QVC, which lost the bidding war, actually had higher
synergies with Paramount than Viacom did.
Consideringtheevidence,itiseasytoseewhybidding-firm
stockholdersoftendonotsharetheenthusiasmthatmanagers
inthesefirmshaveaboutmergersandacquisitions.Inmost
acquisitions, even those where synergy is real and creates
value,theacquiringfirm’sstockholdersgetlittleornoneof
thebenefitsfromsynergy.Infact,inasignificantpercentage
ofacquisitions,acquiringfirmspaymorethan 100 percentof
the valueof synergy, leaving theirstockholders worse off
than they would have been without the acquisition.
Why Do Bidders Overpay for Synergy?
Anumberofpossibleexplanationsexistforthephenomenon
of bidders overpaying for synergy:
- Biasedevaluationprocess.Inmostmergerdeals,the
assessment of whether the deal makes sense (i.e.,
whetherthetargetcompanyisabargainattheoffered
price) is done by the deal makers(the investment
bankers for the acquiring firm). This process is
clearly open to conflicts of interest and bias. The
deal-makers’feesrestonthedealgettingdoneand
notonwhetherthedealmakessense.If wecouple
thisbiaswiththefactthatmanagersatmostacquiring
firmshavealreadydecidedthattheywanttodothe
acquisitionatanyprice, itisnotsurprising thatso
manybaddealsgothroughwithacquirersoverpaying
for synergy and control.