"Combined Value = Stand alone value of acquiring firm (V a ) + Stand alone value of acquired target firm (V t ) + Value of synergy ΔV at " - Discuss this equation with reference to Synergy benefits in Merger of Companies

Synergy results from complementary activities. For example, one firm may have a substantial amount of financial resources while the other has profitable investment opportunities. Likewise, one firm may have a strong research and development team whereas the other may have a very efficiently organized production department. Similarly, one firm may have well established brands of its products but lacks marketing organization and another firm may have a very strong marketing organization. The merged business unit in all these cases will be more efficient than the individual firms and hence, the combined value of the merged firms is likely to be greater than the sum of the individual entities (units) due to synergy created which enhances the operational efficiency and more business value. Accordingly, the combined value of the firm is calculated using the following formulae: Combined Value = Standalone value of acquiring firm (V a ) + Standalone value of acquired target firm (V t ) + Value of synergy ΔV at . Normally, the value of synergy is positive and this constitutes the rational for the merger. In valuing synergy, costs attached with acquisitions should also be taken into account. These costs primarily consist of costs of integration and payment made for the acquisition of the target firm, in excess of its value, V t . Therefore, the net gain from the merger is equal to the difference between the value of synergy and costs. Net gain = Value of synergy ΔV at - Costs.