notcapture.Theseoptionscanbetheresultofmoregrowth
opportunities or a better competitive position for the
combinedfirmormoreadvantageoustimingofinvestments,
and can add value to the acquiring firm.
7
The intuition behind the real options argument is sound.
Acquisitionssometimesopenuppossibilitiesthatwouldnot
have beenavailable otherwise, and these opportunities are
difficult to convert into expected cash flows.
8 Some healthy skepticism is warranted in most cases,
though.Iftheonly waytoenteran emergingmarketis by
buyingacompanyinthatmarketandthatacquisitiongives
exclusive rights to the acquiring firm to expand in the
emerging market, there is good reason to apply an option
premium.If,asismorecommon,acquiringafirmisoneof
many different ways of entering a competitive market, a
discounted cash flow valuation is more than adequate for
capturing expected synergies.
Valuing Financial Synergies
Synergycanalsobecreatedfrompurelyfinancialfactors.We
considerthreelegitimatesourcesoffinancialsynergy:better
useforexcesscashorcashslack,agreatertaxbenefitfrom
accumulatedlossesorhighertaxdeductions,andanincrease
in debt capacity and therefore firm value. We begin the
discussion, however, with diversification, which though a
widelyusedrationaleformergers,isnotasourceofincreased
value by itself, at least for publicly traded firms with
diversified investors.
Diversification