Pricing mergers with differential synergies

• Date: 01 January 2018
• Author: Paul Kwan,Nipun Agarwal
• DOI: http://doi.org/10.1002/jsc.2175
• Published date: 01 January 2018

RESEARCH ARTICLE

DOI: 10.1002/jsc.2175

Strategic Change. 2018;27(1):3–7. wileyonlinelibrary.com/journal/jsc © 2018 John Wiley & Sons, Ltd. 3

Abstract

Mergers and acquisions (M&A) transacon pricing is a negoaon between the acquirer (buyer)

and the target rm (seller). Both these rms have a dierent esmate of the synergies that can

be obtained from this merger and as a result the valuaon of the target rm is dierent for the

acquirer and the target rm. This percepon of synergies can be easily impacted by the behavior

of the acquirer and the target. This arcle analyzes the pricing of M&A transacons based on dif-

ferenal synergy percepons, while looking at risk‐averse–risk‐taking behavior of acquirers and

opmisc–pessimisc behavior of the target rm. Results show that the acquirer’s risk‐taking

behavior and percepon of merger synergies determines the price oered for the M&A transac-

on. The target rm’s percepon of synergies is less relevant (if at all) and their opmisc be-

havior is most useful, when the acquirer perceives high synergies exisng in the potenal M&A

transacon.

1 

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 INTRODUCTION

Mergers and acquisions (M&A) transacons are a negoaon of the

price that the acquirer is ready to pay for the target rm and the price

that the target rm believes its worth. This price is obtained from the

synergies that both the acquirer and the target rm believe they will

obtain from the merger. If there is a substanal dierence between

the percepon of synergies and the nal valuaon, then the trans-

acon will oen fall through. The target rm valuaon and percep-

on of synergies oen is impacted by behavioral characteriscs of

the acquirer and target rm. We can oen see two rms in the same

posion may have dierent valuaons and consideraon of the syn-

ergies that can be obtained. This arcle reviews how synergies and

the risk‐averse–risk‐taking behavior of the acquirer and opmisc–

pessimisc behavior of the target rm can impact this valuaon. Fur-

ther, we develop an agent‐based model to analyze this problem. In

the next secon, we undertake a literature review M&A and agent

based modeling literature that relates to the problem of pricing M&A

transacons. Aer that, we review the methodology and discuss the

results from the agent‐based model to explain the outcomes of the

experiment.

2 

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 DIFFERENTIAL SYNERGIES IN MERGER

& ACQUISITION TRANSACTIONS

Kahneman and Tversky (1979) state that human beings value gains

more than losses, which means that a drop in the valuaon of the

target rm is more valuable to an acquirer than an equivalent gain in

the valuaon and vice versa from the target rm’s perspecve. Baker,

Pan, and Wurgler (2009) have empirically shown that the shareholder

of target rms usually accept oers that are above the 52‐week high

stock price. This would mean that the shareholder of the target rm

usually believe that the value obtained is equal or less than what they

would receive and that the 52‐week high stock price provides a beer

valuaon. Shleifer and Vishny (2003) have raised the queson that

oen rms can undertake misvaluaon. This could potenally occur

if the acquirer believes that it can gain greater synergies than actual

occur in reality aer the postmerger integraon is completed. Robin-

son and Viswanathan (2005) and Shleifer and Vishny (2003) nd that

mergers occur in waves and the valuaon depends on the market con-

dion and reason for the merger.

Explaining this further, Kiymaz and Baker (2004) state that merg-

ers occur to maximize synergies, while divestments occur to spin‐

o misaligned parts of a rm. Kummer and Steger (2008) nd that

these merger waves reoccur, while Bouwman, Fuller, and Nain (2009)

acknowledge that rms oen undertake herding behavior, where

Pricing mergers with dierenal synergies*

Nipun Agarwal | Paul Kwan

School of Science & Technology, University

of New England, Armidale, NSW, Australia

Correspondence

Nipun Agarwal, 152 Williams Road, Prahran,

Victoria 3181, Australia.

Email: nipun1@msn.com

* JEL classicaon codes: G3, G34, G4.