Valuing synergies in strategic mergers and acquisitions using the real options approach
Journal: Investment Management and Financial Innovations (Vol.14, No. 1)Publication Date: 2017-05-16
Authors : Anna Loukianova; Egor Nikulin; Andrey Vedernikov;
Page : 236-247
Keywords : acquisitions; mergers; real options; synergy;
Abstract
The purpose of the current paper is to elaborate the model for assessing cumulative synergetic effect in M&A (Mergers and Acquisitions) deals on the basis of a real options approach. The majority of papers on the synergetic effects of M&A deals typically focus on a particular type of synergy, while the current paper proposes a model that accounts for the cumulative simultaneous effect of different types of operating and financial synergies. The methodology of our research is loosely based on Datar-Mathews real option valuation model, which is flexible and intuitive for practitioners. Formulae for assessing eight types of synergy typically arising from M&A deals are developed. They are integrated into a single model to assess their cumulative effect on the M&A deal using a simulation modelling approach. The method was used ex post to find synergy values in two recent M&A deals in the pharmaceutical industry, and produced sound results. The proposed approach to value target companies could be used by firms before an M&A deal in the due diligence process. Using this tool a company can build a bidding strategy and define the maximum premium it can pay for the target.
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Last modified: 2018-03-15 17:26:40