Valuing synergies in strategic mergers and acquisitions using the real options approach

  • Received February 7, 2017;
    Accepted March 29, 2017;
    Published May 12, 2017
  • Author(s)
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  • Article Info
    Volume 14 2017, Issue #1 (cont.), pp. 236-247
  • Cited by
    15 articles

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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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