Chapter 3


So many mergers and acquisitions (M&A) are justified on the grounds of achieving proposed synergies. This usually sounds great. In addition, it is hard to refute as it refers to benefits that may occur in the future—possibly many years down the road. Sometimes this occurrence or lack of occurrence is long after the CEO who came up with the brilliant idea has departed the scene. Given that it is common for many of these proposed synergies to fail to appear, and given that mechanisms to hold CEOs and their boards financially accountable when they do not (such as through give-backs of compensation) are almost always not in place, it is important that there be a more rigorous analysis a priori so that an objective evaluation can be made. Deal decision makers need to be able to critically evaluate proposed synergies and determine how likely they will be. Fortunately, there is useful research that can shed some light on such synergies. Unfortunately, few deal decision makers are aware of any of this research. Even worse, some don't want to know about it in case it implies that a proposed deal may not yield the benefits they say it will. There is little more to say about the latter group, but we attempt in this chapter to add to the information set of those who would find such relevant knowledge useful.

What Is Synergy in the Context of M&A?

In the context of M&A, synergy refers to the combination of two companies that create an overall entity that is more valuable ...

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