Discussion
Firm A has a value of $200 million, and B has a value of $120 million. Merging the two would allow a cost savings with a present value of $30 million. Firm A purchases B for $130 million. What is the gain from this merger?
Answer: A
Correct answer: $30 million
The gain is the synergy, the present value of the cost savings the merger makes possible - $30 million. As before it is independent of the price paid, which affects only how the $30 million is shared between the two sets of shareholders.
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