Preparing for Value Creation in a Complex Merger among Firms in a Similar Business: Synergy Generation and Distribution Issues

The subject of this chapter is strategically motivated mergers among firms in related businesses (Rumelt 1974). Accordingly, value creation rather than more narrowly finance-motivated value capturing (Jemison and Haspeslagh 1987; Payne 1987; Lubatkin 1988) is the focus of the present study. Many strategically motivated mergers take place because of an anticipation of the creation of synergy, that is, added value for all parties. The estimation of potential synergy can be difficult enough in a typical case involving two companies; however, there are also a number of examples of mergers in which three or more companies decide to join forces, and, in these cases, estimating potential synergies becomes immediately much more complex. The merger negotiation process in the former case will generally be fairly straightforward in terms of contributing to synergistic benefits and splitting them among the new owners. However, when the number of parties increases, the process rapidly takes on additional dimensions of complexity. Not only does the amount of analytical work increase for estimating synergy benefits for the various merger combinations, but the negotiations regarding how to split these synergies also become more complex. Additionally, since there will now be the possibility of mergers between sub-sets of the parties, a set of negotiations may take place regarding the formation of sub-coalitions.