The Value of Synergy: A Net Present Value Estimation of Marine Harvest’s Potential !Synergies in an Acquisition of Grieg Seafood!

Jacob Z. Krøvel & Jørgen V. Bruaset

Student thesis: Master thesis


The scope of this thesis has been to investigate the synergies that arise in a corporate acquisition and how they are valued, by bridging the academic framework of Aswath Damodaran to a hypothetical acquisition of Grieg Seafood by Marine Harvest. Currently, Marine Harvest is by far the largest producer of farmed salmon in the world, with Grieg Seafood being the fifth largest producer. In 2013, Marine Harvest acquired 25,81% of Grieg Seafood’s outstanding shares. As they have stated non-organic growth to be an important strategy for the firm, the investigated case is highly relevant and plausible. The structure of the farmed salmon industry has gone from fragmented to consolidated, and the five largest producers supply more than half of the industry output. Farmed salmon is traded in the spot market, and the industry is characterized as cyclical, due to the production life-cycle, as well as the biological risks of production. Although salmon is an expensive source of protein relative to sources such as chicken and pork, the industry is expected to face a demand-driven growth due to an increasing global need for protein. Marine Harvest possess a stronger value chain integration than Grieg Seafood. This decreases biological risks and secures long-term sustainability at the expense of increased costs in certain stages of production. On the other hand, Grieg Seafood possesses an unexploited competitive advantage in the form of excess production capacity, which is a scarce resource due to strict regulations. Hence, Grieg Seafood is an attractive acquisition target for Marine Harvest. When analyzing the individual firms, Marine Harvest’s theoretical enterprise value is estimated to be 30.117 NOKm, based on a cost of capital equal to 9,00%. Additionally, Grieg Seafood’s enterprise value is estimated to be 4.670 NOKm, based on a cost of capital of 8,36%. As a result of a decreasing beta, the cost of capital for the combined company post-acquisition would be reduced to 7,94%, which yields a theoretical enterprise value of 40.949 NOKm, when accounting for synergies. The total synergies are valued at 6.162 NOKm, of which 2.473 NOKm stems from improved operational activities, 346 NOKm are related to reductions in overhead costs, and the remaining 3.343 NOKm are due to financial synergies. As the problem statement of the thesis addresses the cash-flow effects from operational synergies, this effect is estimated to have a net present value of 1.751 NOK, when adjusted for realization costs. The findings indicate that a full-on acquisition should yield positive net present effects, and thus should be considered a desirable strategic move for Marine Harvest to ensure further growth.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2014
Number of pages168