Doubts

Exercise Set 07, question 2 - M&A

Exercise Set 07, question 2 - M&A

by Virginia Maria Ceccarelli -
Number of replies: 2

Good Morning Professor,

I have a doubt regarding exercise set 07, particularly question 2. In the computation of "gross profit with new sales of B" I would have done 10% * 1.32 * 40%, and not 10% * 1.20 * 40% as reported in the solutions.

Could you please explain me if this is an error and why?

Thank you, 

Virginia Ceccarelli.

In reply to Virginia Maria Ceccarelli

Re: Exercise Set 07, question 2 - M&A

by Lorin Yuezer -
Hi Virginia,

I actually ran into the same question earlier today.

I think the reason they use 10% × 1.20M€ × 40% instead of 10% × 1.32M€ × 40% is because we’re only calculating the incremental gross profit generated by the new sales due to the synergy (i.e., the 10% sales uplift). So:

- 1.20M€ is the original (pre-synergy) revenue of Company B.
- The 10% growth leads to 0.12M€ in new revenue.
- Applying the 40% margin (which is the new, improved margin post-acquisition) gives 0.048M€ in incremental gross profit.

Using 1.32M€ would capture the entire post-merger sales value, which includes the baseline revenue that was already there before the synergy — so it would overstate the synergy benefit.

I hope that helps :)

Best,
Lorin
In reply to Virginia Maria Ceccarelli

Re: Exercise Set 07, question 2 - M&A

by Julio Crego -
Lorin is right.

It depends on your interpretation. You could also have computed:

Increase in sales: \(10%\times 1.2\times 0.25\)
Increase in gross profits: \((0.4-0.25)\times 1.32\)

The sum must be the same as in the solutions. In both cases, we are computing the economic gain and not the level of gross profits.