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Value Enhancing Strategies

1. In your words, briefly describe a synergy. Why are synergies so important?
2. Why do such a large portion of mergers and acquisitions fail to meet the pre-acquisition targets.
3. Explain how lease rates are calculated (by the lessor)150-200 words
4. Choose 1 of the following Value drivers and briefly discuss why it is important in increasing market value :

Sales growth for years 1-3
? Implement a new promotional campaign to promote exciting or new products
? Form a distributional alliance to enter a new market
? Invest in R&D to create new products
? Acquire a competitor firm

Operating profit margin
? Initiate cost-control programs to reduce operating and administrative expenses
? Invest in a promotional campaign aimed at improving the brand image of your products or services in an effort to support premium pricing policies

Net working capital-to-sales ratio
? Initiate inventory control policies designed to reduce the time that inventory is held
before sale
? Implement a program of credit analysis and control designed to either decrease the time customers take to pay for their purchases or to incorporate penalties for late payment
? Negotiate more lenient credit terms from the firm's suppliers
Property, plant, and equipment-to-sales ratio ? Consider outsourcing of production to strategic partners who might be more efficient in
their operations in an effort to reduce the firm's need for plant and equipment
? Implement stringent controls over the acquisition of new plant and equipment to assure
that all purchases are economically viable
? Improve maintenance of existing plant and equipment to improve up time, which reduces the need for additional plant and equipment

Cost of capital
? Review the firm's financial policies to assure that financing is being obtained from the
lowest-cost sources
? Approach large institutional investors in an effort to develop direct sources of financing for
the firm's new capital needs, thus bypassing the significant costs associated with using the
public capital markets

Solution Preview

1. In your words, briefly describe a synergy. Why are synergies so important?

In lay man terms, Synergy is achieved when 1+1= 3. In other words, synergies are achieved if the whole is greater than the sum of the parts.

It is basically, the idea that the value and performance of two companies combined will be greater than the sum of the separate individual parts.

This term is used mostly in the context of mergers and acquisitions. For example, if Company A has an excellent product but lousy distribution whereas Company B has a great distribution system but poor products, the companies could create synergy with a merger.

Synergies are one of the key reasons for mergers and acquisitions in today's world. Firms merge or acquire other firms to obtain cost or revenue related synergies. For example, a merged entity has larger market share, more resources and greater economies of scale to attain higher revenues and profitability.

Corporate synergy occurs when corporations interact congruently. A corporate synergy refers to a financial benefit that a corporation expects to realize when it merges with or acquires another corporation. This type of synergy is a nearly ubiquitous feature of a corporate acquisition and is a negotiating point between the buyer and seller that impacts the final price both parties agree to. There are two distinct types of corporate synergies:

Revenue: a revenue synergy refers to the opportunity of a combined corporate entity to generate more revenue than its two predecessor standalone companies would be able to generate. For example, if company A sells product X through its sales force, company B sells product Y, and company A decides to buy ...

Solution Summary

Value Enhancing Strategies