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Quantifying Operational Synergies in a Merger/Acquisition

Author

Listed:
  • Diwakar Gupta

    (Department of Mechanical Engineering, University of Minnesota, Minneapolis, Minnesota 55455)

  • Yigal Gerchak

    (Department of Industrial Engineering, Tel-Aviv University, Ramat-Aviv, Tel-Aviv 69978, Israel)

Abstract

Merger and acquisition activity has increased sharply in the last decade. It seems useful to have models that can help senior managers of bidder firms make informed decisions about the amount of premium, over the target's share prices prevailing prior to merger announcement, that can be justified on the basis of operational synergies. The goal of this article is to capture important parameters from the production side that have a bearing on the valuation of the target's shares. We show that the production characteristics of both the bidder and the target matter in a significant way. For example, if the bidder and target operate in independent markets, the bidder has flexible production facilities but the target's production facilities are inflexible, then an increase in the bidder's demand can make the target less attractive and lower the value of operational synergy.

Suggested Citation

  • Diwakar Gupta & Yigal Gerchak, 2002. "Quantifying Operational Synergies in a Merger/Acquisition," Management Science, INFORMS, vol. 48(4), pages 517-533, April.
    • Handle: RePEc:inm:ormnsc:v:48:y:2002:i:4:p:517-533
    DOI: 10.1287/mnsc.48.4.517.209
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    References listed on IDEAS

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