Series 79 practice questionhardOperational due diligence – cost synergy validation
A strategic buyer projects $10 million in annual cost synergies from an acquisition. During due diligence, the banker discovers that only $4 million are realistically achievable due to integration limitations. What is the MOST APPROPRIATE action for the banker?
- AAdjust the pro forma financial model to reflect $4 million in synergies✓ Correct answer
- BExclude all synergies from the model
- CUse the original $10 million projection, noting risks in a footnote
- DAverage the two figures for modeling
Explanation
Why A — Adjust the pro forma financial model to reflect $4 million in synergies
The model should reflect the banker’s best estimate of achievable synergies, not projections known to be unrealistic. Excluding all synergies underestimates value; footnotes are not sufficient disclosure; averaging is not rigorous.
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