Discussion Issues and Derivations
- Valuing Synergy
Synergy is the increase in value that occurs when two firms, with different
products, markets or functional strengths, come together. Thus, synergy
can be written as follows:
V(AB) = V(A) + V(B) + Synergy
Synergy can come from variety of sources but it shows up in value in one
of three ways:
a. as an increase in current cash flows (resulting from economies of scale
or related synergies)
b. as an increase in growth (resulting from growth synergies)
c. as a reduction in the cost of capital (resulting from a higher debt capacity
or lower costs of debt)
- Valuing Control
The value of control is really the difference in value between the firm
optimally managed, and the value of the firm under the status quo. The value
of control is small in well managed firms and large in poorly managed firms.
To value control, we need to do the following:
a. Value the firm under incumbent management, and current management policy
b. Value the firm under optimal management
c. Value of Control = Value of firm under optimal management - Value of
firm under incumbent management