Why do acquirers estimate the net present value of synergies when evaluating a target company?

Estimating the net present value of synergies is critical for acquirers as it helps them determine the potential value that can be realized from the combination of companies. The rationale behind this assessment lies in understanding how much additional value the acquirer can create through the merger or acquisition. Companies often strive to substantiate their offer price with realistic projections of the synergies they expect to achieve post-transaction.

Including a high percentage of the value from synergies in the offer compromises a potential negotiation leverage. If an acquirer were to overestimate these synergies or include them excessively in their valuation, it could lead to overpaying for the target company. Traditional financial wisdom suggests that firms should be conservative in their projections to assure investors and stakeholders of sound decision-making. Therefore, acquirers often build their offer around a conservative estimate of synergies, presenting a valuation that accounts for known factors without inflating expectations.

This cautious approach ultimately enables companies to balance an attractive offer with prudent financial management, minimizing the risk associated with the additional projections they include in their valuation discussions with the seller.