What does run-rate synergies mean?
Hey folks,
What does run-rate synergies mean? Are synergies meant that occur every year after a merger?
When e.g. redundancies result in one-time synergies what are examples of run-rate cost synergies?
Thanks!
Run Rate Meaning
from certified user @CompBanker"
Run-rate generally means the full year impact of something that has only occurred for a portion of the year. For example, if you laid off employees last quarter which generated $100 million in cost savings in that quarter, the run-rate impact would be $400 million.
from certified user @ke18sb"
Run rate usually pertains to extrapolating a time period, typically a quarter, over the course of a year. For example, say I have a startup and in Q1, Q2 and Q3, there was no revenue because it was preproduct launch, but then in Q4 I had 1mm in revenue. My annual revenue would only be 1mm, but I can say I have a 4mm run-rate on that revenue because going forward I'll get 1mm in revenue per quarter.
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Run-rate generally means the full year impact of something that has only occurred for a portion of the year. For example, if you laid off employees last quarter which generated $100 million in cost savings in that quarter, the run-rate impact would be $400 million.
Thanks guys!
just to add on the above: run rate is the year in which full synergies are achieved. Say you assume 20% of opex synergies (out of total opex), you phase it in different stages: 25% in Y1, 50% in Y2, 75% in Y3 and 100% in year 4 (from Year 4 onwards you have run rate synergies). The calculation for Y1 is as follows: opex20%25%-integration costs=net opex synergies. Integration costs are typically assumed to be run rate opex synergies. From here on you calculate your tax shield to discount them to PV.
Quantifying Synergies (Originally Posted: 01/18/2012)
How do you go about quantifying the synergies gained through strategic alliances and acquisitions? Any help would be appreciated. Thank you.
It's difficult to do that from the outside, but basically you would take a stab at any SG&A redundancies and purchasing / manufacturing / logistics / whatever efficiencies or scale gained through the transaction. To the extent that the combined entity can increase asset utilization, that would be a synergy as well and you could try to calculate that if you know what the company's fixed and variable cost structure looks like. Unless you have inside numbers as an advisor, you are more or less reliant on management to (hopefully) give you honest and well thought out expected numbers.
One back of the envelope approach is to generate an estimate of fixed costs and then see if the company's operating line has reacted as you would expect during times of increasing or decreasing sales (i.e., is management full of shit, or does EBIT actually seem to be subject to the fixed costs they claim as sales vary). You could then overlay the expected transaction / target cost structure and sales base to try to see how sales would trickle down to the operating line in the absence of additional fixed costs.
In reality, synergies rarely develop to the extent that management expects, and a lot of acquisitions create no value or even destroy value. Something that is asset light with an easy to cross sell product where the majority of the middle of the P&L can be wiped out (G&A) is a better bet than something with independent manufacturing facilities that operate on a different ERP system, for example.
That doesn't really answer your question, but there is no easy answer to what you want to do.
Thank you for the response. I appreciate your input.
Questions on Control Premium and Synergy Valuation (Originally Posted: 09/19/2013)
Hi,
I came across questions in my M&A course and couldn't find the answers to it on Google. I was hoping you peeps could help me out with understanding this.
1) I believe control premium to be (intrinsic value + synergy)(control premium %). Would that be right? Or do we exclude the synergy and just calculate it as (intrinsic valuecontrol prem)?
2) Synergies should be calculated after tax. Question gives an asset reduction synergy. Asset has an accounting BV of 19.5m, and Sale price of 25m. Tax rate at 30%. I would assume after-tax synergies would be: 25m - (25m-19.5m)*30%.
Thanks in advance guys. I appreciate the help.
Exclude synergies
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.
Hey watdo, thanks for the quick reply.
I think I did not phrase the second question properly. I apologise. The asset was meant to be sold off due to a merger. So the question here (an MCQ) was how you would calculate the amount post-tax. Would you tax the entirety of the Sale Price? The BV? Or tax the gain (-0.3*5.5m) against the $25m.
Wouldn't you only step the asset up if this were an asset purchase? If this were a stock purchase, the assets would remain at book value, no?
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.
Calculating Synergy Value (Originally Posted: 07/01/2015)
During business valuation process, we can arrive at the enterprise value and the equity value, and hence forth, the price of each share of the candidate. Let's say, Company A is planning to acquire Company B. While building the model, should I take the industry standard 30% premium on the implied share price and arrive at the purchasing price per share? Is there a better way to do it?
Also, how do we calculate the synergy value once the valuation is derived?
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.
TorontoMonkey1328 I need some explanation here. Tried 2 approaches -
(1) precedent transactions says 8.0x mean
(2) DCF: How do I track the cost savings? How much of them are attributed to COGS and SG&A? As per my reading, SG&A synergy savings amount 0.5 - 3% of the combined entity (standard practice), but I need to arrive at a defensible range.
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
It's pretty hilarious when ANYONE tries to estimate the value of synergies.
The only benefit an onsite consultant has is that they are 3 steps closer to the dartboard before they are blindfolded and take their shot.
Control premium & synergy: Precedents (Originally Posted: 08/26/2011)
Usually, it is said that "a company will pay a control premium for assumed synergies", but isn't this wrong? Isn't control premium the amount a company will pay the shareholders in order to gain control of the company?
A company is willing to pay a premium for assumed synergies, as well as a control premium, correct? Won't combining two companies result in some kind of synergy, whether they gain control of it or not?
Thanks.
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 in M&A deals (Originally Posted: 07/03/2014)
Hi,
I am looking for available benchmarks on M&A synergies per sector /industry (e.g. how much savings as % of the cost base is targeted/announced on average in the airline industry...), not important if either revenue or cost related and could be expressed as % of cost base or % of revenues. It would be fantastic if anyone could point me towards the right direction or PM me any relevant materials. Thanks.
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.
Synergy Valuation (Originally Posted: 01/06/2015)
I am valuing a company and have forecasted revenue on a standalone basis to be $714m in year 1, $728m in year 2 etc) and COGS 510m in year 1, 520m in year 2 etc. COGS was worked out as a percentage of sales. This remains constant at 71.4%
According to my data, by combining, the company will sell 4% more per year. Thus revenue (with synergy) is now $743m in year 1, $757m in year 2 etc
Also by combining the company will lower COGS by 3% per year. I am unsure how to account for this. Any help would be greatly appreciated.
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.
Just curious but could you also do the following.. use COGS (standalone value i.e. without synergy) and multiply it by 0.97?
The final part of my valuation states that by combining companies, cash flow and growth will go up by an additional 3% per year, if 15% of my operating profit is devoted to R&D
Consequently, I will increase FFCF (with synergy) by 3%.. Then run DCF... is this correct? I am also unsure what to do regarding the 15% which is devoted to R&D... any idea?
Synergy Projections (Originally Posted: 01/16/2008)
Hey All,
How does one determine projected synergies from past mergers & acquisitions. For example, if I wanted to know the estimated synergies regarding First Data, what filing would I look at and where would I find these projections? Thanks in advance.
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
Synergies - How do you value them? (Originally Posted: 02/04/2010)
Hi All,
How do you value synergies in a M&A model? (especially cost and revenue synergies)?
Thanks for your help
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.
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