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The Value of Synergy

Aswath Damodaran

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

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Date posted: November 14, 2005  

Suggested Citation

Damodaran, Aswath, The Value of Synergy (October 30, 2005). Available at SSRN: https://ssrn.com/abstract=841486 or http://dx.doi.org/10.2139/ssrn.841486

Contact Information

Aswath Damodaran (Contact Author)
New York University - Stern School of Business ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0340 (Phone)
212-995-4233 (Fax)
HOME PAGE: http://www.damodaran.com
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