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Mergers & Acquisitions. Synergy Valuation Models Report

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Updated: Jun 13th, 2020


Nowadays, the business world is looking for continuous expansion to generate higher revenues and enhancing the quality of the production processes. Additionally, mergers and acquisitions contribute to the strengthening of the competences and stimulation of the core competitive advantage while facing the increasing and intense competition in the world. Nonetheless, the significant differences between mergers and acquisitions tend to exist due to the different nature of the phenomenon. The takeover and acquisition imply having control of the acquired firm’s equity by 50 % (Piesse, Lee, Lin, & Kuo, 2013). In turn, the merger implies the creation of the new business unit (Piesse et. al, 2013).

Despite having slightly dissimilar nature, the intentions remain the same, as they remain an essential instrument to stay competitive on the market. In turn, the concept of the synergy enhancement also has to be taking into account while improving the quality of acquisitions and justifying their importance. It is commonly known that one of the goals of acquisitions is to enhance the synergies between the organizational and structural components (Damodaran, 2005). Nonetheless, it is important to take them into account due to the essentiality of the maintenance of the efficiency of the business processes and the lack of knowledge of the synergies applications in the context of mergers and acquisitions.

In this instance, the primary goal of the paper is to evaluate and describe merger and acquisition theories, synergies and valuation models to determine the sufficiency of their application in the real case scenarios. Additionally, it underlines the essentiality of acquisitions, mergers, and takeovers in the business world. Lastly, it determines their beneficial effects on the functioning of both participants of the process.

Merger & Acquisition Theories

Differential efficiency theory is the first theory, which is actively applied in management and economics to determine the nature and implication of the mergers and acquisitions in the real business world. It could be said that it clearly describes the relationship between the companies after the takeover and the possibility of the benefits for both sides. In this instance, it implies that that the acquisition of Company A of Company B is beneficial for both organizations, as Company A can enhance the efficiency of Company B while operating in the same industry (Piesse et. al, 2013). It implies that this activity is beneficial for both actors of acquisition and can be actively implemented in the context of the horizontal takeovers.

As for the inefficiency management theory, it implies that the efficiency of Firm B can be increased by other means due to the public origin of its status (Piesse et. al, 2013). This approach underlines different types of takeovers by emphasizing the conglomerate acquisitions. Nonetheless, both inefficiency management theory and differentiation efficiency are aimed at the enhancement of the effectiveness by optimization of the resource allocation, introduction of the new corporate culture, and creation of synergies between two companies. Nonetheless, these aspects have to be carefully assessed, as the adverse effects tend to exist during the implementations of the mergers and acquisitions.

Furthermore, the agency theory states that managers and shareholders of the company seek for the personal profit maximization and enhancement of financial positions of the individuals (Piesse et. al, 2013). In this case, the main challenge is the existence of the separate ownership of the different parts of the firm by diverse managers and representatives. Nonetheless, the primary solution to the agency issue is the implementation of the contractual nature of the agreements to avoid misinterpretation of the actions and fraud. Nonetheless, another solution is the takeover, as the inefficient management can be replaced. Consequently, the acquisitions, takeovers, and mergers are essential while solving managerial issues.

In turn, the free cash flow hypothesis implies that it can be one of the potential sources of funding of the takeovers due to the free nature of these financial resources. It remains evident that excess cash flow is necessary for financing various essential projects and activities (Piesse et. al, 2013). Additionally, it is apparent that it has a high correlation to the agency dilemma since the management does not tend to distribute cash flow efficiently for the sufficient financing of the projects. In the end, the constant management of the cash flow excess is an essentiality for the successful performance and creation of a coherent competitive advantage.

Market power hypothesis states that mergers and acquisitions can enhance the control of the company over a particular market area including the geographical expansion (Piesse et. al, 2013). In this case, horizontal and vertical takeovers have a tendency to exist and are explained by the desire of the companies to increase market power. It could be said that these types of activities strengthen the position on the market by establishing a coherent flow of resources in the supply chain.

Furthermore, the diversification hypothesis implies creating a distinct competitive advantage by increasing the number of activities and reducing risks (Piesse et. al, 2013). In this instance, it is clear that diversification is one of the vital elements while creating a competitive advantage and improving the company’s position on the market. It could be said that the acquisition can develop the company’s diversification by expanding the range of the provided services and products.

The information hypothesis implies acquiring higher volumes of information during the takeovers (Piesse et. al, 2013). It could be said that in this instance, the companies tend to learn from each other due to the availability of the information. Additionally, it presents the information about the company’s values, status, and financial targets, which can be enhanced during the implementation process of acquisitions. Nonetheless, the manipulations of the share price might tend to exist due to the individual aims of the managerial authorities (Piesse et. al, 2013).

