Interview question: how to value a $100mil synergy?
Hi everyone, came across these questions recently in an interview book but there's no answers provided and I'm a little stumped. First one is "how do you value a synergy?", for which I found this page that seems to offer a decent explanation: https://www.fe.training/free-resources/valuation/…
Second one I'm pretty confused on is "how would you value a $100mill synergy? please give a number as your answer". Could anyone provide some guidance? I'm new to IB interviews but it seems very vague, no info on it being a cost or revenue synergy provided or any discount rate, plus it would theoretically take a model to calculate. Would an interviewer expect that of me in an interview?
Thanks, would really appreciate any help!
Interested
Doesn’t matter whether it’s a cost or revenue synergy. Everything - that generates positive cash flows - is valued using a discount rate to get to NPV.
If revenue synergy - discount to PV using WACC (rev synergies are hard to realize and mostly a bs selling point)
If cost synergy- same concept, consolidation improves cash structure and you are left with higher margins. Discount to PV using WACC (easier concept to sell since you can fire a bunch of people with the same role and realize them almost immediately)
This is the real life answer. Academic answer might say “add a premium to WACC because risk…” Only bringing it up in case the interviewer mentions risk and wants to test if you know this.
Realistically, you’d sensitize WACC regardless and show PV at different levels of WACC
Don't forget that you cannot just discount the full revenue synergies! Apply EBITDA margin or even better a specific cost breakdown to generate those additional revenues and only then discount the cashflows.
You can also capitalize the synergy at a revenue multiple
Not sure what you mean, can you expand on that?
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