Expected operational synergies as a determinant of M&A premium levels and their cyclical changes in time

Abstract

Purpose of the study

Expected synergies are often presented as a motivator to pay high premiums in corporate mergers and acquisition. In the existing literature on the topic, however, there is a distinct dissonance on whether this holds true empirically. Apparently, the inability to agree on the role of expected synergies as a determinant of takeover premiums stems from differing interpretation of synergies as a concept and differing methodologies to measure synergistic value. This paper aims to provide new information to this discussion via three vehicles. First, I narrow the scope from overall synergies and focus merely on operational cost-side synergies to decompose the relationship between premiums and expected synergistic value. Secondly, I introduce differing valuation processes between industries as a possible way to increase prediction power for premiums. Thirdly, I study the premiums’ autocorrelative time-behavior and its dependency on expected operational synergies as an extension to speculative explanations for the premiums’ momentum proposed in extant research.

Data and methodology

The data set consists of 2,082 European public takeovers between 2006 and 2015, extracted from Mergermarket database. The relationship between takeover premiums and expected operational synergies is tested with simple OLS regressions and subsequent F-tests for testing the joint power of additional variables included in the model, with and without a set of industry classification binaries included. The momentum effect in premiums is confirmed with estimating monthly premium average’s autocorrelation coefficients and testing their significance. Based on these results, an autoregressive moving average model is estimated for two subgroups determined by the assumed existence of expected operational synergies to determine whether changes in expected operational synergies cyclically drive the premiums in time.

Findings

Takeover premiums are found to be generally independent on expected operational synergies. Also, premium levels significantly differ between industries. The expected operational synergies’ role as a determinant of takeover premiums is found to significantly deviate between industries, but individual industries where the effect would be considerably strong are not identified. Consistently with the existing research, takeover premiums are found to exhibit momentum. Specifically, monthly premium averages are found to be correlated with up to five lagged monthly periods. The time-behavior of premiums is not found to significantly deviate between transactions with and without expected operational synergies. Thus, it is concluded that changes in expected operational synergies do not generally drive takeover premiums.