“Are You Paying Too Much for That Acquisition?”
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Read the assigned article, “Are You Paying Too Much for That Acquisition?” by Eccles, Lanes, and Wilson, from Harvard Business Review (1999).
In the textbook, complete the following problems.
Problem 7.11 (Show calculations for a, b, and c.)
Problem 7.12 (Show calculations for a and b.)
Using information from “Are You Paying Too Much for That Acquisition?” address the following with a minimum of 500 words.
List and describe the components used to calculate synergy value.
Critically evaluate which component is most underestimated. Explain your answer.
Sample Solution
The article “Are You Paying Too Much for That Acquisition?” by Eccles, Lanes and Wilson (1999) describes the components used to calculate synergy value. Synergy value is a measure of the amount of money that can be generated from an acquisition beyond what would have been expected from each company’s individual results (Eccles et al., 1999). The following are components that can be used in this calculation:
1) Revenue Increase – This measures how much additional revenue could be gained due to combining resources and capabilities with the acquired firm. It represents the difference between projected sales before and after the merger or acquisition (Eccles et al., 1999).
2) Cost Reduction – This component looks at potential savings in costs such as production, marketing, advertising, and distribution. For example, if two companies are merging they might be able to capitalize on economies of scale by utilizing existing resources instead of having to create new ones (Eccles et al., 1999).
3) Efficiencies– This component measures any efficiencies that can come from combining forces such as increased leverage in negotiations with suppliers or improved customer service through expanded reach (Eccles et al., 1999).
4) Tax Benefits – This looks at how much money can be saved through tax breaks associated with an acquisition. Mergers may provide certain benefits including lower corporate tax rates and deductions for certain losses related to acquisitions (Eccles et al., 1999).
In conclusion, these four components taken together make up synergy value which helps determine whether an acquisition is beneficial or not financially for both parties involved. It is important for those considering mergers or acquisitions to carefully evaluate each component in order to make sure it provides real financial benefit over time.
