CHAPTER 15
The Value of Synergy
WhenCarlyFiorinaarguedforHewlett-Packard’sacquisition
ofCompaq,sheofferedanumberofreasonsthedealmade
sense.Shenotedthatthecombinedcompanywouldbeableto
meetthedemandsofcustomersfor“solutionscapabilityona
trulyglobalbasis.”Shealsoclaimedthatthefirmwouldbe
abletoleadwithitsproducts“fromtoptobottom,fromlow
endtohighend.”Ashercrowningargument,sheclaimedthat
the merger made sense because it would create “synergies that
are compelling.”
Synergy,theincreaseinvaluethatisgeneratedbycombining
twoentitiestocreateanewandmorevaluableentity,isthe
magic ingredient that allows acquirers to pay billions of
dollarsinpremiumsinacquisitions.It istruethatinvestors
havehistoricallytakenajaundicedviewofsynergy,interms
ofbothitsexistenceanditsvalue,andthetrackrecordonthe
deliveryofsynergysuggeststhattheyhavegoodreasonfor
skepticism.Inthischapter,webeginbyconsideringpotential
sourcesofsynergyandhowbesttovalueeachofthem.We
thenalso examinetheproblemsthat analystsoftenfacein
valuingsynergyand whyacquirersoftenfailtodeliver the
synergy that they promised at the time of the acquisition.
WHAT IS SYNERGY?
Synergy is the additional value that is generated by
combining twofirms,creatingopportunities thatwouldnot
havebeenavailabletothesefirmsoperatingindependently.It