Adjusting for Synergies
Hi,
can s/o clarify why adjusting for synergies leads to a lower valuation range? E.g. EV/LTM EBITDA would obv. be lover if one adds synergies to the denominator. Doesn't make sense, does it?
because you're adjusting the pro forma LTM EBITDA, but not adjusting your pro forma EV as if the companies had been operating as one entity for the last 12 months.
but it's all bullshit anyways. outside of firing HRs and janitorial staff, good luck actually predicting what synergies will be recognized and what synergies are made up in someone's head.
Yeah. I've worked with buyers who do the following when presented with synergies:
It's fair take. I saw a BCG report once that said less than 1/3rd of all M&A transactions actually add value.
This is the answer. Agree w/ Lapike most of the time rev synergies get little to no credit, and you'll usually get a haircut on cost synergies.
Smh I don't get it. Can someone maybe just briefly elaborate on why the multiple should be smaller if synergies are taken into consideration? Common sense would be that this is sth that lets me justify a higer purchase price.
Sure - you're creating make believe value in the denominator that would have never been earned... because synergies can only happen in the future.
This equation now looks like this:
(Today's Enterprise Value Based on Not Having Synergies Between the Two Companies) / (Combined EBITDA of Yesterday or Last 12 Months With Having Synergies)
Your numerator is unaffected and your denominator theoretically increased. In reality, if those synergies had been recognized throughout the year... the EV would be greater. In other words, if your combined LTM EBITDA was $20 and with synergies it was $22... your EV could be $100 without synergies and with synergies (built into the full year) it could be something like $112. Which gives you a valuation 5.0x vs 5.09x.
tl;dr: you're not making an apples to apples comparison when you compare (EV) to (LTM EBITDA and synergies).
You would need to do: (EV with 12 months of magical synergies built in) to (LTM EBITDA and synergies).
Note: I've never heard of a proposed M&A deal being valued using EV / LTM EBITDA & synergies. I'm just a lowly liberal arts college student, though so don't take my word for it.
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