Functioning synergies are those synergies that lets firms to develop their functioning performance and to expand the progress and development of the company in four different ways. First of all, economies of scale that may or may not appear from the merger, it lets the combined firm to be more profitable. Second of all, a higher pricing power from decreasing the competition and higher market share which could assist the company in a larger margin and operating income. Then, combination of separate working strengths from two companies could push up the operation efficiency. Last but not least, the combined firm would have higher growth in the new or existing markets with established distribution network...
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...return. However, this method can likewise be use by the target company to compute how much the premium should acquiring company may compensate for them. The premium would boost the cost for acquiring company to purchase the target company to take control. Also, the premium will deduct the synergy value and should be taken away from the calculated synergy value.
To sum up, the event study method, the contrast between the actual return and the above approximate return symbolizes an investment’s abnormal return. It calculates how the company acts over time and it is a well-known valuation method to examine if the merger and acquisition is useful or not. But this method did not consider some factors such as change in organisation structure and the working habitat but those factors will influence the cost of synergy and functioning effectiveness in different departments.
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