Acquirer Target Post merger

Revenue 50000 20000

Operating margin 12% 7% wd
tax rate 30% 30% kd
RR 48% 35%
Growth 5% 3%
Steady Growth 2% 1%
beta 1.35 1.25
Rf 6% 6%
Rp 8% 8%
Wd 10% 15%
Kd(1-t) 5% 5%

INCREASE EBIT post m&a 100 in million

1 Efficiency gain if
g 8%
OM 8%
debt increases to 20%

2 Final offer value

Post merger

20%
6%
 Target
Revenue 20000
Operating margin 7%
tax rate 30%
RR 35%
Growth 3%
Steady Growth 1%
beta 1.25
Rf 6%
Rp 8%
Wd 15%
Kd(1-t) 5%
Ke 16.00%
Ko 14.35%
Ke(Steady) 14%
Ko(Steady) 13%

FV of Target
Year 0 1 2 3 4
Revenue 20000 20600.0 21218.0 21854.5 22510.2
Revenue Growth 3% 3% 3% 3% 3%
Operating profit (EBIT) 1400.00 1442.00 1485.26 1529.82 1575.71
Operating Margin 7% 7% 7% 7% 7%
Tax Rate 30% 30% 30% 30% 30%
EBIT(1-t) 980.0 1009.4 1039.7 1070.9 1103.0
RR rate 35% 35% 35% 35% 35%
Reinvestment 343.00 353.29 363.89 374.81 386.05
FCFF 637.00 656.11 675.79 696.07 716.95
DF 0.87 0.76 0.67 0.58
PV of FCFF 573.8 516.8 465.5 419.3

PV of 5 years 2353.1
Terminal Value 3274.5
DCF EV of Target (status quo) 5627.6
 5 6 Terminal Value
23185.5 23417.3
3% 1%
1622.98 1639.21
7% 7%
30% 30%
1136.1 1147.4
35% 35%
397.63 401.61
738.46 745.84 6402.08
0.51 0.45
377.7 3274.5
 Acquirer
Revenue 50000
Operating margin 12%
tax rate 30%
RR 48%
Growth 5%
Steady Growth 2%
beta 1.35
Rf 6%
Rp 8%
Wd 10%
Kd(1-t) 5%
Ke 16.8%
Ko 15.6%
Ke(Steady) 14%
Ko(Steady) 13%

FV of Acquirer
Year 0 1 2 3 4 5
Revenue 50000 52500.0 55125.0 57881.3 60775.3 63814.1
Revenue Growth 5% 5% 5% 5% 5% 5%
Operating profit (EBIT) 6000.00 6300.00 6615.00 6945.75 7293.04 7657.69
Operating Margin 12% 12% 12% 12% 12% 12%
Tax Rate 30% 30% 30% 30% 30% 30%
EBIT(1-t) 4200.0 4410.0 4630.5 4862.0 5105.1 5360.4
RR rate 48% 48% 48% 48% 48% 48%
Reinvestment 2016.00 2116.80 2222.64 2333.77 2450.46 2572.98
FCFF 2184.00 2293.20 2407.86 2528.25 2654.67 2787.40
DF 0.86 0.75 0.65 0.56 0.48
PV of FCFF 1983.4 1801.2 1635.8 1485.5 1349.1

PV of 5 years 8255.0
Terminal Value 12396.9
DCF EV of Acquirer (status quo) 20651.8
 6 Terminal Value
65090.4
2%
7810.84
12%
30%
5467.6
48%
2624.44
2843.15 25613.94

12396.9
 Target
Revenue 20000
Operating margin 8%
tax rate 30%
RR 35%
Growth 8%
Steady Growth 1%
beta 1.25
Rf 6%
Rp 8%
Wd 20%
Kd(1-t) 5%
Ke 16.00%
Ko 13.80%
Ke(Steady) 14%
Ko(Steady) 12%

FV of Target
Year 0 1 2 3
Revenue 20000 21600.0 23328.0 25194.2
Revenue Growth 8% 8% 8% 8%
Operating profit (EBIT) 1600.00 1728.00 1866.24 2015.54
Operating Margin 8% 8% 8% 8%
Tax Rate 30% 30% 30% 30%
EBIT(1-t) 1120.0 1209.6 1306.4 1410.9
RR rate 35% 35% 35% 35%
Reinvestment 392.00 423.36 457.23 493.81
FCFF 728.00 786.24 849.14 917.07
DF 0.88 0.77 0.68
PV of FCFF 690.9 655.7 622.3

PV of 5 years 3119.8
Terminal Value 5054.1
DCF EV of Target (Optimally managed) 8173.9
DCF EV of Target (status quo) 5627.6
Efficiency Gains 2546.3
 4 5 6 Terminal Value
27209.8 29386.6 29680.4
8% 8% 1%
2176.78 2350.92 2374.43
8% 8% 8%
30% 30% 30%
1523.7 1645.6 1662.1
35% 35% 35%
533.31 575.98 581.74
990.44 1069.67 1080.37 9646.14
0.60 0.52 0.46
590.6 560.5 5054.1
FV of Combined Firm
Year
Operating profit (EBIT)
Operating Margin
Tax Rate
EBIT(1-t)
RR rate
Reinvestment
FCFF
DF
PV of FCFF

PV of 5 years
Terminal Value
DCF EV of Combined firm
Value of combined firm without synergy
Synergy Gain

Assumption:
Value of Acquirer (status quo) 20651.8175
value of Target (optimally managed) 8173.9
Value of Combined firm (without synergy) 28825.7

EBIT of target 1400.00

EBIT of acquirer 6000.00
Sales of target 20000
Sales of acquirer 50000
Current operating margin 10.57%

Increase in EBIT post M&A 100

New operating margin 10.71%

EBIT 7500.00
Operating margin 10.71%
tax rate 30%
RR 40%
Growth 8%
Steady Growth 2%
beta 1.43
Rf 6%
Rp 8%
Wd 20%
Kd(1-t) 6%

0 1 2 3 4 5
7500.00 8100.00 8748.00 9447.84 10203.67 11019.96
10.7% 10.7% 10.7% 10.7% 10.7% 10.7%
30% 30% 30% 30% 30% 30%
5250.0 5670.0 6123.6 6613.5 7142.6 7714.0
40% 40% 40% 40% 40% 40%
2100.00 2268.00 2449.44 2645.40 2857.03 3085.59
3150.00 3402.00 3674.16 3968.09 4285.54 4628.38
1.00 1.00 1.00 1.00 1.00
 3402.0 3674.2 3968.1 4285.5 4628.4

19958.2
23771.2
43729.3
28825.7
14903.6

Increase in EBIT by 100 million has been incorporated from the first year assuming synergy gains are realised starting from th
 Levered beta of combined firm
Beta levered D/E Tax rate Beta unlevered FV Weightage
Target 1.25 0.18 30% 1.11 8173.9 0.28
Acquirer 1.35 0.11 30% 1.25 20651.82 0.72
28825.7

Blended WACC
Beta of new firm 1.43
kd 6%
Rf 6%
Rp 8%
Ke 17.40%
Wd 20%
We 80%
Blended WACC 15.12%

Ke steady 14.00%
Ko steady 12.40%

6 Terminal Value
11901.56
10.7%
30%
8331.1
40%
3332.44
4998.65 48063.98
 23771.2

Value of Target firm 5627.6004

Efficiency gain 2546.33
Synergy Gain 14903.59

Final Offer Value 23077.519

ns are realised starting from the first year

Weighted Avg unlev beta D/E post acquisition Levered beta of new company
0.25 1.43
1.21