Were the EBITDA contributions to the performa a mere reverse working of the % of each segments revenue?



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Hi Binny,

These questions are from the case study of the merger of at&t and sbc.

1. Could you help me understand, how were the synergy estimations for each year made? What were the factors considered?

2. Were the EBITDA contributions to the performa a mere reverse working of the % of each segments revenue to the present combined revenues of both the companies together? If any other factors were considered, what were they?

3. I thought I had understood the concept of synergy well. But when you made a mention that the acquisition price and the total synergy gain, were almost the same, I wondered, if SBC hadn't paid the entire money to at&t in one stretch upfront, it could have had the same benefit more or less, since the NPV of the acquisition would be 0.

5 Answer(s)


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1. The synergy number is calculated by the company. The synergy calculation is typically sub-divided into many departments - Marketing, R&D, Infrastructure, Overheads, IT etc. Then under each of these departments, the department heads will make an estimation on how much they will save if the 2 companies merged. Like for example, under infrastructure, they would have saved about $500 million by eliminating redundant fibre optic cables and routing equipment.

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EBITDA contributions is really nothing but the weighted average of the 2 individual EBITDA's. does that answer your question #2 - not sure if i got your question right ?

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Yes Binny. Could you please answer Q3?

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Regarding Q3 - good observation.
The NPV indeed would have been 0 if the time period of the synergies accumulation is the same time period for which you are calculating the NPV. If your NPV calculation was for 5 years then it would have been a negative NPV, if the full synergies were realized only after 8 years.

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oh ok... 8 years seems to be a pretty long period. Probably in the period of 8 years, hadn't both the companies merged, the cash flows they would have individually generated could have been much better... so is there any method to find out if the deal was more profitable than the opportunity cost of the deal i.e. if the merger hadn't taken place?