Question of the day
2026-09-20
How are cost synergies modeled to flow through the income statement and ultimately to value?
Answer it out loud first — like you would in the room. Then check yourself:
Reveal the model answer
Model answer
Cost synergies reduce combined operating expenses, increasing pro forma EBIT/EBITDA. They're typically phased in over a ramp (e.g., partially in Year 1, fully by Year 2-3) and offset by one-time costs to achieve them (severance, integration spend). After-tax, they boost net income and accretion. In a DCF/value sense, the present value of recurring after-tax synergies, net of the PV of one-time costs to achieve them, is the value created — and this should be compared to the control premium paid.
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