Breakeven synergies

A premium is value handed to the target's shareholders on the day the deal is announced. Whatever the buyer thought the business was worth on its own, it has agreed to pay more, and the difference is gone. To stand still, the buyer has to create at least that much value out of the combination.

Turning that into a number is quick. Take the premium, decide what multiple the market will put on the extra earnings, and divide. That gives the after tax earnings required each year, and grossing up for tax gives the pre tax cost savings management has to find.

Its usefulness is that it converts a vague argument into something a board can test. Management can always say a deal is strategic. It is much harder to say that a business will yield savings comfortably above a specific number that everyone in the room has just seen calculated.

State the conditions, because all of them flatter the buyer. The calculation assumes the synergies are permanent, that the market capitalises them on the same multiple as everything else, and that they cost nothing to achieve. Costs to achieve are real and usually land first, so the honest reading of the answer is a floor rather than a target.