Calculation of Synergy Benefits for an M&A Deal This is an exclusive teaching material of Dr.

Paritosh Basu

The following are excerpts from a due diligence report for estimated financial positions as on 31. 3. 2023 in respect of an M&A Deal in which
both the Acquirer and the Target are manufacturing the FMCG household products using the same raw material.
Please calculate monetary value of each line item of synergy benefits. Finally use a DCF model to calculate the total value of synergies. Also
please calculate the per share value of synergy benefits. You may assume numbers for additional information that you may require.

Synergy
Sl.
Identified Areas of Synergy Benefits Synergy / Compatibility UOM Acquirer Target Benefit. Remarks
No.
Maximum
Rs/Mln..
A. Capital
a. Equity Capital & Reserves Rs. 300 Mln.. will Rs. Mln. 1,000 600.00 300.00 Reduction in deployment
Deployed reduce after
settlement of deal.
b. Weighted average of Ke % 17 19.00 51.00 May be due to risk factor.
Part savings will be possible
c. Long Term borrowed capital Collaterals are FA Rs. Mln. 2,500 900.00

d. Weighted average of LT Kd No change in 12.0% 10.50% 37.50 Better negotiation should be

requirement possible
e. Weighted average cost of % 11.50% 10.30%
Working Capital

B. Revenue Synergy - Higher Sales Rs. Mln 600

EBIDTA post consolidation less WC Inerest 32% 192.00

C. Operational and Cost Synergies

2. Cash & Cash Equivalent
a. Avg. availability for FY 2020-21 To be maintained Rs. Mln. 500 350.00
after deal
b. Annualised value of other Income Rs. Mln. 35 30.00 7.86

c. Income Yield 7.00% 8.57% 1.57%

3. Net exposure to USD exchange rate Cash flow is even in
a. Year's Net Cash Flow terms
Inflow of
- outflow USD. (-ve) 200 (+ve) 150 Natural Hege if timing
Mln. matches
b. Treasury operations Average strike Rates Self Consultant
c. Average Rates for transaction Avg. for FY 2016 - Rs. 82.00 81.25 Better negotiation skill of
Outward /USD 1 Target
Avg. for FY 2016 - 81.00 81.05 Better negotiation skill of
Inward Target

4. Procurement of the major Raw Material.

a. Total requirement in FY2016 MT 2,500 1,200.00 Both Cos. Use the same material
b. Average landed cost Rs. / MT 710 650.00 0.15 Savings due to better rate

c. Stock holding period Plants are in same Days 60 100.00 0.01 Savings for Interest cost on
town holding period of Target

d. Credit Terms Days 60 75.00 0.01 Possible savings of interest

cost by Acquirer

5. Markets
a. Regions West, North North, East

b. Method of Distribution External Channel of Self stores + Distributors

Acquirer
takes care of 40% Distributors
c. Average cost of S&D on Net Turnover % 7 9.40 149.46 Savings possible in Target -
Revenue + Distributors' Margin Combined synergy may be
better

d. Addl. Investments required Volume to be handled Rs. Mln 200 -200.00 Capital Expenditure
to handle Target's Prod. In Self 60%
Stores. (Finance - Loan 75%)
Addl. Interest Cost p. a. (Loan 10% -15.00 Interest Cost for Capital
repayment in 5 years) Investment in first year
e. Turnover Rs. Mln 11,250 5,640.00
f. Average period of receivables Days 45 55.00 18.78 Savings in Target assuming 18% GST

6. Other elements of COGS Rs. Mln 5,000 1,840.00 1,329.79 Savings: 11.82% of Rs. 5,000
Mln.
COGS as percentage of Turnover 44.44% 32.62%
This is a strictly confidential teaching material of Dr. Paritosh Basu
7. Leadership Manpower (Common)
a. Major Function Post acquisition the No. 9 7 35.00 Assuming @ Avg. Rs. 5
two plants will Mln/person
function as divisions

This is a strictly confidential teaching material of Dr. Paritosh Basu

DCF Valuation Model for Synergy Benefits

Value @
Sl.
Line Items for Synergy Benefits 100%
No.
Realisation
I Assumed Proportion of Realisation - Revenue
Assessed Proportion of Realisation - Opn and Costs, etc.

II Synergy Benefits - Revenue (EBIDTA) 192.00

Synergy Benefits - Costs
1 Cost of Longterm Borrowed Fund 37.50
2 Other Income 7.86
3 Raw Materials Cost and Inventory Management 0.15
4 Marketing, Selling & Distribution Expenses 149.46
5 Other Elements of Cost of Goods Sold 1,329.79
6 Interest on Working Capital - Accounts Payable 0.01
7 Interest on Working Capital - Inventory 0.009
8 Interest on Working Capital - Receivables 18.78
9 Leadership Manpower Cost 35.00
10 Interest on Loan for Capex -15.00
Subtotal - Cost Synergy Benefits 1,563.55

11 Total Synergy Benefits 1,755.55

C Depreciation on Capital Assets (Life in years) 10 20.00

D Net Profit Before Tax 1,735.55
E Effective Income Tax 25% 433.89
F Capital Expenditure -200.00
G Free Cash Flow to Equity Shareholders* 1,521.66
H WACC 17%
I Terminal Growth Rate 5%
J Discounted Cash Flow 7,356.92
K Number of Shares (Assumed - in Mln.) 1000
L Synergy Value per share (Rs.) 7.36

Note: Common Assumption for all synergy benefits.

None of the Synergy Benefits will increase with growth in business over the years other than the
 This is an exclusive teaching material of Dr. Paritosh Basu

Rs./Million
Perpetuity
Year - 1 Year - 2 Year - 3 Year - 4 Year - 5
Value
30% 50% 80% 100% 100% 100%
50% 75% 90% 100% 100% 100%

57.60 96.00 153.60 192.00 192.00 192.00

18.75 28.13 33.75 37.50 37.50 37.50

3.93 5.89 7.07 7.86 7.86 7.86
0.08 0.11 0.14 0.15 0.15 0.15
74.73 112.10 134.51 149.46 149.46 149.46
664.89 997.34 1,196.81 1,329.79 1,329.79 1,329.79
0.00 0.01 0.01 0.01 0.01 0.01
0.00 0.01 0.01 0.01 0.01 0.01
9.39 14.09 16.90 18.78 18.78 18.78
17.50 13.13 11.81 11.81 11.81 11.81
-15.00 -12.00 -9.00 -6.00 -3.00 -
774.28 1,158.79 1,392.01 1,549.36 1,552.36 1,555.36

831.88 1,254.79 1,545.61 1,741.36 1,744.36 1,747.36

20.00 20.00 20.00 20.00 20.00 20.00

811.88 1,234.79 1,525.61 1,721.36 1,724.36 1,727.36
202.97 308.70 381.40 430.34 431.09 431.84
-200 - - - - -
428.91 946.09 1,164.21 1,311.02 1,313.27 10,962.69
0.8547 0.7305 0.6244 0.5337 0.4561 0.3898

366.59 691.13 726.90 699.63 599.00 4,273.68

the years other than the revenue synergy as provided in estimation sheet.