Frequently Asked Questions
Exercise Set Calculating synergies value (Q2)
The last question of this exercise asks to calculate the total value of synergies after the acquisition. Students ask why we multiply the increase in sales (€1.2 x 10%) by the gross margin (40%) instead of simply taking the increase in sales (€1.2 x 10%) amount.
The reason is that the synergies should measure the incremental FCF the firms will receive. Hence, the increase in sales that should be included should not be the full 10% x 1.2M because the firm does not receive that full value at the end of the day. The increase in sales is accompanied by an increase in variable costs, and that should be taken into account. This is why we multiply by the gross margin.