Having looked at the management's reported level of synergies, we now need to get some understanding if possible, of where those synergies might be coming from.

In this next section, we're asked to calculate the pro forma earnings, the gross profit margin, and EBITDA profit margins for the combination, excluding any synergies and asked to comment on whether this information provides us with any insights into the likely sources of synergies.

So our first step is to calculate the pro forma earnings, and this is simply adding up the revenue of the analog devices and maxim, and then costs on a line by line basis to calculate the group or pro forma earnings that we would have if these two businesses had been in a combination last year.

So we just need to add across for each of the hardcoded values.

I'm just gonna do that quickly.

And then we need to copy from the right for the already calculated formulas for the gross profit operating profit and EBIT and EBITDA are further down.

So now what we can see is the pro forma earnings, which provides us with a picture of what these two businesses would've looked like in terms of their income statement had they been one entity in the prior year.

This question's asking us to see whether these numbers give us any insight as to the source of synergies.

So let's have a go at calculating the next two elements of the requirements, which were to calculate the gross profit and EBITDA profit margins.

One thing we do need to be a little bit careful with here though, is that amortization has been broken out for us on the bottom here, and we can see that there are two sources of amortization, firstly from within cost of goods sold, and secondly from within operating expenses.

Both of these need to be added back to calculate ebitda, but when calculating a gross profit margin, we can see that there is a bit of a disparity here in that for analog, the vast majority, 75% or so of amortization is shown as an operating expense, whereas for Maxim, it's almost 75% shown as a cost of goods sold.

So for better comparability of the gross profit margin ratio, what we're gonna calculate is the gross profit margin, excluding any amortization.

Now, to calculate this, what we've got to do is take the gross profit and add back to this, the amortization that is deducted in calculating the gross profit IE from our cost of goods sold before we divide all of it by our sales.

And secondly, to calculate the EBITDA margin, we just need to take the EBITDA that has been calculated and divide that by our revenue.

Once we've calculated this for analog, we can then copy to the right for Maxim and then for the pro forma combined entities numbers.

And what we can see from this is that from a gross margin perspective, Maxim is earning lower gross profit margins than analog and also earning lower EBITDA margins than analog.

And there may therefore be an expectation that potentially the synergies could be created by transforming the revenues that are earned by Maxim and putting them on the same profit margin scale as we have for the existing analog business.

If we have a look at doing that, we could potentially identify what we might be making in terms of synergies, both from a cost of goods sold perspective and from an operating expenses percentage by looking at the gross profit margin and the EBITDA margin individually.

So let's have a look at those two component parts.

First, what we're gonna have a look at is the synergies that we might expect if we were to move maxim's earnings onto the same profit margin that analog currently has.

And what I'm gonna do is make the column a bit wider just to fit everything in here.

What this analysis is trying to say is, if we were to move maxim's revenues onto the same profit margin ratio as we have for analog, then we would be able to keep analog's existing gross profit margin ratio consistent.

And to do that calculation, what we're gonna have to say is, okay, well what would we expect to see as the gross profit excluding amortization of the pro forma earnings, the combined entity if we have the same profit margin as analog currently does.

So to do that, let's calculate what we'd expect to see as gross profit, excluding amortization, which would be the revenues of the group multiplied by the gross profit margin, excluding amortization for analog on their own.

And then we can subtract from this, the pro forma gross profit, and we add back the amortization that appears in our cost of goods sold on a pro forma basis.

This gives us 74.5.

So if the pro forma revenue earned the same profit margin as the existing analog group does at the moment, we'd end up with a gross profit excluding amortization that is 75.4 higher than what we currently have as our pro forma gross profit, excluding any amortization.

This indicates to us the cost savings that we might expect to make within the cost of goods sold within Maxim.

We could also get to the same number by applying the gross profit margin, excluding amortization to maxim's revenue on a standalone basis, and deducting from that maxim's gross profit, excluding amortization on a standalone basis as well.

So 75.4 is what we might expect to make as the cost of goods sold savings through synergies.

We also want to see if there are any other cost savings through our sales general and administrative costs.

And we do that by having a look at our EBITDA margin in a similar way that we've done so far for the gross profits.

So next, we wanna calculate these synergies that we'd expect to see if maxim's EBITDA margin is aligned with analog.

And again, we do that by taking the pro forma revenues And multiplying that by the analog standalone EBITDA margin and deducting from this, the forecast EBITDA on a pro forma basis.

What this is indicating to us is that we might expect to make EBITDA synergies in total of 113.5, and of that 113.5, 75.4 of those synergy cost savings are coming within cost of goods sold.

Or in other words, we can say that 66.4% of the synergies that we might expect to make within all of our operating expenses come from within the cost of goods sold.

So once again, these numbers are indicating to us that since maxim's gross profit margin and EBITDA margins are below analogs, when those revenues come into the group, we might expect to see the profit margin on both of those increase giving us 113.5 of synergies in total of which about two thirds, the 66.4% come from cost of good sold savings.

One final metric that is often used in relation to understanding synergies is to look at these synergies as a percentage of the targets LTM revenues.

And if we look at this from management's expectations management saying they expect to make 275 million of synergies, we can divide that by maxim's standalone revenues of twenty six hundred and thirty two to give us a ratio of 10.4%.

So again, often when we talk about this from a headline perspective, the indication that we might want to explain to management of the company we're advising is that in this instance, the stated target synergies were 10.4% of the targets LTM revenues at the time of announcement.