Case 080M&A and corporate developmentCore
You are shown a deck to buy a labels business for Rs 1,050 crore against a standalone value of Rs 800 crore, with the gap closed by cost and revenue synergies. What share of the revenue synergies must arrive for the deal to break even?
1The situation
Gomti Packaging, an invented corrugated box maker, is shown a deck proposing it buy Revati Labels for Rs 1,050 crore. A discounted cash flow puts Revati's standalone value at Rs 800 crore.
The deck closes the gap with two kinds of synergy, both assumed to last forever: Rs 30 crore a year of pre-tax cost savings from shared plants and purchasing, and Rs 20 crore a year of extra EBITDA from selling labels to Gomti's box customers. Integration will cost Rs 60 crore up front. Tax is 25% and Gomti's WACC is 12%.
2Your task
Does the deal create value on the deck's own numbers, what share of the revenue synergies must arrive to break even, and what would you tell Gomti's board?
Quick check
On the deck's full numbers, how much value does the deal create for Gomti?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
On the deck's numbers the deal creates about Rs 2.5 crore, and it needs about 98% of the revenue synergies to break even. Cost synergies are worth Rs 187.5 crore and revenue synergies Rs 125 crore. Covering the Rs 250 crore premium and Rs 60 crore of integration cost uses all the cost synergies and almost all the revenue ones. The deal is priced for perfection; Gomti should negotiate the price down or pay part of it only if the revenue synergies appear.
Step 1What must the synergies pay for?
The buyer gains only if what it receives, standalone value plus synergies less the cost of getting them, exceeds what it pays. Gomti is paying Rs 250 crore above standalone value and must spend Rs 60 crore more to integrate, so the synergies must be worth at least Rs 310 crore just to stand still. Value each stream as an after-tax perpetuity: Rs 30 crore of cost saving is Rs 22.5 crore after tax, worth Rs 187.5 crore at 12%. Rs 20 crore of revenue synergy EBITDA is Rs 15 crore after tax, worth Rs 125 crore.
Step 2Why single out the revenue synergies?
Cost synergies are in the buyer's own hands: close a plant, merge two purchasing teams. Revenue synergies need customers to change what they buy. Think of two shops merging: closing one rent is a decision, getting one shop's customers to buy from the other is a hope. After the cost synergies, Rs 122.5 crore of the Rs 310 crore still has to come from revenue synergies worth Rs 125 crore, so 98% of them must arrive. That is a deal priced for perfection on its least reliable input.
| s* | share of the revenue synergies that must arrive for zero value created |
| 1,050 - 800 | premium over standalone value |
| 60 | integration cost |
| 187.5 | value of the cost synergies, assumed fully delivered |
Step 3How fragile is the answer?
Run three sensitivities, each tied to a real risk. Discount the revenue synergies at 15% to reflect their extra uncertainty and they are worth only Rs 100 crore, so the deal destroys about Rs 22.5 crore even if all of them arrive. If only 80% of the cost synergies come through, value created falls to minus Rs 35.0 crore. And if half the revenue synergies arrive, Gomti loses Rs 60.0 crore.
| Share of revenue synergies delivered | 0% | 50% | 75% | 100% |
|---|---|---|---|---|
| Value created for Gomti, Rs crore | -122.5 | -60.0 | -28.8 | +2.5 |
Step 4What would you tell Gomti's board?
Keep the view tied to the numbers. The deal is strategically plausible but financially priced for perfection, so proceed only on better terms. Three levers: a lower price, where every Rs 10 crore off lowers the revenue synergy breakeven by about 8 points; an earn-out, paying part of the price only if Revati's sales to Gomti's customers hit agreed targets; and a line-by-line plan for the cost savings with owners and dates. Without one of these, the sellers are being paid today for synergies Gomti will have to create.
Where candidates lose it
Candidates add up all the synergies at face value, see value above price and say yes. Lumping cost and revenue synergies together hides the fact that the deal depends on the half Gomti does not control.
The second loss is valuing the synergies pre-tax, which inflates them by a third. Rs 50 crore of pre-tax synergy at 12% looks like Rs 417 crore and makes a thin deal look comfortable; after tax it is Rs 312.5 crore.
What the interviewer asks next
- The revenue synergies take three years to ramp up. How does that change breakeven?
- How would you structure an earn-out tied to the revenue synergies?
- Gomti pays in its own shares. Who now bears the synergy risk?
- What evidence would make you believe the revenue synergies?
Asked at Moelis & Company, Generalist, New York, 2026 (Wall Street Oasis): Gave a deck and asked a ton of questions about if the company should pursue acquisition of another given company.
Company names and figures are illustrative.