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In this question, we find the Synergy after taking the total market value of the combined and individual companies and we do not deduct debt.
In all other questions I have done so far, we already find the Market value of Equity of Combined company and individual companies to find the benefit to the shareholders. Even if free cash flow to firm is used and capital structure remains same.
What is the exception in this question that we take the total value instead of equity value? This is the only question I found like this.
The answer calculates the total benefit of the synergy. Part of that benefit is given as premium to the shareholders of Fodder. The remainder is to the benefit of the shareholders of Pursuit (and gains always go to the shareholders, not to the debt.)
But to calculate the synergy benefit in every other questions I have done, we deduct the date from the total market value, this question is an exception as we are taking the total value of the company instead of the total market value of equity.
Can you please help understand that concept?
In general the total market value of equity will be the total market value of the company less the market value of the debt.
Any synergy benefits increase the total market value of the company, but the increase all goes to equity (the market value of the debt is not affected by the synergy benefit).
Here the synergy benefit is calculated as the difference between the new total MV less the total of the individual MV’s. That benefit all goes to equity (less whatever of it is given to the shareholders of the target company).
But normally we calculate the synergy benefit by taking the combined market value of equity less individual company market value of equity right?
In this question only we took total market value.
I see your point and it would have been sensible to take account of the extra debt raised (and if you had you would still have got the marks).
However it is somewhat covered in the report which is effectively saying that it is not really worth them buying Fodder, because even ignoring the extra debt the benefit is so small.
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