While synergies arise when two businesses are integrated and create greater value than on their own the most common types are cost synergies as the two sets of resources provide efficiencies when operated together.
Imagine two businesses merge, but they've got two departments that do exactly the same thing.
Maybe we could cut costs by cutting one of those departments.
Annual synergy cash flows can be estimated using past transactions. What we'll do is we'll go into those past transactions find some kind of metric about the synergies. So maybe synergies as a percentage of sales, or selling general and admin expenses.
And then we will take that percentage and apply it to our transaction.
In addition the value of synergies can be estimated using DCFs or multiples. Now, this means the value today and if the value today was a thousands I might be willing to pay a premium of up to a thousand in order to secure acquiring this target.
Glossary Synergy Analysis
