This workout says a business is considering two transactions with the synergy characteristics below Which of the deals is likely to justify a higher premium paid? Well let's compare them, so deal A says it will have a synergies run rate of 100 million (that means constant 100 million) Deal B says exactly the same But what is the source of those synergies? Well in deal A, 60% of the synergies are cost synergies (that means costs will be reduced) They are low risk. They're in the control of the company, therefore we think it's likely they will occur All of which will be made at the target level. So if that's the target, it's reasonable for the target to expect to be paid for these They are providing the synergies, providing the value 20% are revenue synergies, now they are much higher risk Revenue synergies means we expect to sell more, that's outside of the company's control. It may not happen at all We therefore wouldn't expect to pay the target very much for these Lastly, 20% are cost of capital synergies. Now these are again quite low risk This means the company will be able to reduce its cost of capital Now we need to argue, where is this coming from? Is it the two companies coming together and the diversification is causing the lower cost of capital? Or is it that the buyer has a very low cost of capital and it can use that very cost of capital and just kind of copy paste it onto the target I think it's probably the latter, the buyer is able to bring their own very low cost of capital And just extend it onto to the target Again, the target would not expect to be paid for this Now let's look at deal B and deal B, 80% of the synergies are low cost. Okay so same again, low cost means low risk However, half of which will be at the buyer level. Oh dear! That also means that half will be at the target level So we wouldn't expect the target to be fully paid for these synergies Again, 20% are revenue synergies, These are high risk, we wouldn't expect the target to be paid for these So in comparing the two deals and trying to work out where the highest premium is justified It's really the cost synergies that we need to compare And given that all of 60% in deal A will be at the target level Whereas only half of 80% will happen in deal B We think that deal A justifies the higher premium paid