to1.1866andnochangeinthecostofdebt),thevalueofthe
combined firm after the takeover can be estimated as shown:
Asaconsequenceoftheaddeddebt,thevalueofthefirmwill
increase from $729.69 million to $752.53 million, thus
creating synergy worth $22.84 million.
DUBIOUS SYNERGIES
Nowthatwehavevaluedoperatingandfinancialsynergies,
we turn to a thirdgroup of synergies thatwe consider of
dubiousmerit.Inthisgroup,weincludethosesynergiesthat
require gross misjudgments by markets to have value.
Accretive Acquisitions
Inmanyfirms,thereisafocusonwhethertheacquisitionwill
beaccretiveordilutive.Anaccretiveacquisitionisonewhere
theearningspershareoftheacquiringfirmwillincreaseafter
theacquisition,whereas adilutiveacquisitionisonewhere
theearningspersharewilldecrease.Whatiswrongwiththis
rationale? An accretive merger requires acquisition of
companieswith price-earningsratioslower thanthatofthe
acquiringcompany.Thus,acompanywithaP/Eratioof 30
that acquires a company with a P/E ratio of 20 will see