valueofsynergyforthefollowingreason:Synergyrequires
twoentities(firms,businesses,projects)foritsexistenceand
iscreatedbycombiningthetwoentities.Control,ontheother
hand,residesentirelyinthetargetfirmanddoesnotrequire
an analysis of the acquiring firm (or its valuation).
If both control and synergy are motives in the same
acquisition,itisbesttoassesstheirvaluesseparately.Infact,
thevalueofcontrolshouldbeestimatedfirstbyvaluingthe
targetfirmtwice,onceonastatusquobasis(with existing
management)andoncewiththechangesthatareintendedin
howthecompanyisrun.Oncethevalueofcontrolhasbeen
estimated,thevalueofsynergycanthenbeestimatedusing
the framework devised earlier in this chapter.
CONCLUSION
Oftenpromisedandseldomdeliveredisperhapsthemostapt
way of describing synergy in most acquisitions. There is
potential for synergy in manymergers, be it operating or
financial.Inthischapter,webeganbylookingatthesources
of synergy and how best to value each one. In general,
operatingsynergiesmanifestthemselvesashighercashflows,
while financial synergies can affect both cash flows and
discount rates. To value synergy, both the acquiring and
target firms haveto bevalued independentlyfirst, and the
sum of thesevalues canbe compared to thevalue of the
combinedfirm(withthesynergybenefitsbuiltin)toestimate
the value gain from synergy.
While there is some evidenceof synergyin the aggregate
acrossall acquisitions, most mergersfailin deliveringany
synergy. Evenif we accept thefact that there isvalue to