TechniqueDeals and M&AValuation
Synergies are worth something only once they are valued rather than asserted
Aswath Damodaran · Session 12: Acquisition Ornaments — Synergy, Control & Complexity
The idea
Cost and revenue synergies are where the extra value in a merger is claimed to come from, and the claim is usually a number in a press release. Damodaran's lecture turns the claim into a method: value the combined firm with the synergy's effect on cash flows or growth or risk, value the two firms without it, and the difference is what the synergy is worth. He then tests the method on a famous combination to show that the announced synergies and the value they would justify were different numbers. The discipline is to make a synergy claim pay for itself in a valuation before it pays for a premium.
A synergy is a change in cash flow, growth or risk; value it as one, and only then compare it with the premium being paid.
When it works
M&A interviews that ask how to value synergies, and any deal where the premium is justified by them.
When it may fail
Synergy forecasts are management's, and the costs of achieving them are often omitted. The method values what is claimed; it cannot say whether it will be delivered.
How to use it
In the merger model, enter the announced synergies as a cash flow change, value them, and compare the result with the premium. If the premium is larger, say who is paying the difference.
Where it came from
Video Session 12: Acquisition Ornaments — Synergy, Control & Complexity · Aswath Damodaran (NYU Stern)
What the source says. Damodaran values synergy as a number, by valuing the combined firm with and without it, and tests the method on the Procter & Gamble and Gillette combination.
Connected ideas
Worth knowing first
Accretion is arithmetic; whether a deal was worth doing is a different questionAnswer accretion with arithmetic and value with evidence, and never let the first stand in for the second.
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Put it to work on L3VLUP
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