How To Calculate Synergy Value In Mergers And Acquisitions

How To Calculate Synergy Value:

Synergy comes out of complementary activities. For an instance, a company might have a considerable amount of financial resources at the same time as the other company has profitable investment opportunities. Similarly, a company might have a strong and knowledgeable R&D (research and development) team whereas the other might have a very efficiently organized manufacturing department. Likewise, a company might have well established brand image of its manufactured products but lacking of marketing organization and another company might have a very strong marketing organization.

If these set of companies merge together, it will be better to play in business. The merged business unit in all these cases will be more efficient than the individual company. Hence, the combined value of the merged companies is probable to be bigger than the sum of the individual entities (units). Before doing this we have to calculate synergy value. Let us have a look how to Calculate Synergy Value by using a formula.

How To Calculate Synergy Value:

Combined Value of Synergy = Individual Value of Purchasing Firm (V1)+  Individual Value of Purchased Firm (V2)/[Target firm (Vt)+ Value of synergy ( V1t)]

Generally, the Synergy value is positive and this constitutes the rationale for the merger. In valuing synergy, costs attached with acquisitions should be taken into consideration. These costs principally consist of costs of integration and payment made for the acquisition of the target firm, in excess of its value, V1.

As a result, the net gain from the merger is equal to the difference between the value of synergy and costs.

Net gain = Value of synergy, V1t – Costs.

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