Merger Synergies Research Articles

Should We Expect Merger Synergies to be Passed Through to Consumers?*

When reviewing horizontal mergers, antitrust agencies balance anticompetitive incentives, resulting from market power, with procompetitive incentives, created by efficiencies, assuming complete information and static, simultaneous move Nash equilibrium play. These models miss how a merged firm may prefer not to pass through efficiencies when rivals would respond by lowering their prices. We use an asymmetric information model, where rivals do not observe the size of the realized cost efficiency, to investigate how this incentive could affect post‐merger prices. We highlight how the strength of this incentive will depend on the market structure of non‐merging rivals and discuss alternative settings where similar issues arise.

Bidder-Specific Synergies and the Evolution of Acquirer Returns

Largely constant average acquirer returns over the past four decades mask fundamental changes in the takeover market. Controlling for bidder composition, the common component of acquirer returns has increased by five percentage points relative to the 1980s. Offsetting this increase, the average bidder-specific component has declined. We propose a theory of bidder-specific synergies to help interpret these opposing trends. In our theory and in the data, acquirer returns increase with the extent to which synergies are unique to that bidder. The composition effect reflects bidder uniqueness. Overall, the evidence is consistent with rising merger synergies that have become less bidder specific. This paper was accepted by Victoria Ivashina, finance. Funding: A. Golubov acknowledges financial support from the Bank of Canada [Governor’s Award]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.02208 .

Valuation of Patent-Based Collaborative Synergies under Strategic Settings with Multiple Uncertainties: Rainbow Real Options Approach

Recent years have seen increasing initiatives involving more applications of real options to value the strategizing process. These initiatives, referred to as Real Option Theory (ROT), imply greater inclusiveness of simple and advanced real options in strategizing processes. While substantial theoretical groundwork on ROT has been laid in corporate finance, and both qualitative and quantitative studies on ROT in business management journals are appearing on an increasing basis, there remain significant opportunities for more research on strategic synergism in patent-based acquisitions. In this vein, the current paper aims to explore a rainbow real options application (real options that are exposed to two sources of uncertainty) to measure patent-based collaborative synergies in high-tech mergers and acquisitions. Having conducted the deviant case study of ZOOX start-up’s acquisition by Amazon.com in 2020, this paper justifies the proposition of the employability of rainbow real options for the valuation of network and relational synergies in highly risky patent-based acquisitions with multiple uncertainties.

How Merger Synergies Can Harm Consumers: A Defense of the Efficiencies Offense

How Merger Synergies Can Harm Consumers: A Defense of the Efficiencies Offense

Returns to Scale from Labor Specialization: Evidence from Asset Management Mergers

Abstract We study human capital synergies in asset management mergers that stem from the improved ability to assign fund managers to more specialized tasks in larger firms. More specialized task assignment allows rotated managers to focus on their investment expertise and leads to incremental $54 million of value added per deal per year on average. The effects are concentrated in mergers that lead to a large increase in firm size and in funds whose management appears less specialized prior to the merger. Our results provide direct evidence on the role of firms in the assignment of tasks to fund managers. (JEL G23, J24, G34)

Creating a merger option to strategically prevent a merger among suppliers or customers

AbstractIt is well‐established in the literature that a horizontal merger in a supply chain is profitable (or beneficial to firms at another tier) if the merger synergy exceeds some threshold referred to as the profitable (or beneficial) threshold. Our paper goes one step further by finding that the profitable threshold is always lower than the beneficial threshold, which implies that a firm may have an incentive to prevent a horizontal merger between its suppliers or customers, but never wants to precipitate one. Moreover, we propose a strategy to achieve the preventive goal—a firm can develop an instrumental merger option with another rival firm, which can help prevent the target merger in one of two ways. First, if the synergy of the instrumental merger is high relative to the synergy of the target merger, the firm can carry out the instrumental merger—even an unprofitable one—preemptively to make the target merger unprofitable. Second, if the synergy of the target merger is not too high and the synergy of the instrumental merger is moderate, that is, the instrumental merger is profitable and will inflict severe harm on the firms in the target merger, the firm can reserve the instrumental merger option as a deterrent and the profitable target merger is deterred. An interesting implication of the deterrent role of the instrumental merger option is that when the firm has two candidate merger partners, it may choose the partner with a lower synergy for the deterrence purpose.

Stakeholder Synergies in Mergers and Acquisitions

Stakeholder Synergies in Mergers and Acquisitions

Sequential mergers under incomplete information

AbstractWe study sequential mergers under incomplete information where the follower is ignorant about the leader's merger synergy. When the follower's own synergy is sufficiently large, incomplete information induces both firms to merge more. These additional mergers benefit both firms and total welfare but hurt consumers. If the follower's synergy is very small, the leader is unable to take any strategic action, and most results are reversed. The analysis suggests that incomplete information strengthens the strategic complementarity between the two mergers and thereby increases the likelihood of a merger wave.

