Separating Financial and Operational Synergy

Abstract

There is strong empirical evidence supporting capital structure targeting, dividend policy targeting, and the existence of dividend clienteles. If these features are understood to enhance firm value, subject to manager preferences, then this evidence also advances the notion that financial synergy could explain the ambiguous landscape of corporate synergy studies. I apply a new structural model of the firm to the problem of determining operational and financial synergies - and in particular, their division between acquirer and target. The results are sensitive to capital structure, dividend policy, and financing. Several empirical studies assume that firm value is linear (and monotonic) in capital structure and financing method. Using the new structural model, I suggest an alternative approach to the calculation of abnormal returns that avoids this assumption. This approach separates financial and operational synergy and provides a testable hypothesis.

Keywords: financial synergy, structural model, optimal capital structure, corporate restructuring

JEL Classification: G32, G33, G34, G35, G38