What does run-rate synergies mean?

Thank you for the response. I appreciate your input.

1. Exclude synergies

2. This is not a synergy. Synergies are revenue expansions and/or cost savings that result from the combination of the 2 companies. You are listing a deferred tax liability. You would need to assume that BV = tax basis. In the acquisition, the asset is stepped up to $25mm. You would debit the difference ($5.5mm) to that asset account. You would credit $5.5mm x 30% = $1.65mm to a deferred tax liability account. The remainder, $3.85mm, would be credited to shareholders' equity.

On synergies, it can be a bit convoluted at times.

If you are advising a company on the sell side, you are first going to value the company as a standalone entity. When you get to modeling in a transaction, you will assess potential synergies and try to approximate the value you think the buyer is willing to pay including those synergies. Simply, you are trying to get a bit more for your client on the sale above and beyond the standalone value because you recognize the value a potential acquire may recognize (particularly a strategic).

If you are advising the buyer, you are going to push back and try to pay based on what you feel the value of the standalone entity is because the buyer takes on the execution risk.

Frequently in strategic transactions, the buyer and seller meet in the middle and split some level of synergies. It's going to be deal dependent (in some cases the buyer may give only an additional 5% premium of the synergies towards the seller's valuation and other times, it could be closer to 50/50).

What it comes down to is supply vs. demand (how many buyers are in the process, how competitive are the bids, how many other companies are in the market that the buyer can find alternatively, etc.) and how badly the buyer wants to make the acquisition.

First, I would do a DCF of B to determine what an appropriate premium is (or to confirm that 30% makes sense). Also, you could do a DCF of the synergies and compare that to the aggregate premium value as a sanity check. precedent transactions is probably worth looking at as well to justify a premium.

Second, I would use the purchase price to understand sources and uses.

Third, build a PF merger model to understand key metrics: how leverage changes over time, accretion / dilution, FCF payout (if A is dividend paying) etc.

Most important thing is understand what question you are trying to answer.

this isn't meant to jab at the OP but its hilarious when bankers try to "value" synergies. only operators / on-site consultants can tell you what the value really should be. just use the standard synergy % savings in the template your group use, no point sweating it because its wrong anyways

The higher the potential synergies, the higher control premium the buyer is willing to pay

Make sense?

Synergies are only realized when the company has control, otherwise it's just an investment.

an acquirer could buy control of a company (as in voting rights) while not purchasing all of the economic ownership. this is typically done via a dual class share or pyramid ownership.

Synergies are usually a function of the duplicate operations of both companies (cost side) and opportunities created by the merger (revenue side). An average produced would have questionable utility.

Your best bet is to look for an academic paper where some MBA school academic has looked at expected synergies vs delivered synergies, then access the data set used to compile the study if that's publicly available.

Synergies are incredibly deal-specific. Any figures you get from that high of a level are going to be tough to apply to your specific scenario.

COGS goes down by 3% in your assumptions, so just do (71.4%-3%)*Combined Revenue? That's the simplest way to do it, though you could build in a gradual decline as well.

If the acquisitions were of substantial size, you may be able to find this info in First Data's investor relations materials.

Generally, the acquiring company's management team provides these estimates to investors / analysts upon announcing an acquisition.

So here is the link to the proxy statement disclosing the merger of first data to KKR : http://ir.firstdatacorp.com/secfiling.cfm?filingID=1047469-07-5202 

Obviously a search for synergy does not work and a look at their projected financial statements does not appear to yield any clues either. Are these projections hidden in this proxy or are they in a different document all together? Thanks again.

Wait, I assumed you were referring to the older roll-up acquisitions that First Data put together.

Why would you expect any synergies to result from First Data being acquired by KKR?  This is a value-driver for strategic acquirers, not financial sponsors.

Smuguy - Fair point. Too many hours staring at a computer screen at this point... I was attempting to use First Data merely as an example. Any other strategic acquisitions occuring between 2000 and today would be of interest and probably would have been better examples to use in this instance. I apologize. Please feel free to replace my previous example with any acquisition by a strategic acquirer.

bump

You don't VALUE synergies. You keep adding synergies until it's Accretive.

Bam!

Haha, amazing.

Synergies are estimates of cost savings (read: firing people) that represent marginal cash flows. Sometimes there are revenue synergies but these are not very common. But the intuition is that saving $X per year is equivalent to earning that much. So it would be subject to a DCF valuation just like any other cash flow. It's usually expressed on its own in the model just to make it easier to see how much the synergies estimates are driving value, also one could conceive of a synergy that has a different discount rate than the regular FCF, but this will probably make everyone's head explode. But to answer your question a synergy needs to be presented as a stream of cash continuing into the future, and then discounted to a present value.