Unique bidder-target relatedness and synergies creation in mergers and acquisitions

Despite the theoretical appeal of the importance of the uniqueness of firm relation in merger synergy creation, empirical evidence supporting this synergy source is limited. We examine the effect of the uniqueness of the bidder-target relationship, i.e., the number of firms that share the bidder-target relationship, on merger synergies. We use machine learning tools to measure unique bidder-target relatedness and find that unique relatedness is associated with a much larger increase in merger synergies than non-unique relatedness. The measure of unique relatedness mostly captures product relatedness, and this measure dominates alternative product relatedness measures in predicting merger synergies. Analysis of the acquirer's post-merger operating performance shows that the unique relatedness creates synergies through enhanced operating efficiency rather than increased investment or revenue.

Evaluating synergy in mergers and acquisitions during the COVID-19 pandemic

Purpose: The paper aims is to present synergy as a relevant source of information about goodwill, contributing to a more precise, balance-sheet evaluation (profitability) of a merger. Based on the mergers and acquisitions (M&A) market analysis, it was possible to assess this effectiveness assessment among individual companies during the COVID-19 pan-demic. This, in turn, was used to determine the methodology for evaluating the synergy effect and the directions of changes in these transactions in individual sectors. Methodology/approach: The article consists of methods of comparative and descrip-tive analysis based on a review of the domestic and foreign literature and a critical assessment of the results from the exploration of data presented by five recognized financial and accounting rating and advisory agencies. Findings: By determining the determinants of the success of M&A transactions, it was possible to assess the impact of synergy on the number and value of these processes carried out during the COVID-19 pandemic, with their potential negative and positive economic consequences. The presented diagnoses and conclusions concern both the international and Polish M&A markets based on aggregated and sectoral data. Practical implications: The article points out the discrepancies in the evaluation of synergy during the COVID-19 pandemic in the context of the number and value of mer-gers and acquisitions, which are of cognitive importance for the development of poten-tial synergy and building capital concentration. Originality: The article is the first attempt to evaluate the synergy in M&A during the COVID-19 pandemic and the effects of these events from economic and record-keeping points of view and from a comparative and descriptive analysis perspective.

Unpatented innovation and merger synergies

The increasingly service-based U.S. economy relies on innovation. While there is considerable research on the importance of certain innovative activities, such as patents, less attention has been paid to unpatented innovation, about which there is naturally less publicly available information. Our study exploits disclosure on the fair value of acquired innovation to show that unpatented innovation plays an important, though often ignored, role in merger value creation. We detail the importance of unpatented technology and show that traditional approaches that rely only on R&D expenditures and patents lead to both misclassification of merger types and underestimates of the impact of innovation in value creation. Our evidence suggests that, on average, unpatented innovation accounts for a larger portion of synergies. We further show that higher (lower) gains accrue to the acquirer (the target) in relation to unpatented innovation, consistent with limited publicly available information about unpatented innovation reducing the target’s bargaining power.

Synergies in mergers and acquisitions in the copper mining industry

Motivation: The results of the research shall broaden the knowledge required for interpretation of synergy effects in the mineral mining sectors. The results obtained shall be used for further research when developing procedures for analysis and evaluation of the effects of mergers and acquisitions in the copper ore mining sector and may also be used by the management of an acquiring party involved in mergers and acquisitions in the copper mining sector.
 Aim: The aim of the research, the results of which has been presented in this article, was to identify areas of processes concerning operations and costs as possible sources of synergies in the merger and acquisition processes in the copper ore mining sector. A critical review of literature about the subject as well as desk research have been used to make the study.
 Results: The obtained results confirm the need for synergy effects, in the areas of both operations and costs, to be considered in the processes of mergers and acquisitions in the copper ore mining sector. Taking into account the strategy map and the cost structure in the copper mining sector, we may conclude that the costs of mining and milling are the key parameters of the cost structure (in relation to overheads) and they should be considered as the specific subject of due diligence, because apparently, this is the area where the greatest synergy value may be achieved.

Valuing technological synergies in mergers

Technological synergy in mergers and acquisitions (M&As) is achieved when there is an increase in value generated by combining the stock of complementary technologies of acquirers and targets, as well as utilizing target’s patents to initiate or defend lawsuits against competitors. Using U.S. patent data, we provide quantitative measures of these two sources of technological synergy. We find that these measures of technological synergy are important considerations of acquiring firms and capital market in valuing target firms’ innovative assets, as the measures are positive determinants of merger premium and total synergy gain. The expected total gains of acquirers’ and targets’ shareholders from technological synergy decrease with the difficulties of post-merger integration as proxied by geographical distance between acquirer and target. Our technological synergy measures are also good predictors of post-merger realized synergy, i.e., increase in patent outputs in the overlapped technology classes and market share.

