Escolar Documentos
Profissional Documentos
Cultura Documentos
P.V. Viswanath
P.V. Viswanath
Synergies in Place
V Firm FCFt (1 WACC ) t t 0
n
This formula implies that synergies in place can arise from improvements in any of the Free Cash Flow components or in WACC.
Implied in FCF or WACC are improvements in timing.
P.V. Viswanath
For example, the new firm may sell more product than the existing firms would have sold independently perhaps because of a more efficient marketing force or because of cross-branding. Economies of scale from higher capacity utilization of existing P&E Greater purchasing power vis--vis suppliers Elimination of intermediaries in a supply chain Improvement in logistics and distribution Closing the targets headquarters Transfer of technology or know-how from one firm to the other.
P.V. Viswanath
Disposal of idle assets, such as a redundant headquarters building, unused plant capacity, excess inventories, receivables, or cash balances. These are typically one-shot benefits, and so it is useful to separate them from the cost reduction synergies that might be associated with these asset reduction synergies
Exploitation of increase in depreciation tax shields deriving from the step-up in basis following a purchase transaction. Transfer of Net Operating Losses from a target to a buyer through merger or acquisition. Reducing WACC by Optimizing the Use of Debt Tax Shields (?) Coinsurance Effects
P.V. Viswanath 5
Financial Synergies
Optimizing WACC
WACC
Optimum
Debt/(Debt+Equity)
Caution: Investors may be able to optimize WACC on their own, through homemade leverage
P.V. Viswanath 6
Coinsurance Effects
WACC
Debt/(Debt+Equity)
Combination of the buyer and seller could cause the WACC curve to shift in advantageous ways
P.V. Viswanath 7
Combination of resources in a transaction that creates the right to grow, but not the obligation. For example, the matching of licenses to enter new markets with the resources to do so. The combined company might be more flexible and be able to move out of current strategies and into new ones in response to evolving conditions.
The combined firm might have greater flexibility in waiting on developing a new technology, perhaps by incumbency advantages. The new firm could exit or enter a business more readily.
P.V. Viswanath 8
Options to defer
The combined firm might be able to switch production from large plants to smaller plants as required To switch production from one plant in a given high cost location (country) to another in response to changing labor costs or exchange rates. To change the mix of inputs or outputs of the firm, or its processes. To switch from one source of supply to another.
P.V. Viswanath
Factor in tax effects Choose a discount rate consistent with the risk of the synergy Reflect inflation, real growth and a reasonable life. Use a Terminal Value to reflect extended life of synergies.
P.V. Viswanath
10
P.V. Viswanath
11
P.V. Viswanath
12
P.V. Viswanath
13