The Value of Synergy
New York University - Stern School of Business
October 30, 2005
Many acquisitions and some large strategic investments are often justified with the argument that they will create synergy. In this paper, we consider the various sources of synergy and categorize them into operating and financial synergies. We then examine how best to value synergy in any investment and how sensitive this value is to different assumptions. We also look at how this synergy value should be divided between the parties (or companies) involved in the investment. We conclude with an empirical examination of how much synergy is actually created in corporate mergers, and how much is paid. Synergy, we conclude, is so seldom delivered in acquisitions because it is incorrectly valued, inadequately planned for and much more difficult to create in practice than it is to compute on paper.
Number of Pages in PDF File: 47
Keywords: synergy, acquisitiion, valuation
JEL Classification: G12, G24, G34
Date posted: November 14, 2005
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