Question

Company A produces cereals and has a market value of € 28.9 million. The company is in the process of acquiring Company B, a wholesaler of food distributors. B has a market value of € 11.6 million. The estimated value of the new company from the merger is € 41.6 million.
a) What is the benefit of synergy?
b) What is the value of B for A?

Answer 1

a).

When a company acquires another company, it is often stated that the investment will create synergies. The primary source of synergy in an acquisition is in the presumption that the target firm controls a specialized resource that becomes more valuable if combined with the acquiring firm’s resources. The objective is to increase effectiveness by sharing perceptions and experiences, insights, and knowledge. People think of synergy as something within an organization. It is usually when two entities collaborate and create a culture of excellence that is mutually beneficial.

Some of the benefits of Synergy are:

-Synergies due to mergers result in larger firm size which is perceived as more attractive to some investors as well as a larger firm gives competitive advantage in an industry as higher market share allows firms to be more dominant and able control the market more.

-Sometimes a corporation buys a loss making corporation in order to reduce their tax burden.

-Synergy helps in increase managerial effectiveness which results in more innovative ideas that will increase the performance of corporation as whole.

Calculating Synergy;

Market Value of Company A = € 28.9 million

Market Value of Company B = € 11.6 million

Value of company's combined = 28.9+11.6

= € 40.5 million

Estimated value of the new company from the merger is € 41.6 million

Since, the estimated value of new company is more than than the value of company combined Synergy exist.

So, Value of Synergy = Estimated value of the new company - Value of company's combined

= € 41.6 million - € 40.5 million

= € 1.1 million

b). Company A is in the process of acquiring Company B. Acquiring Company B will create synergy for Company A.

So, net value of B for A = value of Company B - Value of Synergy

= € 11.6 million - € 1.1 million

= € 10.5 million