Valuing synergies - Methods and their application in the M&A industry

Abstract

What drives the price of a merger and acquisition deal? What enables some buyers to outbid others when competing over the same target? The objective of this thesis is to determine which synergies that different market actors consider as key synergies, how the actors quantify and value synergies and how the synergies impact the acquisition premium. The topic has been investigated through semi structured interviews and a survey with eight different market actors in the merger and acquisition industry. Our conclusions indicate that the assessment of what are key synergies depends on the reason to acquire and the time horizon of the buyer. Most actors find cost reducing synergies the easiest to quantify and common industry practice seems to be to only account for these in the acquisition business case. The most preferred method when valuing synergies related to mergers and acquisition is to use a discounted cash flow model and to utilize different comparable multiples as benchmarks. The value of the synergies creates a range for the acquisition premium, but since there is significant uncertainty related to the realization of them, the buyer is seldom willing to pay for more than fifty percent of the discounted value of the synergies.