Discussion
Firm A has a value of $100 million, and B has a value of $70 million. Merging the two would allow a cost savings with a present value of $20 million. Firm A purchases B for $75 million. What is the gain from this merger?
Answer: B
Correct answer: $20 million
The gain from a merger is the value created, that is the synergy: PV(AB) minus PV(A) minus PV(B), which is given here as the $20 million present value of the cost savings. It is quite separate from what was paid, which determines how the gain is divided rather than how large it is.
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