Adding Value with M&A: Easier Said than Done
Mergers and Acquisitions (M&A) is an economically extremely important mechanism to reallocate resources: The global M&A deal volume corresponds to roughly 4% of global GDP. Yet adding value with M&A is easier said than done, especially for the acquirer. To shed light on the key financial considerations surrounding M&A decisions, the open-access finance platform TEJU finance has just published its latest module “Mergers and Acquisitions.”
“For a deal to make financial sense, the value of the (reasonably) expected synergies must correspond to at least 50% of the target firm’s stand-alone value!”

After a brief discussion of the driving forces behind M&A transactions and an overview of the standard takeover process, we take a closer look at the financial mechanics of M&A deals.
Framework to Understand M&A Deal Structures
In particular, we present a simple yet powerful framework to analyze M&A deal structures. With a few intuitive steps, this framework allows us to get from the stand-alone values of the merging firm to the combined value of the merged companies, taking into consideration how the deal is financed and how much of the anticipated synergies the acquirier is planning to share with the target company.

In the process, we understand how the specific deal structure allocates merger value added among the deal parties and what implications the proposed deal structure has on the merged firm’s ultimate ownership structure.
Importantly, we also see how to use that framework to better understand how and why the market reacts in certain ways to the announcement of deals.
We test the framework using the real-life case of the recent acquisition of MuleSoft by Salesforce for $6.5 billion in March 2018.
Does M&A Pay?
We also provide a brief overview of recent academic studies on the question of whether M&A transactions add value, on average. The answer is: “Yes.” Takeovers slightly increase the combined value of the merging firms. However, it is important to note that most of the takeover gains go to the target firm. Oftentimes, the shareholders of the acquiring firm lose money.
Why is it so Hard to Add Value with M&A?
The evidence is that the firms often overestimate the synergy gains from a deal, while underestimating the costs associated with the integration of the acquired company. Combined, these two factors constitute a potentially toxic cocktail.
To substantiate these claims, we discuss survey results according to which almost one out of three acquirers admit that their deal has delivered less than 50% of the expected growth synergies. Moreover, we document that acquirers conclude that merger integration costs equal approximately 15% of the deal value.
Taking into consideration the hefty takeover premiums for the target shareholders and the significant merger integration costs, we conclude with a very simple rule of thumb for acquirers: For a deal to make financial sense, the value of the (reasonably) expected synergies must be at least 50% of the target firm’s stand-alone value.
Put in simple words: If a target firm is currently valued at 100 million, the expected synergies from the deal must be at least 50 million, so that the merged value of the target company is 150 million. Of the value-added, roughly 30 million will go to the target shareholders as a takeover premium. The rest will be absorbed by merger integration costs. This is what “adding value with M&A is easier said than done” means.
Interested to learn more about M&A? Check out our latest module “Mergers and Acquisitions (M&A).”
