synergy,acquiringfirmstockholdersgetalmostnoneofthe
benefits of the increased value; in fact, they overpay for
synergyinmostacquisitions.Weattributethisoverpayment
toanumberoffactorsincludingmanagerialhubris,biasinthe
estimation process, and a failure to plan for synergy. We
closedthechapterbyconsidering howbestto improvethe
oddsondeliveringsynergyandsomecommonerrorsinthe
valuation of synergy.
1 The irony is that this motive has to remain unstated or
understated,sinceantitrustlawscanbeutilizedtostopsuch
mergers.
2 Chapter 13 considers how much control is worth.
3 Thisassumptionallowsustocomputea reinvestmentrate
for perpetuity:
Inthis example,both firmshavereturnsoncapitalof 7.42
percent in perpetuity and grow 4.25 percent a year. The
resulting reinvestment rate is 57.28 percent (4.25%/7.42%).
4 Tocomputethecombinedfirm’sreturnoncapital,weadd
theoperatingincomesoftwofirmspriortothemergerand
dividebythetotal capitalofthetwofirms. Thisyieldsan
after-tax return on capital of 18.11 percent for the firm:
5 Thevaluesthatweusedwerethevaluesimmediatelybefore
theacquisitionannouncement. Thisistopreventthebiases