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Synergies, shareholder value and exchange ratios in “value‐creating” mergers Why shareholders should doubt management's pre‐merger promises

Synergies, shareholder value and exchange ratios in “value‐creating” mergers Why shareholders... Purpose – The purpose of this research paper is to clarify why shareholders should be prudent when managers promise value gains from a synergetic merger. Design/methodology/approach – The paper proposes a simple two‐state model of stochastic firm cash flows which allows for a discussion of wealth redistribution in conglomerate mergers, both under perfect information and moral hazard. Findings – It is found that shareholders regularly lose in non‐synergetic mergers, and will not necessarily gain if synergies are positive. In the model, a corresponding critical level of synergies is calculated explicitly. It is shown that there are also new value effects induced by moral hazard, which constitute genuine financial synergies of their own. Research limitations/implications – The positive synergies are due to the mitigation of asset substitution problems after the merger, and they are an interesting question for generalization in future research. Practical implications – As one of its practical implications, the findings suggest that managers should provide shareholders with concrete ideas of where promised synergies might come from, and why there should exist any bargaining range for equilibrium exchange ratios which leaves all shareholders better off. Originality/value – The paper shows that these questions can be answered on a rigorous basis which might improve the pre‐merger decision process between managers, shareholders and the affected groups of stakeholders, respectively. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Synergies, shareholder value and exchange ratios in “value‐creating” mergers Why shareholders should doubt management's pre‐merger promises

Managerial Finance , Volume 34 (4): 10 – Mar 14, 2008

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
0307-4358
DOI
10.1108/03074350810849288
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this research paper is to clarify why shareholders should be prudent when managers promise value gains from a synergetic merger. Design/methodology/approach – The paper proposes a simple two‐state model of stochastic firm cash flows which allows for a discussion of wealth redistribution in conglomerate mergers, both under perfect information and moral hazard. Findings – It is found that shareholders regularly lose in non‐synergetic mergers, and will not necessarily gain if synergies are positive. In the model, a corresponding critical level of synergies is calculated explicitly. It is shown that there are also new value effects induced by moral hazard, which constitute genuine financial synergies of their own. Research limitations/implications – The positive synergies are due to the mitigation of asset substitution problems after the merger, and they are an interesting question for generalization in future research. Practical implications – As one of its practical implications, the findings suggest that managers should provide shareholders with concrete ideas of where promised synergies might come from, and why there should exist any bargaining range for equilibrium exchange ratios which leaves all shareholders better off. Originality/value – The paper shows that these questions can be answered on a rigorous basis which might improve the pre‐merger decision process between managers, shareholders and the affected groups of stakeholders, respectively.

Journal

Managerial FinanceEmerald Publishing

Published: Mar 14, 2008

Keywords: Acquisitions and mergers; Stakeholder analysis; Modelling

References