Does the Management’s Forecast of Merger Synergies Explain the Premium Paid, the Method of Payment, and Merger Motives?

Financial Management, pp. 879-910, Winter 2011

32 Pages Posted: 23 Sep 2012 Last revised: 9 Jan 2015

See all articles by Ahmad Ismail

Ahmad Ismail

American University of Beirut

Date Written: 2011

Abstract

I study a sample of 336 M&A deals to investigate the effect of managements’ estimate of synergy on the reservation price and the payment method. I find that synergy does not explain the premium paid implying that it may have been announced to induce shareholders to endorse the deal. Acquiring firms are more likely to overpay if they have low growth potential, while the target firm is large, has higher pre-merger operating performance, and high growth potential. Acquirers may be serving their own self-interests as they are more likely to exceed their reservation price if they receive low compensation and if entrenchment provisions are in place. I also find that these acquisitions lead to post-merger shareholders’ wealth destruction, which is more pronounced when acquirers overpay. I document that the greater the synergy and the acquirer firm-specific overvaluation, the higher the likelihood of settling the deal with more shares.

Keywords: Synergy, Acquisition, Premium, Motives

JEL Classification: G34

Suggested Citation

Ismail, Ahmad, Does the Management’s Forecast of Merger Synergies Explain the Premium Paid, the Method of Payment, and Merger Motives? (2011). Financial Management, pp. 879-910, Winter 2011, Available at SSRN: https://ssrn.com/abstract=2002165

Ahmad Ismail (Contact Author)

American University of Beirut ( email )

Bliss Street
Olayan School of Business
Beirut, POB 11236
Lebanon

HOME PAGE: http://www.aub.edu.lb/osb/publicprofile/Pages/profile.aspx?memberID=ai05

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