Lastly, the bankruptcy avoidance hypothesis states that the acquisitions, takeovers, and mergers contribute to the flow of the financial resources and absence of the hardships with resource allocation (Piesse et. al, 2013). It remains evident that acquisitions help avoid the possibility of bankruptcy due to the improvement of the financial position. It could be said that the companies can be proposed being acquired to improve their budgeting and performance.

In the end, all of the hypotheses, which are mentioned above underline the essentiality and justification of the differential efficiency theory. It remains evident that the action of the company A can highly improve the position of the company B due to the creation of synergies. In this instance, it will be beneficial for both parties, as their resources can be optimized and their importance can be increased on the market. Lastly, it contributes to the avoidance of risks and finding solutions to complex issues, which often take place in the business world.

Major Synergies Valuation Models

Firstly, synergy implies the generation of the additional value during the integration of the firms. It could be said that it underlines the fundamental intention of the acquisition or takeover due to the essentiality of the profit maximization. In this case, two types of synergies such as operating and financial tend to exist. It remains evident that the operating synergy implies having a high influence on the flow of operations and implementation of the economies of scale (Damodaran, 2005).

In turn, the financial synergies are generated while applying tax benefits and other financial operations for the optimization of cash flow and the creation of the cash excess (Damodaran, 2005). In the end, the synergies provide a relevant understanding of the generation of the additional value and beneficial nature of acquisitions. Additionally, they are fundamental elements of the company’s success on the market.

In this instance, two major synergies valuation models such as net present value and relative valuation have a tendency to exist. Both of these approaches determine the value of the synergy but discover it from the different perceptions. Firstly, net present value is usually used for the representation of the particular features of the corporate strategy and organizational framework, and the synergy value is reflected by the level of risks of the synergy flows (Fiorentino & Garzella, 2014). It could be said that it discovers the synergies in the enhancement of the operation processes while integrating the organizations.

In turn, the net value is presented by discounted cash flow, in which the correlation between present synergy value and the deals, and discounted future earning, in which the relationship between present synergy value and the future earnings. Nonetheless, analytic and synthetic approaches tend to exist, and the synthetic scheme implies the differences in the chosen values between both firms and the combined firm. In turn, the analytic approach presents the simple correlation between the present value of the synergy and the chosen term. This approach contributes to the measurement of the synergies and coherent assessment of their implications.

In turn, relative valuation assesses the synergies by their market prices. It could be sais that it provides a relevant understanding of the value creation in the financial context. In this case, the value of the synergy is determined by comparing it to the particular constant value, which is relevant for the industry (Fiorentino & Garzella, 2014). It could be said that it contributes to the understanding of the company’s position on the market about the currently acquired firm. Additionally, this valuation helps determine the interrelationship and differences between values of two firms, which are the participants of the acquisition procedure.

The relative valuation implies utilizing two models for the analysis such as multiple and comparable transaction models. This method tends to establish the constant variable, which plays the role of the mediator and contributor to the assessment of the issue between the companies. Multiple approach states the relationship of the product of synergy flows and constant common variables (Fiorentino & Garzella, 2014).

In turn, the comparable transaction model implies the measurement of the interrelationship between the product of synergy flows and the constant and common variable for the comparable transactions (Fiorentino & Garzella, 2014). In this instance, the common variable is also defined and contributes to the creation of the relevant image of the synergy valuation in the context of the assessment of the company’s efficiency after the acquisition or takeover.

Nonetheless, in this case, analytic and synthetic ways of analysis are also present. It could be said that the analytic approaches were explained in the previous paragraphs. Nonetheless, the synthetic methods are more complicated, as they require a combination of the variables of two participants of the acquisition. For instance, the synthetic approach implies the measurement of the synergy value in relation to the variance of the several values of the combined firm and two independent companies (Fiorentino & Garzella, 2014). It helps to see the modifications of the value of the synergy before and after the acquisition. In the end, it could be said that the valuation models cultivate an understanding of the necessity of acquisitions and their importance while defining the significance of acquisitions.

In conclusion, the evaluation and determination of the values while having synergies in the context of the acquisitions. However, the synergy valuation models have to be implemented carefully to avoid misinterpretation in the analysis. It remains evident that major synergy valuation models have to be actively implemented, as the results are often misinterpreted and not considered in the desired context. Lastly, both synthetic and analytical models have to be taken into account, as they help evaluate the synergies of the complex mechanism, as, despite the observation from the dissimilar perspectives, they tend to present the current image of the synergy valuation coherently.


Damodaran, A. (2005). Web.

Fiorentino, R., & Garzella, S. (2014). The synergy valuation models: Towards the real value of mergers and acquisitions. International Research Journal of Finance and Economics, 124, 71-82.

Piesse, J., Lee, C., Lin, L., & Kuo, H. (2013). Merger and acquisition: Definitions, motives, and market responses. In C. Lee & A. Lee (Eds.). Encyclopedia of finance (pp. 411-419). New York, NY: Springer Science+Business Media.

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