Price the synergy before paying for it

Learning goals

• Calculate the acquisition NPV accruing to A.
• Explain why 30 applies to this case.
• Identify the case-specific assumption or failure mode before taking action.

Draft · approximately 40 minutes, excluding further revision.

Shared case and decision context

Acquirer A is worth 500, target B 180 and achievable after-tax synergy PV 50. A offers cash 210. Integration costs are already included in synergy. No other financing or tax effects occur. A separate divestiture would remove a persistently loss-making unit.

Economic or professional mechanism

Restructuring can change operating assets, ownership or financing. Value creation requires incremental cash flows, lower risk or better deployment of capital; a new legal form alone does not create synergy. In an acquisition distinguish the total economic synergy from the premium transferred to target holders. Assess execution probability and integration costs before setting the maximum price.

Apply, challenge and communicate

Premium is 30, leaving 20 of NPV for A. Paying above 230 would destroy A’s value under these assumptions. Compare divestiture proceeds plus retained-business improvements with the value surrendered; apparent EPS accretion and the desire to be larger do not replace valuation discipline.

Trace debt-financed restructuring into ratios

A debt-funded repurchase changes shares, interest and leverage. Suppose earnings before new interest100,50 shares, debt raised200 at5%,tax25%,and10 shares repurchased. New earnings92.5 and40 shares imply EPS2.3125, above the old2 even though operating earnings did not improve. Net debt/EBITDA rises if EBITDA is unchanged. Cost of capital can change as tax benefits and distress risk interact; there is no universal guarantee it falls.

Separate cost savings from financial engineering

Operating restructuring can close facilities, change suppliers or reduce recurring costs, often requiring upfront cash and disruption. Balance-sheet restructuring can refinance debt, exchange claims or change maturity and covenants. Value the incremental after-tax cash flows and risk effects rather than merely labeling a charge nonrecurring. A one-time restructuring cost can be followed by recurring savings, but repeated programs raise questions about normalized earnings.

Formula and assumptions

Acquirer NPV=synergy−(offer−standalone target value)

Case analysis with explicit assumptions

1. Acquirer A is worth 500, target B 180 and achievable after-tax synergy PV 50. A offers cash 210. Integration costs are already included in synergy. No other financing or tax effects occur. A separate divestiture would remove a persistently loss-making unit.
2. Method: Acquirer NPV=synergy−(offer−standalone target value)
3. Case result: 20. Premium is 30, leaving 20 of NPV for A. Paying above 230 would destroy A’s value under these assumptions. Compare divestiture proceeds plus retained-business improvements with the value surrendered; apparent EPS accretion and the desire to be larger do not replace valuation discipline.

Errors to catch

• Do not replace the stated assumptions with an unstated shortcut. Reconcile units, timing and the claim being valued or duty being assessed.
• A proof of synergy realization is not a defensible conclusion for these case facts.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.

• Reference · www.cfainstitute.org
• Reference · www.investor.gov