THE SYNERGY ENTERPRISES IN THEIR COOPERATION AND THE SYNERGY VALUATION

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1 THE SYNERGY ENTERPRISES IN THEIR COOPERATION AND THE SYNERGY VALUATION Jiří CHUCHRO a, Iveta VOZŇÁKOVÁ b, Kamila JANOVSKÁ b, Šárka VILAMOVÁ b, Břetislav MECA b a Ostravská těžební, a.s., Ostrava, Czech Republic, EU, chuchro@esapconsult.cz b VSB Technical University of Ostrava, Ostrava, Czech Republic, EU, iveta.voznakova@vsb.cz Abstract The collective characters acquisitions and fusions is clearly the valorization of the company, the increase of the company s value and the enhancement of competitiveness. The elementary owners reasoning is such, that the company s value after a transaction will be higher than the sum of values of each separated company before the transaction. Keywords: Synergy, Value of synergy, Synergetic effect, Fusion 1. INTRODUCTION One of the opportunities to increase the company value in the currently open and global economy are fusions and acquisitions. Acquisition means an obtained determinative share in a company, which allows the acquiring company to have control and manage over this company. Fusion can be realized by two forms. These forms are consolidation or amalgamation). Fusions are very often the next step after making an acquisition, this is the amalgamation or the consolidation in one company. The main target of this process (negotiation) can be the request of expanding the portfolio products, the expansion of the markets, the achievement of know-how, to eliminate the competitors, the acquirement of distribution chains, the diversification of risks, to exploit the hidden potential of the acquired company, the generation of higher volumes of available funds and many other. The unequivocal reason is the effort to achieve grows of capital incomes, to increase the value of the company or alternatively to maximize the profit. The requirement to successfully make a fusion and an acquisition is the increase of the company s value. A successful acquisitive transaction is the one which fulfills all expectations of the owners, shareholders, management. With these expectations, the achievement of the established and expected marketing values of the company will often be after the acquisition or fusion. 2. VALUE OF SYNERGY As the lower, owners expected limited value could be considered the sum of the value of each separated company before making any changes (acquisition or fusion). The owners most probable expectations will be the attainment of a higher market value of the acquired company than the cost of invested capital. The elementary owners reasoning (shareholders) is such, that the company s value after a transaction will be higher than the sum of values of each separated company before the transaction. The result of acquisition and fusion is increasing the company s market value. The difference between the value of a new company originated by fusion and the sum of values of each separated company is considered as the profit from acquisition. Profit from acquisition is then the resulting effect of acquisitions and fusions, for the owners of the new company. However, a sure portion from a made acquisition don t gain only buyers, but also sellers, who know the synergy and want to get paid for that. The seller understands this portion like profit from acquisition, but for

2 the buyer it means acquisitive expense, because it is difference between the value of the acquired company and the real paid value. Generally, the buyer pays a higher price for the corporation than the price of the separated company. The ratio in which the utility from synergy is divided depends on the negotiating position of the partners. From the text outcomes that profit from an acquisitive transaction isn t expected only by the emerging entity, but also by the original owners. As stated by Mařík [1] valid relations: CostA = P B - V B (1) where: CostA Expense of acquisition for buyer (for seller it is profit from the sale of company), P B V B Real price paid for the acquired company Value of the separated company B before the acquisition NPV = [V AB (V A + V B ) (P B - V B )] (2) where: NPV V AB V A Profit from acquisition (for the buyer) Value of merged company Evaluation of the company A before the acquisition The sum of expenses of acquisition for the buyer and the profit from acquisition for the buyer is called Synergy. Synergy is the acquisition s and fusion s effect, so-called synergetic effect. The base of synergy is the fact that a new company, which results from a fusion, has higher portfolio possibilities and opportunities, with which the company reaches a higher value than could be the sum of values of the separated companies before the fusion, this means, that synergy is the increment of values resulting from merged economic entities. 3. VALUATION OF STRATEGIC PROJECTS This issue of valuing synergies can be seen as a valuation, respectively determination of the value of strategic projects. The question is - how will the value of the company increase when the strategic project A is realized and what will the value of the company be when the project B is realized and, at the end, what will be the value of the company when both projects are realized simultaneously, which means AB, assuming that the projects A and B are not only modified technical variations. To address questions such as "What happens with the value of the company when A, B or AB is chosen, it is very convenient to use the so-called "Entrepreneurial models" which include a module determining the value of a company". Such a complex entrepreneurial model provides real time answers to: how does the company value change what values do the key driving factors creating the value reach how can you manage the value of the company using these key driving factors 4. MODEL USED TO DETERMINE THE VALUE OF THE COMPANY The model used to determine the value is constructed on the basis of one of the revenues methods, namely the discounted cash flow method. The benefit of this section is the adaptation of the methodology used for creation of the main financial statements in order to meet the conditions of the Czech accounting, to prepare the user software and to create an interface for EMA. PM entrepreneurial models, which is applied as a data base of this model. The construction of a model used to determine the value of the company is based on the definition equations resulting from the cash flow accounting statement and other definition equations necessary for the

