Chapter 9 Flashcards
(20 cards)
What is synergy in M&A?
Synergy is the additional value created when two firms combine that is beyond their stand-alone values.
What is the ‘2 + 2 = 5’ effect?
It represents the belief that a combined firm can generate more value than the two firms independently.
Why is valuing synergies important?
It helps in pricing the deal, predicting investor reaction, and guiding post-merger integration.
How does synergy affect investor reaction?
If price < standalone + synergy value, buyer AR is positive; if price > that sum, buyer AR is negative.
Why are synergies difficult to create?
Because it requires cost, time, integration efforts, and may be replicated by competitors.
What are the two components of synergy value?
Synergies in place + real option synergies.
What are synergies in place?
Predictable gains from integration, like cost savings or tax advantages.
What are real option synergies?
Payoffs that depend on future events or flexibility, such as R&D breakthroughs.
Name two types of revenue synergies.
Cross-selling and bundling products.
Name two types of cost reduction synergies.
Economies of scale and sharing operational knowledge.
What are asset reduction synergies?
Selling redundant assets or reducing excess capacity.
What are tax synergies?
Combining loss-making with profitable firms or using tax inversions.
What are financial synergies and are they reliable?
Lowering WACC through combined creditworthiness; often debated or overestimated.
Which type of synergy is more likely to be achieved: cost or revenue?
Cost synergies—McKinsey found 86% of acquirers achieved >70% of them, but only 50% did so with revenue synergies.
What is an example of a growth option synergy?
New product development through R&D capabilities.
What is an example of an exit option synergy?
Flexibility to abandon or change projects due to improved capital structure.
How should synergies be presented in valuation?
All synergy estimates should be net of taxes and based on credible sources.
Which type of M&A deal yields the highest synergies?
Horizontal deals usually yield higher synergies than vertical or conglomerate mergers.
What went wrong in the AOL–Time Warner merger?
The acquisition premium was too high and the synergy projections were vague and unconvincing.
What went right in the Pepsi–Quaker Oats deal?
Pepsi disclosed detailed synergy plans and outperformed its peers post-deal—an example of strong synergy planning and communication.
