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Dear Sir.
When we discuss the value of the firm in this section, we are referring to the value of the firm’s equity; that is, that part of the cash flows generated by the firm’s assets that accrue to the firm’s shareholders.
Recall the following:
VA = value of firm A (acquiring firm); VB = value of firm B (the target firm);
and VAB = value of the combined firm
The M&A should only proceed if VAB > VA + VB (there must be synergy!)
?V = VAB – (VA + VB),
where: ?V = incremental net gain from the M&A (i.e. synergy)
We can now define:
= the value of Firm B to Firm A in an M&A.
V*B = VB + ?V
V*B NPV (M&A) = V*B – Cost to Firm A of the acquisition….i understand all the above,except the last point,when they say “we can now define”,the V*B part,it does not make sense to ma after the above explanation,please help,thank you.I don’t know where you have copied all this from, but for them to have written it all out in symbols like that is a bit silly as far as the AFM exam is concerned 🙂
What the last line means is that the benefit to the shareholders of company A is the value of company B to company A (i.e. V*B) less the cost to company A of the acquisition (although that isn’t obvious from the equation as they have written it).
Yes sir,what confuses me is that the value of V*B itself.how on earth they get that mathematically,when the change(V is the differnce of the VA +VB),and suddenly we say V*B is the sumt of VandV*B,my thought process is that it should be V-VA.Thank you, i know get the implication by the last statemen(Comapny A value)t,but i don’t get the way around V*B.
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