Strategic vs. Standalone Value
DCF analysis of a company’s cash-flow and comparables analysis provide what is known as a company’s “standalone value”. However, a company may be worth more than “standalone value” to a strategic investor, where the investor derives synergies or strategic value from an acquisition, where the combination of two companies is worth more than the sum of the parts. Examples of these may include:
- Where economies of scale or staffing efficiencies create a synergistic improvement in value.
- Where a company has a brand or intellectual property that can create value for the other company.
- Where putting the capabilities of two companies together allows attraction of new clients or new types of revenues.
- Where a business combination allows better utilization of underused equipment/facilities or other resources.
- Where a merged larger business is able to acquire customers that the merging companies were individually unable to serve.
- A merged business might be able to make better use of highly paid specialized staff, or to afford new competences that make the business more competitive.
It is not possible to calculate synergies in the abstract; once the details of the two companies and the assumptions underlying the business combination are known, synergies can be calculated. While synergies can only be calculated as one approaches closing of a transaction, this knowledge of how value is created via synergies allows us to target investors with likely synergies. Such investors are likely to pay a higher price when purchasing a business.