Let's see how we incorporate synergies into the pro forma income statement. In this merger, we contemplate both COGS and SG&A synergies. However, whether you identify COGS, SG&A, or revenue synergies depends on the nature of the transaction and the businesses to be combined.
Note that our synergies can be toggled on and off from our assumptions tab in our model. Also, note that we don't expect synergies until FY09, since the deal will probably not close until near the end of FY08.
The are two assumptions we make in the TargetCo P&L that are worth noting. First, we think that applying 2010's 0.5% revenue growth to years 2011 and 2012 is a bit too conservative, so we instead input a growth rate of 1.0%. Second, capital expenditures ("capex") was not available for 2010 in the Wachovia research report used, so we flatlined 2010 capex using 2009's capex as a percent of sales.