Calculate synergy from acquisition: Assume that you are Best Buy, the electronic
ID: 383911 • Letter: C
Question
Calculate synergy from acquisition:
Assume that you are Best Buy, the electronics retailer, and that you would like to enter the hardware component of the market. You have been approached by investment bankers for Company X, which has a recognized brand name. Based on the below proposed breakdowns on benefits and costs, what will be the synergy for the acquisition? (please disregard the discount factor)
The total revenue of Best Buy and Company X will increase 4 million each year for the next 5 years from combing the two distribution channels.
The total revenue of Best Buy and Company X will increase 5 million each year for the next 5 years from tapping into different customer bases.
The total operation cost of Best Buy and Company X will reduce by 2 million each year for the next 5 years.
The cost to restructure the merged companies will be 10 million as a one-time cost.
The cost to complete the deal will be 3 million as a one-time cost.
$42 million
Explanation / Answer
Synergy can be defined as an effort to combine two different organizations to reap better benefits than their individualistic performance.
Hence Synergy of Acquisition can be stated as the benefits gained by acquiring another company,
From the given question we can infer the following,
x1 = Restructuring costs
= $ 10 million
x2 = Cost to complete deal
= $ 3 million
Therefore, Spending on Acquistion, X = x1 + x2
= 10 + 3
X = $ 13 million
Revenue increase by combining two distribution channels, y1 = $ 4 million * 5 (i.e., Considering next 5 years)
= $ 20 million totally
Revenue increase from tapping into customer bases, y2 = $ 5 million * 5 (i.e., Considering next 5 years)
= $ 25 million totally
Savings in operation costs, y3 = $ 2 million * 5 (i.e., Considering next 5 years)
= $ 10 million totally
Total Savings of acquisition, Y = y1 + y2 + y3
= 20 + 25 + 10
Y = $ 55 million
Total synergy gained can be found by decrasing the cost spent on acquisition from the gained synergy over five years. Hence
Synergy Gained, SG = Total savings on acquistion - Spending on Acquisition
= Y - X
= 55 - 13
SG = $ 42 million
Hence it can be seen that the total synergy that can be gained by Best Buy on acquiring Company X can be $ 42 million.
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