Answers / M&A Advisory

A client is acquiring a target with significant cost synergies expected to phase in over three years. How do you value these synergies in a merger model, and what discount rate do you use?

An advanced M&A Advisory question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).

THE SHORT ANSWER

I model synergies as incremental EBITDA, net of implementation costs, phased over three years. To value them, I discount the after-tax synergy cash flows to present value using the acquirer's WACC, adjusted for the risk of realization—typically a higher discount rate (e.g., 12-15%) because synergies are uncertain. Alternatively, I apply a multiple to the steady-state synergy EBITDA (e.g., 8-10x) and discount back. I also consider synergy decay or one-time costs.

WHAT INTERVIEWERS LISTEN FOR

  • ✓Phase synergies over 3 years
  • ✓Net of implementation costs
  • ✓Discount at WACC or higher rate
  • ✓Multiple approach as alternative

COMMON MISTAKES

  • ✗Using target's WACC for synergies
  • ✗Ignoring phase-in timing or implementation costs

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