Given the background of these companies and overview of the industry, we have determined that the underlying purpose for Phillip Morris to proceed with the acquisition of Kraft Inc. is based on their desire to diversify. Phillip Morris presented a bid to purchase Kraft Inc. and Kraft considers the bid low. They believe that their stock is worth more. This leads to the question: is Kraft's monetary estimation of their stock justified? In order to address this issue, we will conduct an analysis which will look at the value of synergy and determine whether that value substantiates Kraft's proposed price. A complete analysis of the appropriate bid price for Kraft is performed using the free cash flows model to value potential synergies, as well as the current present values of the two companies involved. While the mechanics of the valuation are fraught with estimations and forecasts, the basic process of determining the potential synergy and its value are fairly straightforward:
" Step 1: Value each firm independently
" Step 2: Determine value of combined firm with no synergy by combining values computed in step 1
" Step 3: Estimate synergies and re-value combined firm
" Step 4: Value synergy by identifying difference between values in steps three and four (Damodaran, 2003)