Terminal Value in M&A: Case Study of Exxon and Chevron

Terminal value calculation in M&A is the make-or-break input you don’t want to fudge, plain and simple. TV often accounts for 50-80% of enterprise value, depending on whether you’re modeling a five-year forecast or a ten-year horizon. That weight matters because small tweaks to TV inputs move the whole deal. So here’s how I approach it, grounded in methods, data, and practical decisions seen in deals.

Two main methods for TV: Gordon growth and exit multiple considerations

First, the two main methods: Gordon growth, the perpetuity approach, and the exit multiple method. Gordon growth uses TV = FCF_n × (1+g) ÷ (r-g). WACC is r, long-term growth is g. In mature markets, g sits around 1-3%. In practice, I cap g at or below long-run nominal GDP or inflation-linked benchmarks to avoid overstating value. The other method sets TV by applying a terminal EV/EBITDA or EV/Revenue multiple to year n’s operating metric. Both are valid; the choice depends on the industry, data availability, and deal structure. In tech and information services, exit multiples of EV/EBITDA 8-15x or EV/Revenue 3-7x are common ranges, with higher or lower multiples depending on growth, margins, and synergies.

In educational and technical M&A material, TV often represents about 75% of the value in a five-year DCF and around 50% in a ten-year DCF. Macabacus notes the same weight, underscoring why TV drives the overall valuation. In a textbook DCF, last-year FCF of $68m with g = 2% and r = 10% yields a Gordon TV of about $867m. PV of TV, discounted at 10% over five years, comes to roughly $538.6m. PV of five-year cash flows, around $218.9m.

So TV accounts for about 71% of the present value in that example. You don’t want to land on a TV that doesn’t reflect the business’s long-run prospects, because you’ll misprice the deal.

How I build the TV in practice

I start with credible base inputs: forecast cash flows for a five- to ten-year horizon, a WACC grounded in the buyer’s cost of capital and risk posture, and a long-run growth rate anchored to macro trends and industry fundamentals. For Gordon TV, I run sensitivity on r and g, because a 1-2 percentage point shift in WACC or a 0.5-1 percentage point change in g materially changes TV and the total value. In 2025 materials, sensitivity analysis is a standard for TV input, and rightfully so. In buyer-side processes, you’ll see TVs cross-checked against implied IRR and deal payback periods, not just headline enterprise value.

The exit-multiple approach needs careful handling too. When you use EV/EBITDA or EV/Revenue, you must anchor the multiple to current trading comps or precedent transactions. In high-growth tech and information-services deals, multiples skew higher when the buyer anticipates strong synergies and a favorable exit environment, but private equity is cautious: in 2024-2025, buyers often constrain exit-multiple TV to below entry multiples to reflect compression risk in higher-rate regimes. If you rely too heavily on a near-term multiple without validating it against peers, you invite litigation and fairness opinions challenges later.

Synergies and their effect on TV

Synergies complicate TV (but also justfiy it). Cost and revenue synergies can have their own terminal values, discounted at the buyer’s WACC, and they can swing the overall TV weight. In one synergy-focused example, PV of synergies was about $1.2bn versus equity premium of roughly $300m, implying the premium is covered four times by synergies PV.

That kind of analysis matters in the buy-side process and helps justify the price. Don’t forget: post-deal, you’ll cross-check TV assumptions against updated forecasts, and you’ll reconfirm TV versus implied IRR.

Practical framework: scenario design and realism

A practical way to think about TV: scenario design and realism. The modern merger model leans on AI-assisted forecasting and dynamic scenario planning for TV and synergies. You should run baseline, upside, and downside TV scenarios, applying ±1-2% shifts in WACC and ±0.5-1% in g. This isn’t decorative; it’s about understanding how the deal performs under changes in discount rate and growth. In real disputes, fairness opinions scrutinize aggressive TV assumptions, especially when they outpace peer performance or consensus growth rates.

Concrete data points you’ll recognize

Let me ground this with concrete data points you’ll recognize. In a textbook DCF example, last-year FCF was $68m, g 2%, r 10%, Gordon TV about $867m, PV of TV about $538.6m. PV of five-year cash flows around $218.9m, so TV contributed roughly 71% of total present value ($538.6m of $757.5m).

That weight is typical in five-year analyses, which is why TV choices dominate the valuation narrative. If you switch to a ten-year horizon, TV’s share tends to drop toward 50%-60%, but you need to confirm your market context and growth outlook.

Real-world signals from 2024-2025 studies align with these patterns. The WilmerHale 2025 M&A Report notes global announced M&A volume around $3.1-3.3 trillion in 2024, rebounding from 2023, with higher rates increasing scrutiny on WACC and TV inputs. In practice, buyers and sellers now expect tighter WACC ranges and more disciplined TV assumptions.

Exogenous data points, like ExxonMobil’s historical benchmarks, show how value realization can outpace initial synergy estimates: ExxonMobil generated $3.8bn in annual pre-tax savings in 1 year against $2.8bn expected in the 1999 merger. That is a reminder that synergy realization can exceed early TV-based expectations, but you must be careful about how you project it in the TV framework.

Case study note. A famous synergy-focused case from BIWS shows synergy PV of about $1.2bn vs equity premium of $300m, implying the premium is covered roughly four times by synergy value. In my experience, that’s aggressive but not impossible if synergies are credible, controllable, and properly integrated. You should model synergy TV separately and discount it using the buyer’s WACC, then compare to the base TV to understand where the value is coming from and how robust the deal is to changes in discount rate and growth.

What this means for deal teams

TV is not a check-the-box input. It’s the driver of valuation, negotiation, and risk. Do the math with discipline: separate the TV built from cash flow forecasts and the TV built from exit multiples, document your rationale, and perform sensitivity tests on r and g.

Use realistic long-run growth rates anchored to macro data, not optimistic projections that outpace peers. Check your TV against implied IRR and payback timelines, not just enterprise value.

Practical notes and next steps

If you want to keep mastering TV, study how projects weigh in mature markets, look at 2% terminal growth as a default, and keep g tied to credible inflation benchmarks. Track how exit-multiple TV behaves in high-growth sectors versus mature sectors. Review fairness opinions in recent U.S. deals to see what numbers drew scrutiny and why. And if you’re building the model, keep synergies separate, test multiple TV scenarios, and layer in AI-assisted forecasts where available.

Want more? Keep exploring the Matactic glossary and sign up for our free M&A course. We’ll keep this tight, practical, and focused on real-world deal mechanics. It drives me crazy when TV inputs aren’t grounded in data and tested across scenarios, so I’m sticking to facts, cases, and disciplined modeling. Whatevs, but when TV is solid, the deal is solid. Peace out, and keep digging into the numbers.