Synergy

Synergy Calculation Steps


1. Value each firm separately, projecting out free cashflows and terminal value.

2. Value the combined firm assuming no synergy. (Add up the present values for the two firms estimated in step 1)

3. Prepare a cashflow statement for the combined firm by just adding up the items on the individual firms' statements.

4. Evaluate where the gains from synergy are going to come from. (Higher revenue growth or lower costs)

5. Translate the synergy gain into money on the combined statement. If revenues are going to grow faster because of the synergy
apply a faster growth rate to revenue in the combined statement. If costs are going to be cut, show the reductions in costs on the statement.

6. Calculate the value of the combined firm with the changes made in step 5.

7. Compare to the value in step 2. The difference is the synergy gain. This is the MOST that one should as a takeover premium.