[Max-Egon U.]

Dear fellow learners,
In the assessment of a target, incremental cost from an acquisition and synergies are important components of the valuation and business case. Estimated incremental cost and synergies are herein requested from the functions involved provided a certain future operating model is executed by the combined business. This is to allow for an estimation of the future cost and synergies of the combined new business, which can then be compared to the stand-alone values of the target and acquirer as-is operating models stand-alone, to derive cost savings and synergistic value potential.
When it comes to this step, the existing acquirer´s resource costs can play a significant role. This is in part, because the as-is operating model of the acquirer is affected and existing resources might be reallocated to handle parts of the newly acquired business, and are no longer available to handle existing tasks of the acquirer´s stand-alone business. Reallocated resources should therefore be considered to be incremental resources, because they might have become redundant, if the acquisition had not occurred.
In practice however, the middle management responsible for such existing resources might not be aware or might be reluctant to count such resources as incremental, because they are already existing internally. This might however not be true as the operating model chnages with the acquisition and integration of the target.
Potential root cause to this might be the need for justification of the middle management department´s existing and budgeted resource needs. I would argue, that such reLlocated resources would however need to be considered incremental, if tasks are reassigned to such resources to handle business relating to the acquired business. If this does not happen, the business case could be considered incomplet or one could argue for the existance of „hidden“ costs, installing an upward bias in the npv of the valuation and potentially overestimating the synergies.
Have you made similar observations, or to the contrary, which mechanisms do you apply to avoid it? How would you approach the challenge and do you distinguish between incremental and re-allocated resources in valuation?
Looking forward to your thoughts and best regards
Max

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