Replies to post #12983 on SiNtx Technologies Inc (SINT)

[dp60]

Synergies, excerpt p.6

Several interesting points here. Hopefully the "second school of thought" rules the day.

"I. Valuing Operating Synergies

There is a potential for operating synergy, in one form or the other, in many
takeovers. Some disagreement exists, however, over whether synergy can be valued and,
if so, what that value should be. One school of thought argues that synergy is too
nebulous to be valued and that any systematic attempt to do so requires so many
assumptions that it is pointless. If this is true, a firm should not be willing to pay large
premiums for synergy if it cannot attach a value to it. The other school of thought is that
we have to make our best estimate of how much value synergy will create in any
acquisition before we decide how much to pay for it, even though it requires assumptions
about an uncertain future. We come down firmly on the side of the second school.
While valuing synergy requires us to make assumptions about future cash flows
and growth, the lack of precision in the process does not mean we cannot obtain an
unbiased estimate of value. Thus we maintain that synergy can be valued by answering
two fundamental questions.
(1) What form is the synergy expected to take? Will it reduce costs as a percentage of
sales and increase profit margins (e.g., when there are economies of scale)? Will it
increase future growth (e.g., when there is increased market power) or the length of
the growth period? Synergy, to have an effect on value, has to influence one of the
four inputs into the valuation process – higher cash flows from existing assets (cost
savings and economies of scale), higher expected growth rates (market power, higher
growth potential), a longer growth period (from increased competitive advantages), or
a lower cost of capital (higher debt capacity).
(2) When will the synergy start affecting cash flows? –– Synergies seldom show up
instantaneously, but they are more likely to show up over time. Since the value of
synergy is the present value of the cash flows created by it, the longer it takes for it to
show up, the lesser its value."

[dp60]

Synergy and LDR Merger.

Excerpted from p. 48-9 ZBH 2016 10-K Annual Report.

"On July 13, 2016, we completed our merger with LDR. We paid cash of $1,138.0 million. The total amount of merger consideration utilized for the acquisition method of accounting, as reduced by the merger consideration paid to holders of unvested LDR stock options and LDR stock-based awards of $24.1 million, was $1,113.9 million. The addition of LDR provides us with an immediate position in the growing cervical disc replacement (“CDR”) market. The combination positions us to accelerate the growth of our Spine business through the incremental revenues associated with entry into the CDR market and cross-portfolio selling opportunities to both Zimmer Biomet and LDR customer bases. The goodwill is generated from the operational synergies and cross-selling opportunities we expect to achieve from our combined operations. None of the goodwill is expected to be deductible for tax purposes."

FWIW, goodwill in Zimmer Biomet acquisition of LDR deal was valued at 482.4 m

(in comparison, goodwill in Zimmer acquisition of Biomet was valued at 7433.2m)

http://investor.zimmerbiomet.com/financial-information/annual-reports

glta

[dp60]

Valuing Cash Slack in a Merger, excerpt from The value of Synergy p. 24

"The value of cash slack in a merger is easy to compute. In its simplest variant, we
would compute the net present values of the projects that the cash-poor firm would be
forced to reject because of its cash constraint and add it on to the value of the combined
firm. As a simple example, assume that firm A is cash rich and project poor and has a
cash balance of $ 10 billion. Assume that firm B is cash poor and project rich and would
have rejected projects with a collective net present value of $ 1 billion because of its
cash constraints. The value of cash slack in this merger is $ 1 billion and can be
considered synergy. "

glta

[dp60]

Valuing a Net Operating Loss Carry forward
Excerpt p.25, The Value of Synergy, Aswath Damodaran, 2005

"Assume that a firm with expected operating income of $ 1 billion next year
acquires a firm with a net operating loss carry forward of $ 1 billion. The computation of
the synergy from this acquisition is the savings in taxes that accrue to the acquiring firm
For instance, with a marginal tax rate of 40%, the savings in taxes this year (assuming
that the tax authorities will allow offsetting the target firm’s operating loss against the
acquiring firm’s gain) is $ 400 million. This is the value of the tax savings synergy, if we
assume that the target firm could never have used the net operating loss."

glta

[dp60]

The value of synergy. (a repeat post)

Very good read on valuation of synergy in the context of merger and acquisition.


http://people.stern.nyu.edu/adamodar/pdfiles/papers/synergy.pdf

"Synergy, the increase in value that is generated by combining two entities to create a
new and more valuable entity, is the magic ingredient that allows acquirers to pay billions
of dollars in premiums in acquisitions."


glta