In determining Enterprise Value, buyers (either financial or strategic) firms must determine the Target's standalone value. The Buyer will often project realization of synergies, but these must be removed from the model for valuation purposes.
Thus two models must be constructed: a standalone and a synergistic model. The standalone model is the value of TargetCo by itself (ie, the present value of its future cash flows -- discounted by its WACC), while the synergistic value is the result of reduced expenses and/or increased revenues as a result of the merger of the two companies. The difference between these two is the "synergies spread".
I missed this distinction during the ACG Cup. I had constructed a single LBO model, and was presenting its findings to a fictional PE firm (in reality this "firm" was the judges of the competition, composed of Houlihan Lokey, NEP, Grant Thorton professionals). Alan Thometz of Grant Thorton (Head of its Transactional Advisory Services group) asked me "aren't you asking us to pay for some of the value we bring to the table?" The answer was yes, but I didn't realize it at the time.
To correctly model a synergy-based buyout, be sure to model both a standalone and a "synergized" model.
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