Synergy Case Study - Introduction to Synergy Valuation
- 01:36
Value the cost and revenue synergies of an acquisition using a DCF methodology and why consistency is important.
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Glossary
Acquisition DCF SynergiesTranscript
Once we have completed a DCF valuation, that will give us the standalone fundamental value of the company, and that is assuming we are not taking a controlling stake. If we take a controlling stake, particularly as a strategic inquirer, what that means is that we can put two companies together and generate cost savings. And this cost savings could include reducing the combined finance team, reducing the combined management team, sales team, etcetera, because you typically won't need as many people to run the combined businesses as you will do running the two businesses individually. In addition to those cost synergies and those cost synge tend to be the most important, you can potentially get revenue synergies, particularly where one firm has a very good distribution in a particular geographical area and another firm has a product, which can be then pumped through that distribution. Generally speaking, when we are looking at acquisitions, the cost synergies are the most important, and so what we're going to do now is we're to model out what those costings look like and then value them using a DCF methodology, you need to make sure you're consistent between the base valuation of the company and the synergy valuation when you add them together. So if you are using a DCF valuation, then you want to make sure your synergies are based on a DCF valuation methodology. If you're using a multiple method, then you want to use a multiple method to value your synergies. Consistency is the key.