Professional Documents
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2019PGP086
Considering the 1st question, there are different schools of thought regarding the valuation of synergy.
One school believes that synergy is too vague a concept to measure and cannot be done so without
umpteen number of assumptions. On the other hand, the other school believes that valuing synergy
is very important even though it may involve assumptions as synergy valuation can be a deciding factor
in deciding the valuation of the firm to be acquired or merged. For the current research, I align with
the second school as I believe that the large sum of excess cash or premiums paid by the acquiring
firm in the name of synergy benefits needs to be valued in terms of whether the premium is justified
or not resulting in overvaluation or undervaluation of the firm.
Regarding the second question, some researchers like (Damodaran, 2005)and (Chatterjee, 1986) have
worked on the concept of synergy valuation and have given methods like Discounted Cash Flow (DCF)
and Cumulative Abnormal Return (CAR) to value synergy. So, these methods can be used to value the
synergies of mergers and acquisitions.
This research will attempt to understand and value synergy in the context of Indian companies
focussing on the steel sector. For the study, various mergers and acquisitions happened over past
years will be studied for which public data is available, and an attempt will be made to understand as
to how much importance the Indian companies place on the synergies if at all created.
References
Alexandridis, G. A. (2017). Value creation from M&As: new evidence. Journal of Corporate Finance,
Vol. 45, pp. 632-650.
Chatterjee, S. (1986). Types of Synergy and Economic Value: The Impact of Acquisitions on Merging
and Rival firms. Strategic Management Journal, Vol.7, No. 2, pp. 119-139.
Damodaran, A. (2005, October 30). The value of Synergy. Stern School of Business.