VALUING SYNERGY: WORKSHEET

SYNERGY VALUATION WORKSHEET

Enter the following information on the bidding firm Current Financial Information Revenues in current year = COGS as % of Revenues = Tax Rate on income = Interest Expenses = Current Depreciation = Current Capital Spending = Working Capital as % of Revenue = Projections of growth in earnings Expected growth rate - next 5 years = Expected growth rate - after 5 years = Risk measures Beta of the stock = 1.10 15.00% 6.00% $1,000.00 70.00% 35.00% $100.00 $50.00 $75.00 5.00%

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Enter the following information on the target firm Current Financial Information Revenues in current year = COGS as % of Revenues = Tax Rate on income = Interest Expenses = Current Depreciation = Current Capital Spending = $800.00 75.00% 35.00% $100.00 $75.00 $100.00

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Working Capital as % of Revenue = Projections of growth in earnings Expected growth rate - next 5 years = Expected growth rate - after 5 years = Risk measures Beta of the stock =

5.00%

20.00% 7.00%

1.25

General Information Current riskfree rate = Risk premium over riskfree rate = 6.00% 5.50%

Information on Synergy benefits What form does the synergy benefit take? 3 (1: Cost reduction ; 2:Cost reduction and Increase growth: 3: Only increase growth)

I. The cost of goods sold without synergy is

72.22%

If the synergy is going to reduce costs, enter the new cost of goods sold

IIa. The growth rate in earnings in the next five years without synergy is If the synergy will increase growth, enter the new growth rate

16.26% 20.00%

IIb. The growth rate after year 5 is expected to be If the synergy will increase this growth rate, enter the new growth rate

6.30% 7.00%

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Bidder Free Cashflow to Equity Growth rate for first 5 years Growth rate after five years Beta Req. rate of return Riskfree Rate $98.48 15% 6% 1.10 12.05% 6.00%

Target $33.33 20% 7% 1.25 12.88%

A+B: No synergy A+B (Synergy) $131.81 16.26% 6.30% 1.14 12.29% $131.81 20.00% 7.00% 1.14 12.29% Weighted by present values of A and B

YEAR 1 2 3 4 5 PRESENT VALUE

FCF (A) $113.25 $130.24 $149.77 $172.24 $198.07

Term Val (A)

FCF (B) $40.00 $48.00 $57.60 $69.12

Term. Val (B)

FCF (A+B) $153.25 $178.24 $207.37 $241.36

TV (A+B)

FCF (A+B:S) $158.17 $189.81 $227.77 $273.32

TV (A+B:S)

$3,470.40 $2,497.48

$82.94

$1,510.64 $1,025.48

$281.02

$4,981.04 $3,523.56

$327.99

6634.009716 $4,523.83

Gains from synergy = Most that bidder firm can bid for target = % Premium over the market price =

$1,000.27 $2,025.74 97.54%

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NOTES: (1) It is not simple to back out the growth rates for the combined firm when there is no synergy because growth rates will change. (2) It is far simpler to remember that in the absence of synergy the cashflows, terminal value and present value of the combined firm will always be equal to the sum of the same for the individual firms. (3) To back out the terminal growth rate of the combined firm in the absence of synergy, use the combined terminal value estimated in conjunction with the required rate of return to solve for the terminal growth rate.

STEPS IN VALUING SYNERGY 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 dollars 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.