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4

Calculating the profit margin of two merged entities

Dear all,

If two companies merge and have seperately a profit margin of 6.4% and 3.8%, what would be the profit margin of the newly merged entity?

Thank you in advance.

Dear all,

If two companies merge and have seperately a profit margin of 6.4% and 3.8%, what would be the profit margin of the newly merged entity?

Thank you in advance.

4 answers

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Best Answer

In order to answer that question you need additional informations.
If we assume there is no synergies from the merger (need to make sure of that) you'll need to have revenues of both companies or at least the ratio of revenues between the two companies.

So if company 1 has a revenue of A $ and company 2 has a revenue of B$ then the new margin will be in percent: margin of the company 1( 6.4*A)+ margin of the second company (3.8*B) and divide the total by the total revenues of the new entity (A+B).

If you only have the ratio between the two revenues then that can works as well: if you know that company 1 has X times the revenue of company 2 then, the new margin will be (in percent):

margin of company 1 with respect to company 2 (which is equal to X*6.4)+ margin of company 2 with respect to company 2 (which is equal to 3.8) and you devide this sum by the total revenues of the company with respect to company 2 (which is X+1).

In order to answer that question you need additional informations.
If we assume there is no synergies from the merger (need to make sure of that) you'll need to have revenues of both companies or at least the ratio of revenues between the two companies.

So if company 1 has a revenue of A $ and company 2 has a revenue of B$ then the new margin will be in percent: margin of the company 1( 6.4*A)+ margin of the second company (3.8*B) and divide the total by the total revenues of the new entity (A+B).

If you only have the ratio between the two revenues then that can works as well: if you know that company 1 has X times the revenue of company 2 then, the new margin will be (in percent):

margin of company 1 with respect to company 2 (which is equal to X*6.4)+ margin of company 2 with respect to company 2 (which is equal to 3.8) and you devide this sum by the total revenues of the company with respect to company 2 (which is X+1).

Thank you very much for the answer Cédric. Say Company A's market share by revenues represents 4/3 times Company B's market share. This means that Margin(A) = 4/3 Margin(B), not the other way around I think, or am I wrong? Market share for company A and B is respectively 12% and 8%. — Anonymous A on Nov 13, 2020

So given those informations we will use the market size (in revenue) as a reference: company A margin is equal to 6.4%*12% of the total market size. For company B it's 3.8%*8% of the total market size. And the total revenue of both company is equal to (8%+12%) of total market size. So your new margin is equal to (6.4/100*12/100+3.8/100*8/100) /(20/100). The hundreds can be simplified so you're left with (6.4*12/100+3.8*8/100)/20. And to get the margin in percent you multiply the result by 100 so your new margin is simple (6.4*12+3.8*8)/20 so roughly 5.4% which makes sense: it's between the two margins but close to company A because they have more market share — Cédric on Nov 13, 2020 (edited)

Thank you very much, that's perfect and makes perfect sense now. Have a good one! — Anonymous A on Nov 13, 2020

Thanks. I'm glad I was able to help. Good luck with the preparation. — Cédric on Nov 14, 2020

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Hello!

It´s a simple weighted average, hence, you need to know how big each of them is.

Best,

Clara

Hello!

It´s a simple weighted average, hence, you need to know how big each of them is.

Best,

Clara

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Hi there,

You have to ask about their relative size!

Fundamentally, you'll have to do a weighted average of their profit margins.

Hi there,

You have to ask about their relative size!

Fundamentally, you'll have to do a weighted average of their profit margins.

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Hi,

It's impossible to answer your question without knowing:

  1. Revenues (or at least volumes for similar products)
  2. Synergies between the two companies and how they impact the profit margin

Best

Hi,

It's impossible to answer your question without knowing:

  1. Revenues (or at least volumes for similar products)
  2. Synergies between the two companies and how they impact the profit margin

Best

Thank you for your answer. No impact post-merger is considered, and the only piece of information we have on revenues is the market share by revenues which is 12% for company A and 8% for company B (respectively from the question). — Anonymous A on Nov 13, 2020

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