The Daily Technical #21: What are synergies and why are they important in a deal?

Good morning. Welcome to the 21st edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What are the two main approaches to valuation?

To nail this question, start by clearly differentiating between the two main valuation approaches: intrinsic and relative.

Intrinsic Valuation: This approach focuses on understanding a business's internal value based on its ability to generate cash flows. The most common method for calculating intrinsic valuation is the Discounted Cash Flow (DCF), which calculates the present value of future free cash flows.

Relative Valuation: Relative valuation relies on comparing the target company with similar, peer entities. This uses average / median multiples—like EV/EBITDA or P/E ratios—from comparable companies.

Common Mistakes

1. Be careful not to mix intrinsic with relative metrics. They're distinct methods; the former is all about future cash flow potential, while the latter is about market comparisons.

2. Some students forget to adjust for market conditions when using multiples. Always account for sector-specific trends or market sentiments that might affect comparables' valuations.

Key Takeaways / TLDR

• Grasp the fundamental difference—intrinsic focuses on cash flow; relative relies on market-based comparisons.

• Don't mix intrinsic and relative metrics; keep your evaluation process straight and logical.

• Always factor in current market dynamics for a more accurate relative valuation analysis.

TODAY’S QUESTION
What are synergies and why are they important in a deal?

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The HirePrep Team