5.3·7 min read

Synergies & the Breakeven

Synergies add earnings that can flip a dilutive deal accretive. The breakeven is the synergy level that leaves EPS unchanged.

By the end you can

✓Explain how synergies offset dilution
✓Compute the breakeven synergies of a deal

A deal that's on day one can still be worth doing if are large enough. The breakeven synergies are the after-tax earnings needed to lift back to the buyer's standalone EPS.

\text{Required After-Tax Synergies} = \text{Standalone EPS} \times \text{PF Shares} - \text{PF Net Income (pre-synergy)}

Divide by (1 - tax) to express it as the pre-tax synergies the integration must deliver.

Worked example · How much synergy to break even?

Given

•Standalone EPS: $4.00
• shares: 650M
• net income before : $2,500M
•Tax rate: 20%

Solution

1.Target net income
$4.00 \times 650 = \$2{,}600\text{M}$
2.Required after-tax
$2{,}600 - 2{,}500 = \$100\text{M}$
3.Required pre-tax
$100 / (1 - 0.20) = \$125\text{M}$

Answer

The deal needs $125M of pre-tax to break even on EPS; anything beyond that is .

Stress-test the synergies

Because can rescue a deal on paper, they're the assumption most worth challenging. Good analysis asks: are the realistic, and how much cushion is there if they come in late or light?

Check yourself

Required after-tax synergies are $80M and the tax rate is 20%. The pre-tax synergies needed are:

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