Many acquisitions and some large strategic investments are often justified with
the argument that they will create synergy. In this paper, we consider the various sources
of synergy and categorize them into operating and financial synergies. We then examine
how best to value synergy in any investment and how sensitive this value is to different
assumptions. We also look at how this synergy value should be divided between the
parties (or companies) involved in the investment. We conclude with an empirical
examination of how much synergy is actually created in corporate mergers, and how
much is paid. Synergy, we conclude, is so seldom delivered in acquisitions because it is
incorrectly valued, inadequately planned for and much more difficult to create in practice
than it is to compute on paper.
