Module II· WACC & Capital StructureAdvanced

Question

Which discount rate is appropriate for the NPV valuation of M&A synergies?

Answer

Three perspectives:

Acquirer WACC: synergies are realized by the acquirer, so its cost of capital. The standard approach.
Target WACC: synergies are risky (uncertain realization), so a higher discount. More conservative.
Synergy-specific risk premium: cost synergies are more certain than revenue synergies → discount cost synergies at the acquirer WACC and revenue synergies at a +3–4% risk premium. M&A-IB practice: method (3) is defensible — value cost synergies (75% realization × acquirer WACC) and revenue synergies (25% × acquirer WACC + 4%) separately.

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Pitch tip

'We discount cost synergies at 8% and revenue synergies at 12% — reflecting realization risk asymmetry.'

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