3 calculation of the model. The model is divided into 8 parts, or mutually related tables, followed by a graphical model support. The construction of the model for determining the value of the company is based on information flows and relations shown in Figure 1. Fig. 1 Information flows and relations of the model used for determining the value of a company The data necessary for the application of the method are drawn especially from the basic accounting statements: balance sheet, profit and loss account, available cash flow, which represent the input of the EMA.PM system financial model. Further calculations are based on the calculation of current value of future available net monetary revenues (NPV), according to a well known operation

4 n i NPV DCFi / 1 r / 100, i 1 where: NPV DCF i = net present value, = future DCF in the i-th year, i = 1,2,...n = seq. number of year, n = number of years, r = discount rate in %. The calculation of the value of a company must be based on the assumption that the company will exist indefinitely. For such a long period, it is impossible to plan cash flow for the individual years. That is why, it is necessary to divide the planning period into two phases, namely the explicitly forecast period and the period beyond. The total value of the company is defined as the sum of the present value of cash revenue during an explicitly forecast period and the present value of cash revenue after this period, the so-called permanent, or final value. The sustained value is determined as TV CFT DR PG, where: TV = permanent value, CFT = cash flow in the permanent value year, DR = discount rate based on WACC, PG = constant rate of CF growth. 5. MODEL USED FOR COMPANY VALUE MANAGEMENT The model for managing the company value is the one with the target behaviour, designed on the basis of a cybernetic system [6]. This cybernetic system is founded on a general scheme of a complex managed by a formatter adapted for the application of company value management. Concrete principles of fuzzy regulator and convergent procedures are implemented in the cybernetic system management mechanisms. The model allows you to enter the value of the company as the target variable that can be achieved using a suitable strategy of command variable "selection". These command variables can be, for example, revenues, selected cost items, items of working capital, etc. The command variables are used to perform the so-called "action interventions" into the financial model inputs so as to achieve the target value of the company. These interventions have the character of fuzzy sets, for example a fuzzy set describing interventions in material costs is shown in Figure 2.

5 Fig. 2 Fuzzy set describing an intervention into a parameter material costs Information for the decision making process whether to perform a "very small" / "small" / "medium" / "large" / "very large" intervention is drawn from the knowledge base which is built on the basis of the expert knowledge and on the test results. More detailed description of the model and its calculation algorithms is beyond the scope of this chapter. Modelling the process determining and managing the value of the company taking advantage of the developed model is incorporated into the cycle of strategic management. The top management of a company can make its strategic decisions in such a way, so that they bring not only a short-term effect but, at the same time, create the conditions for long term development of the company, thus increasing its value as a result. The main benefit is the verification of the applicability of fuzzy approaches in modelling of economic phenomena and processes. Previously known applications are in the field of management and regulation of technical systems. Another benefit of the development of a model used for determination and management of the company value is its integration with the entrepreneurial model system named EMA.PM. This system allows you to extend questions such as "What happens if...?" by asking questions such as "What needs to be done to..." (increase the value of the company). 6. CONCLUSION The fusion process can be indicated as a generator of company s growth. Synergetic effect can be achieved through existence and optimal combination of synergy sources. The most significant sources of synergy effect are the economies of scale (decreasing average production costs), logistic, distribution, management, marketing and so on. The analysis of the synergy effects and the determination of will allow the evaluation of potential success.

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