1) Value each firm independently, 2) Value the new (proposed) combined company without synergy, 3) Finally, adjust the combined firm value based on anticipated synergies. These formulas when carried out, will lead to the true maximum share value that should be offered as the fare market value for a company that is trying to be acquired.
Kraft Inc. used this to there advantage initially, by rejecting Philip Morris bid of $90/share, saying that they believed that the company was worth a minimum of $110/share. They also backed up their words with actions by proposing a restructure plan to their shareholders, exactly six days after the initial buyout bid was received.
Works Cited
Damodaran, A. Acquisition Valuation. Retrieved June 15, 2003 from the World Wide Web: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/ valuation/val.htm#ch7
Federal Reserve. 10Year Treasury Constant Maturities. Retrieved June 15, 2003 from the World Wide Web: http://www.federalreserve.gov/releases/h15/data.htm
Ibbotson, R. G. Building the Future From the Past. Retrieved June 15, 2003 from the World Wide Web: http://www.tiaa-cref.org/siteline/siteline_article_17_528_38369.html