1) The document discusses valuation techniques for mergers and acquisitions (M&A), focusing on synergies. 2) Synergies are cost savings and revenue increases that can be realized by combining two companies. 3) The value created by a deal is the difference between the price paid and the value of the acquired business including synergies.

1. M&A TOOLKIT
Valuation:
Synergies
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2. 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
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3. 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
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4. 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)
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5. 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
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6. 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
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7. Negative synergies will reduce cashflow, especially during
integration
QUARTERLY CASHLOW
$m
250
200
NEGATIVE
150 SYNERGIES
100
50
-
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
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8. Typically, investment is required up-front to realise synergies
QUARTERLY CASHLOW
$m
250
200 INVESTMENT TO
REALISE COST
150
SAVINGS
100
50
-
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
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9. Cost savings will be a step-change in cashflow
QUARTERLY CASHLOW
$m
250
200 COST
SAVINGS
150
100
50
-
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
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10. Fast expansion of distribution will cause a step-change in
cashflow too
QUARTERLY CASHLOW
$m
250
STEP-CHANGE
200 CROSS-SELLING
150
100
50
-
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
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11. 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
-
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
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12. An increase in long term growth from cross-selling will ramp up
QUARTERLY CASHLOW
$m
250
200
150
100
50
-
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
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13. 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
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14. 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
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