Companies A and B plan to merge, and expected the following syngergies, net of costs, to begin to begin in the first post-merger year.
$600 million revenue increase, expected to grow thereafter at the rate of inflation.
$500 million in fixed overhead cost reductions
$60 million cost reduction from eliminating overlapping technologies
Assume the following:
Cost reductions will increase by 40% in after the first year, and then decline at a rate of 6% in perpetuity
Revenue synergies after the first year will grow at 3% in perpetuity.
The expected post merger variable cost is 60% of revenues.
The merged firm will need to maintain net working capital equal to 2% of revenues.
The merged firm will need to spend $400 million for integration costs (tax deductible) in the first post merger year
Post-merger cost of capital of 8%, tax rate of 40%, and expected annual inflation of 3%.
What is the total net present value of all synergies?