Synergy Quantification

---
name: synergy-quantification
description: Sizes cost and revenue synergies separately, phases them net of cost to achieve, discounts them to a present value, and states the synergy a buyer must believe to justify the premium paid.
---

# Synergy Quantification Agent

## When to use
Use this when a combination is being priced or defended and someone has quoted a synergy number without showing where it comes from: setting the premium in a live process, testing a management case before a board, or preparing the synergy page of an announcement deck. Reach for it when the real question is whether the premium buys value the acquirer creates or hands it to the seller.

## What it does
It produces a synergy build: cost synergies sized bottom-up, revenue synergies sized separately and haircut, both phased over a realistic ramp, net of cost to achieve, tax-effected and discounted to a present value, then set against the premium paid to state the run-rate the buyer must deliver to break even.

## Method
1. Split the two buckets. Never quote a single number.
   - Cost synergies are controllable and largely deterministic; revenue synergies depend on customers agreeing to something. Blending them lets the soft half hide inside the hard half.

2. Build cost synergies bottom-up. Line by line, role by role.
   - Duplicate corporate functions by headcount and cost, procurement as addressable spend times a savings rate, footprint consolidation, and contract rationalization, each with an owner and the P&L line it lands in.

3. Size revenue synergies with an explicit haircut. Price the belief.
   - Cross-sell as target customers times attach rate times price, carried at gross margin not revenue, plus any pricing effect; apply a stated haircut and show the un-haircut number beside it.

4. Phase the ramp. Book each item in the year it actually lands.
   - Cost typically ramps 30, 70, then 100 percent over three years; revenue slower still.
   - A synergy that requires a systems migration is not a year-one synergy, whatever the integration plan says.

5. Charge the cost to achieve. Pay before you collect.
   - Severance, retention, systems integration, lease exits, and advisory, commonly 1.0x to 1.5x the run-rate cost synergy, weighted into the first two years.

6. Tax-effect and discount. Convert the run-rate into a value.
   - Apply the marginal tax rate, discount at the acquirer's cost of capital rather than the target's, capitalize the terminal run-rate, and net off cost to achieve.

7. Compare against the premium. State the must-believe figure.
   - Premium is offer equity value less unaffected equity value; solve for the run-rate pre-tax synergy whose present value equals it, and express that as a percentage of the target's cost base so it can be benchmarked.

8. Set the announced number. Separate disclosure from the internal case.
   - Announce only synergies you can name and own, hold the rest as internal upside, then sensitize on ramp, haircut, and cost to achieve.

## Inputs
- Target and acquirer cost bases, headcount, and addressable spend
- The integration plan or a view on sequencing and systems
- Cross-sell assumptions: customer counts, attach rates, price, and gross margin
- Cost-to-achieve estimates by category
- Marginal tax rate and the acquirer's cost of capital
- Offer equity value and the target's unaffected equity value

## Output format
- A cost-synergy build by category, each with its run-rate and owner
- A revenue-synergy build with the gross figure, the haircut, and the credited figure
- A phasing section stating what lands in each year for both buckets
- Cost to achieve by year, with the multiple of run-rate it represents
- A present value of synergies, net of cost to achieve and after tax
- The premium paid and the run-rate synergy required to justify it, as a percentage of the target's cost base
- Present all schedules in prose, never as markdown tables

## Example
For Stonebridge Packaging and Lakeview Cartons (fictional, illustrative): the offer values Lakeview equity at 1,000 against an unaffected 800, so the premium is 200. Cost synergies build to a run-rate of 45: corporate overlap 18, procurement 15 on addressable spend of 300 at a 5 percent savings rate, and footprint 12, phased 13.5, 31.5, then 45. Revenue synergies are 20 of gross-margin contribution, haircut by half to 10 and phased over four years. Cost to achieve is 54, or 1.2x the cost run-rate, spent 32.4 in year one and 21.6 in year two. At a 25 percent tax rate and a 9 percent cost of capital, the present value is roughly 380, comfortably above the 200 premium. Break-even needs only about 30 of run-rate pre-tax synergy, 5 percent of Lakeview's 600 cost base, against a management case of 55, or 9 percent; the write-up announces the 45 of named cost actions and holds the revenue half back.