Question of the day
2026-07-29
A target trades at a $1.0bn standalone equity value. A strategic pays a $300m premium and expects $50m of after-tax run-rate synergies. Roughly how should you think about whether the deal creates value?
Answer it out loud first — like you would in the room. Then check yourself:
Reveal the model answer
Model answer
Compare the premium paid to the value of synergies. The premium is $300m. Capitalize the $50m after-tax recurring synergies as a perpetuity-like value; at, say, a 10% discount rate that's ~$500m of PV (50/0.10), net of one-time costs to achieve them. If synergy PV (~$500m, minus a haircut for ramp/risk and one-time costs) exceeds the $300m premium, the acquirer captures net value. If synergies are smaller or heavily haircut, the buyer overpaid and transferred value to the seller. (Discount rate and capitalization are illustrative.)
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