The Daily Technical #129: What are synergies and why are they important in a deal?

Good morning. Welcome to the 129th edition of The Daily Technical.

Now, you’re here for one reason, so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Which line items are included in the calculation of net debt?

The calculation of net debt accounts for all interest-bearing debt, such as short-term and long-term loans and bonds, as well as non-equity financial claims, such as preferred stock and non-controlling interests.

From this gross debt amount, cash and other non-operating assets, such as short-term investments and equity investments, are subtracted to arrive at net debt.

Net Debt = Total Debt – Cash & Equivalents

Common Mistakes

1. Adding liabilities that do not bear interest, such as accounts payable or accruals. Only include items like short-term and long-term loans, as well as bonds, which explicitly generate interest.

2. Counting operational investments as deductions. Only subtract non-operating assets like short-term or minority equity investments that wouldn’t be needed for regular business operations.

3. Not accounting for preferred stock as part of debt can misrepresent net debt. Recognize preferred stock as it often has characteristics similar to debt, impacting the net debt calculation.

TL;DR

• Begin with interest-bearing liabilities: short-term and long-term loans and bonds.

• Include non-equity financial claims: preferred stock and non-controlling interests.

• Total debt calculated from above gives gross debt.

• Subtract cash and non-operating assets (short-term and equity investments).

• Formula: Net Debt = Total Debt – Cash & Equivalents.

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

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