

• Negative synergies (e.g. loss of customers; distraction)


Include the timeframe to realise and assign a probability to each
synergy
CREATING A SYNERGY “MAP”

Duplicated
Shared Cross-selling “Soft”
functions Shared facilities Cross-selling
operating new synergies
(e.g. (e.g. factory existing
activities products/ (e.g. know-
corporate rationalisation) products
(e.g. sales) solutions how)
reporting)

High probability Low probability
Realised within 1 year 3+ years to realise

Source: “When to walk away from a deal”, HBR

Your synergy assumptions will appear quantified in your
cashflow projection
QUARTERLY CASHLOW
$m
250

200

150

100

“AS-IS”
50
FORECAST
-
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
YYDDMM Syndicate Case_name
© 2007-2013 IES Development Ltd. All Rights Reserved 5

Negative synergies will reduce cashflow, especially during
integration
QUARTERLY CASHLOW
$m
250

200
NEGATIVE
150 SYNERGIES
100

50

-

Typically, investment is required up-front to realise synergies

QUARTERLY CASHLOW
$m
250

200 INVESTMENT TO
REALISE COST
150
SAVINGS
100

50

-

Cost savings will be a step-change in cashflow

QUARTERLY CASHLOW
$m
250

200 COST
SAVINGS
150

100

50

-

Fast expansion of distribution will cause a step-change in
cashflow too
QUARTERLY CASHLOW
$m
250
STEP-CHANGE
200 CROSS-SELLING
150

100

50

-

An increase in long term growth from cross-selling will ramp up

QUARTERLY CASHLOW
$m
250 LONG TERM HIGHER
GROWTH FROM
200
CROSS SELLING
150

100

50

-

An increase in long term growth from cross-selling will ramp up

QUARTERLY CASHLOW
$m
250

200

150

100

50

-

Remember that there will be negative synergies as well as positive
synergies to include in your valuation

Can 1 + 1 = 1.5?
POSSIBLE NEGATIVE SYNERGIES
•Disruption to both businesses while management is busy
integrating; competitors take advantage
•Suppliers act to reduce dependence on retailer, so offer less
support and develop alternative channels
•Reduced future store growth – e.g. Local government will grant
permission for 1 new store/city, not 2
•Loss of customer loyalty if CP brand goes
•Expensive investments e.g. integrating IT
•Overlapping stores; cost to shut down
•Culture clash – key processes disrupted
•Key people leave

Add up all the synergies and deduct the negative synergies

DCF VALUATION
$m 3 4 2
5 77 5
15 12
60 60

"As Is" Value Synergy 2 Synergy 3 One-off cost Negative Valuation Value Likely Current
Hypothesis synergies "to us" creation premium Market Cap
opportunity


Mand a toolkit synergies

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