In synergies versus premium analysis, we want to compare the present value of synergies (let's say it came to 100) And compare that to the premium that we paid for a company, over and above its market cap for the deal Let's say that was 90 If it's in excess, fantastic! We've still got some value we can extract from that company So let's start by finding the acquisition equity value for our target, that's all the way up at the top. The acquisition equity value was 165 What about the market cap prior to the deal? The market cap again, up in a similar place was 132 So we can see that in order to gain control in the business. The amount that we paid in excess of the market cap was 33 Great! What I now need to workout is the present value of synergies I'm hoping it's going to be at the very least 33, but I would much rather it be 34, 40, 50, 60 I want to make sure there's lots of value that I can still extract from my target company So to do this, we're going to need a discount rate. And the discount rate is going to the the WACC of the target company But we're going to add on a risk premium The reason for this, is that the synergies (the cash flow synergies), they're not quite as certain as the normal cash flows of the business So because they're a little bit riskier, we add this premium So that comes to 10% So what is the benefit from owning this company? It's those synergies, that's why we paid above and beyond its current market value So I'm going to go and find the post tax synergies up in our assumptions section That's 5, it's not quite yet post tax. So I need to times it by one minus the tax rate Giving me 3.5 Okay, so that's the figure from year 1 I'm going to assume that that stays constant into the future, that's a perpetuity If I want to find the present value of a perpetuity to one year before I can take the cash flow from year 1 and divide that by discount rate That will get me the present value to year 0 of those figures And it comes to 35 So have we created value or destroyed it? Well the synergies that we're going to earn are 35 and how much did we pay above and beyond the premium for them? Only 33, that's great! So we've left 2 of value in the company Now to be fair, if I'm paying a premium of 33 and I'm only going to get out of it synergies of 35 That's not a lot of value that's been left in the company. So we might want to try and negotiate down the premium paid