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.
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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%.
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
Thank you very much, that's perfect and makes perfect sense now. Have a good one!
Thanks. I'm glad I was able to help. Good luck with the preparation.
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).
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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).
4 comments
Hi,
It's impossible to answer your question without knowing:
- Revenues (or at least volumes for similar products)
- Synergies between the two companies and how they impact the profit margin
Best
Hi there,
You have to ask about their relative size!
Fundamentally, you'll have to do a weighted average of their profit margins.
Hello!
It´s a simple weighted average, hence, you need to know how big each of them is.
Best,
Clara
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