Finally, with the anticipated growth figures, one can estimate the value of synergy as evident in the appendix. Based on the synergy computations:
" Kraft's PV, based on Free Cash Flows is $69.81 per share, based on 131M outstanding shares
" Potential synergy is estimated to be $4.488M
" When synergy is added to Kraft's PV, the result is $13,633M
All of this information together indicates that Phillip Morris should be willing to pay $104.07 per share of Kraft ($13,633M/131M shares), which translates into a 49% premium of Kraft's PV. It is interesting that Kraft's PV based on free cash flows is not quite as high as Kraft's estimation their own value, nor as high as Phillip Morris' bid price.
One final note on the synergy computations provided is that one assumption has the potential to change the entire scenario drastically. That is the assumption that there will be no cost synergies. While Phillip Morris' CEO indicates that Kraft would be left to continue business as usual, it is highly unlikely that this would occur. In fact, it would be foolhardy to acquire Kraft without mandating some efficiency between General Foods and Kraft. In fact, all other things remaining the same, if Phillip Morris could anticipate a cost of goods sold efficiency of just .5% upon acquisition of Kraft, the value of Kraft's premium, again based on the free flows to cash model, increases to 76% of its PV.