What is the indicated value of the combined firm after the acquisition in the given example?

What is the indicated value of the combined firm after the acquisition in the given example?

• A. 810 million
• B. 540 million
• C. 180 million
• D. 900 million

Answer: (A)

The value of a merged firm comes from adding the two companies’ standalone values and the extra value created by combining them (synergies). In this example, the acquirer is worth 540 million and the target 180 million, for a pre-synergy total of 720 million. The merger is assumed to generate 90 million in synergies, such as cost savings or cross-selling opportunities. Adding these gives 810 million, which is the indicated value of the combined firm after the acquisition. The other amounts would represent only one of the firms or a larger synergy than is assumed here, respectively.

The value of a merged firm comes from adding the two companies’ standalone values and the extra value created by combining them (synergies). In this example, the acquirer is worth 540 million and the target 180 million, for a pre-synergy total of 720 million. The merger is assumed to generate 90 million in synergies, such as cost savings or cross-selling opportunities. Adding these gives 810 million, which is the indicated value of the combined firm after the acquisition. The other amounts would represent only one of the firms or a larger synergy than is assumed here, respectively.