Synergies of Mergers and Acquisitions or Business Combinations

1. Dr Raju Indukoori

2. Meaning of Synergy
The value of a combined firm is greater than
the value of sum of individual firms.
1 + 1 > 2
2Dr Raju Indukoori

3. Synergy Value
• It is the excess of the merged value over the sum of individual
firms.
• It is the ability of a business combination to be more
profitable than the sum of the profits of individual firms
• Acquiring companies look at target firm for synergy value.
• Acquiring firm also considers expenses while acquiring the
target firm.
3Dr Raju Indukoori

4. Synergy Value Equation
EP)PV(PVPVVS TBAAA 
incurredExpensesE
paidPremiumP
firmTargetofValuePresentPV
nacquisitiobeforefirmAcquiringofValuePresentPV
nacquisitioafterfirmAcquiringofValuePresentPV
Where
T
BA
AA





4Dr Raju Indukoori

5. Synergy Value – An example
An acquiring company with a present value of Rs 1,000 Cr is
contemplating to acquire a target company worth Rs 680 Cr
with an expenses of Rs 20 Cr. The post merger value is
expected by the analysts as Rs 1750 Cr. What was the synergy
value in this combination
5Dr Raju Indukoori
EP)PV(PVPVVS TBAAA 

6. Synergy Value – An example
An acquiring company with a present value of Rs 1,000 Cr is
contemplating to acquire a target company worth Rs 680 Cr
with an expenses of Rs 20 Cr. The post merger value is
expected by the analysts as Rs 1750 Cr. What was the synergy
value in this combination
EP)PV(PVPVVS TAA 
Cr50Rs
20Rs680)Rs1,000(Rs1,750RsVS


6Dr Raju Indukoori

7. Types of Synergy
• Growth Synergy
• Efficiency Synergy
• Financial synergy
• Operation synergy
• Technological synergy
• Competitive synergy
7Dr Raju Indukoori

8. Sources of Synergy
• Revenue Growth.
• Cost Reduction.
• Tax Benefits.
• Surplus funds.
• Unused debt capacity.
• Asset Write ups.
• Reduced Competition.
• Increase in concentration.
8Dr Raju Indukoori

9. Sources of Synergy
Revenue Growth
• Strengthened product
• Integration of channels of distribution
9Dr Raju Indukoori

10. Sources of Synergy
Cost Reduction
• Reduce overlapping costs
• Economies of scale
• Increased bargaining power with suppliers.
• Usage of common assets.
• R&D
10Dr Raju Indukoori

11. Factors Destroying the synergy sources
• Target company employees resistance.
• Poor product quality.
• Change in perception of the customers.
• Environmental issues
• Product liabilities
• Unresolved lawsuit
11Dr Raju Indukoori

12. Synergy Factors / Theories
# Factor Value of A+T T Share
holder’s
gain
A Share
holder’s
gain
1 Pure Synergy Increase Increase Increase
2 Winners Curse Zero Increase Decrease
3 Agency Problem Decrease Increase Decrease
4 Valuation Increase/
Decrease
Increase /
Decrease
Increase /
Decrease
12Dr Raju Indukoori

13. Synergy & Value Creation
• Acquiring poorly managed firm.
• Acquiring undervalued firm.
• Acquiring stressed company.
• Acquiring company with poor IR.
13Dr Raju Indukoori

14. Synergy and Success of a Merger
• Revenue Growth
• Cost Reduction
• Enhanced Efficiency: Managerial, operational,
financial and technological.
• Meeting strategic objectives.
14Dr Raju Indukoori

15. Synergy Value and Swap Ratio
– Problem 1
A company with a market price of Rs 128 is contemplating to
acquire a target company trading at Rs 89. If the acquiring company
offers 0.90 of its share for every one share of the target company, Is
that justified? If yes to whom?
15Dr Raju Indukoori
• Swap ratio based on market price = Rs 89/ Rs 128 = 0.70
• Any proportion greater than 0.70 would benefit the share holders of the target
company
• Target company would generate synergy value of the swap ratio is less than 0.70

16. Synergy Value and Swap Ratio
– Problem 2
A wants to acquire T by
exchanging 0.15 shares for every
one share of target company.
16Dr Raju Indukoori
1) ___ Cr shares have to be issued by A ?
2) Post merger EPS of A is Rs _________.
3) With the given P/E multiple expected price of A is Rs ________.
4) Post merger equivalent EPS of T is Rs______.
A T
EAT in Rs 180 36
No of Shares in Cr 60 18
Market Price in Rs 30 14

17. Synergy Value and Swap Ratio
– Problem 2
A wants to acquire T by
exchanging 0.15 shares for every
one share of target company.
17Dr Raju Indukoori
1) 9 Cr shares have to be issued by A
2) Post merger EPS Of E is Rs 3.13
3) With the given P/E multiple expected price of A is Rs 31.30?
4) Post merger equivalent EPS of T is Rs 0.47.
A T
EAT in Rs 180 36
No of Shares in Cr 60 18
Market Price in Rs 30 14

18. Synergy Value and Swap Ratio
– Problem 2
18Dr Raju Indukoori
A T A Post Merger
EAT in Rs Cr 180 36 216
No of Shares in Cr 60 18 69
Market Price in Rs 30 14 31.30
EPS in Rs 3 2 3.13
P/E 10 7 10

19. Synergy and Success of a Merger
• Revenue Growth
• Cost Reduction
• Enhanced Efficiency: Managerial, operational,
financial and technological.
• Meeting strategic objectives.
19Dr Raju Indukoori

20. Any Questions….
20Dr Raju Indukoori

21. Thank You
21Dr Raju Indukoori