6. Deal Synergies

Overview

In this lesson, we project both the cost synergies and the revenue synergies that the acquirer has assumed will occur once the companies are combined.

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Summary

  1. Lesson Goal (00:04)

    The goal of this lesson is to project the synergies that can be achieved after the proposed transaction.

  2. Projecting the Synergies (00:19)

    The total amount of synergies from a transaction can be broken down into different individual synergies. In our example, the proposed transaction involves five synergies: revenue, cost of goods sold, stores, e-commerce, and sales and marketing. Our model gives us the total amount that can be realized from each of these synergies.

    Synergies are not fully realized as soon as the transaction completes. It usually takes several years to realize the full potential of our synergies. In our example, we assume an additional 20% of the value is realized each year, so that the full value of the synergies is reached after five years. We can therefore project each synergy individually for each year by multiplying the total value of the synergy by the percentage realized in that year. We then add the amount from each synergy to find the total synergies for each year of our projection.

  3. Projecting Implementation Costs (02:12)

    There are generally implementation costs associated with synergies. For example, the company may have to pay staff redundancy payments or lease payments associated with closed stores. These implementation costs will reduce the value realized from synergies in the early years. In our model, the implementation costs in the first two years are greater than the value from the synergies. However, after these two years, the implementation costs end and the synergies start to generate value for the combined business.

Transcript

In the previous lesson we reviewed the financial performance of Trouser Town and Shirt Shop. In this lesson, we're going to project the synergies that can be achieved from 2017 to 2021.

Based on the management presentation from Shirt Shop we know that there's 58 million in potential synergies to be tapped in this transaction; 20 million from revenue and the remainder from costs. When modeling synergies it's important to remember that you don't achieve the full potential of synergies for some years. And in our model I'm going to assume that 20% of synergies is achieved each year.

To project individual synergies I'll simply start with revenue take the total amount, anchor, and multiply by the relevant percentage. And then copy across for the remaining cells.

In this projection only 4 million of revenue synergies are applied in 2017, but in 2021 we'll get the full value of 20 million. For COGS synergies it's simply going to be cost of goods sold, again anchored and multiplied by the relevant percentage.

And for Opex Synergies it's all of the remaining values: Sales and Marketing, E-Commerce, and Stores.

Again I'll anchor, and multiply by the percentage.

And total synergies will simply be the sum.

When I copy across the total synergies in 2021 should equal to the total realizable synergies I have in my table. Which it is. In addition to synergies taking time to be fully realized, they also take some costs to implement. Again from the management presentation from Shirt Shop, I know that these estimates are 25.6 and 54.8.

These implementation costs tend to focus on staff redundancy payments and lease payments when we're shuttering stores or other buildings. In the first couple of years we'll actually make a loss from this transaction, 'cause the implementation costs will be greater than total synergies. But once the implementation costs have been met then the synergies will really begin to add value to the combined entity. When reviewing synergies it's always worth baring in mind that revenue synergies tend to be more speculative than cost synergies. Cost synergies are much easier to quantify and the probability of cost synergies being realized are higher than revenue synergies.

With this simple projection now built let's move on to the transaction assumptions for this deal in the next lesson.