Estimating Merger Synergies and the Impact on Corporate Performance: An Empirical Approach

Anders Elgemark

Student thesis: Master thesis


This study develops a methodology for estimating synergies created in mergers. It investigates the impact on accounting- and cash flow based performance measures when two companies combine into one, and compare pro-forma pre-merger values to the post-merger values of the combined entity. This study also analyzes the impact on corporate performance following a merger, which is too estimated by studying the impact on accounting- and cash flow based performance measures. The conventional method of estimating merger synergies is the event study approach. This approach, however, has several limitations. In contrast to an accounting- and cash flow based approach, an event study merely calculates the value of potential synergies that might be realized according to estimates by participants on financial markets at the time of the merger announcement. Such studies are conducted by studying the impact on market capitalization following a merger announcement of publically traded companies. Moreover, the event study approach does not allow for a detailed analysis of where and when the additional value is created: It only provides the aggregated sum of the total effects estimated at the announcement. On the contrary, an accounting- and cash flow based approach enables the researcher to study the outcome of a merger and estimate the actual value created as well as identifying the sources of the value creation. A review of the most prominent accounting- and cash flow based studies of merger synergies currently available is presented. After considering the existing research, a methodology is developed for estimating merger synergies and measuring the impact on corporate performance. The methodology is thereafter applied in a case study of the merger between Aarhus United and Karlshamn, forming AarhusKarlshamn in 2005. The results show evidence of positive merger synergies in the main measurement period. The impact on corporate performance is primarily positive, however, results are somewhat mixed depending on the type of performance measures analyzed and the interpretation of what is a positive impact. Lastly, an event study is included. Even though it has its limitations as a methodology, it is included in order to provide results from a second methodology and type of data. The result from the event study supports the main results since it too indicates that positive synergies are created in the merger. Corporate managers, shareholders, advisers and researchers may apply the methodology developed in this report on specific mergers to obtain an indication of whether a merger actually has created the additional value through the creation of merger synergies, and compare the results with their expectations and estimates at the time of the merger decision. The mastery of this methodology can hopefully improve their ability to more accurately estimate the potential benefits from a merger when facing such a decision.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2014
Number of pages98