Rent Extraction with Securities Plus Cash

ABSTRACTIn our target‐initiated theory of takeovers, a target approaches potential acquirers that privately know their standalone values and merger synergies, where higher synergy acquirers tend to have larger standalone values. Despite their information disadvantage, targets can extract all surplus when synergies and standalone values are concavely related by offering payment choices that are combinations of cash and equity. Targets exploit the reluctance of high‐valuation acquirers to cede equity claims, inducing them to bid more cash. When synergies and standalone values are not concavely related, sellers can gain by combining cash with securities that are more information sensitive than equities.

Discussion on the Performance of M&A Transformation and Upgrading in Manufacturing Enterprises - Taking Hifuture Technology for Example

Under the background of “Made in China 2025 strategy” and the integrated development of “manufacturing + Internet”, traditional manufacturing enterprises have set their hands on the Internet one after another to boost their transformation and upgrading through mergers and acquisitions and seek new profitable growth and business development. Traditional manufacturing mergers and acquisitions Internet enterprises belong to cross-border mergers and acquisitions, there is a greater risk of mergers and acquisitions, mergers and acquisitions results are full of uncertainty. According to the data of stock market and the enterprise financial index, build events analysis model and entropy value method to analyze Hifuture M&A performance of science and technology, the results show that the M&A is advantageous to the enterprise new profit growth point, but no significant positive effect on M&A performance, the main manufacturing enterprises of industry competition, resources integration after the merger synergies.

Synergy in Mergers and Acquisitions: Typology, Life Cycles, and Value

Value in mergers and acquisitions (M&A) derives from the synergistic combination of an acquirer and a target. We advance the existing conceptualization of synergies in three ways. First, we develop...

Synergy in Mergers and Acquisitions: Typology, Lifecycles, and Value

Value in mergers and acquisitions (M&A) derives from the synergistic combination of an acquirer and a target. We advance the existing conceptualization of synergies in three ways. First, we develop a theoretically-motivated, parsimonious typology of five distinct sources of synergy based on two underlying dimensions: the level of analysis at which valuable activities occur and the orientation by which those activities are governed. The typology uncovers three novel synergy sources (relational, network, and non-market) arising from acquisition-induced changes in firms’ external cooperative environments, and classifies two other well-known synergies (internal and market power). Second, we introduce the concept of synergy lifecycles to explore how the timing of initial realization and the duration of gains vary across the five synergies, based on differences in the post-merger integration required and in the control the acquirer has over the assets and activities combined by the merger. Third, we consider how the synergy types interact, yielding co-synergies when they complement each other and dis-synergies when they substitute for one other. This enables us to expand the traditional conceptualization of the total value created by M&A as the sum of each of the synergy types, their co-synergies, and their dis-synergies.

Divergence of Investment Bank Valuation and the Winner’s Curse in Takeovers

We study the winner’s curse in mergers and acquisitions, in which winning bidders fail to account for the uncertainty about target value and thus overpay. Using a unique setting where target firms hire multiple investment banks as advisors, we construct a novel measure of target valuation uncertainty based on investment banks’ disagreement on target valuation. We find that when valuation disagreement is higher, bidders pay significantly higher acquisition premiums. Moreover, bidders who pay high premiums have lower announcement returns and lower long-term post-merger returns when valuation disagreement is high. These bidders also create lower merger synergies. Our findings suggest that the winner’s curse does exist in takeovers and cause distortion in resource allocation.

Unpatented Innovation and Merger Synergies

The increasingly service-based U.S. economy places a high reliance on innovation. While there is considerable research on the importance of certain innovative activities such as patents, less attention has been paid to unpatented innovation, about which there is naturally less publicly available information. Our study exploits disclosure on the fair value of acquired innovation to show that unpatented innovation plays an important, though often ignored, role in merger value creation. We detail the importance of unpatented technology and show that traditional approaches that rely only on R&D expenditures and patents lead to both misclassification of merger types as well as underestimates of the impact of innovation in value creation. Indeed, our evidence suggests that, on aggregate, unpatented innovation accounts for a larger portion of synergies. We further show that higher (lower) gains accrue to the acquirer (the target) in relation to unpatented innovation, which is consistent with limited publicly available information about unpatented innovation reducing the target’s bargaining power.

Price and Probability: Decomposing the Takeover Effects of Anti‐Takeover Provisions

ABSTRACTWe study the effects of anti‐takeover provisions (ATPs) on the takeover probability, the takeover premium, and target selection. Voting to remove an ATP increases both the takeover probability and the takeover premium, that is, there is no evidence of a trade‐off between premiums and takeover probabilities. We provide causal estimates based on shareholder proposals to remove ATPs and address the endogenous selection of targets through bounding techniques. The positive premium effect in less protected firms is driven by better bidder‐target matching and merger synergies.