The Construction of Financial Value: Crafting Synergy Estimates in Acquisitions

Synergies between two firms often serve as the economic rationale supporting mergers and acquisitions. We investigate whether synergy estimates reflect the performance improvement of the transactions or if, alternatively, these estimates are a façade instrumental to the acquisition narrative to provide an economic argument for acquisitions. We investigate this question with mixed methods. First, we analyze a sample of significant transactions involving 404 international acquirers of public targets disclosing synergy cost estimates. We test the extent to which these synergy estimates are associated with several ex-post performance measures. Our findings reveal a negative association between synergy estimates and multiple post-deal operating performance measures relative to the pre-deal average. Instead, we find that synergy estimates are positively correlated with the offer price premium, goodwill, and future goodwill impairment, indicating that firms disclosing higher synergy estimates are more likely to overpay for their targets. Second, drawing on ten interviews with valuation specialists, investment bankers, strategy consultants, and a CFO, with deep knowledge in acquisitions and synergy estimation, we find that synergy estimates are often constructed to ensure completion of transactions, which explains why they tend to be disconnected from post-acquisition performance improvement. Overall, our paper contributes to the literature on the social construction of numbers, as exemplified by synergy estimates.