Synergies, Shareholder Value and Exchange Ratios in Value Creating Mergers - Why Shareholders Should Doubt Managements Pre-Merger Promises

Managers promises of future synergies are a common means to convince shareholders that an intended merger will raise shareholder value. The paper argues that those arguments should be well grounded, as shareholders regularly lose if the merger remains non-synergetic, and will not necessarily gain even if positive synergies can be realized. In a simple model of conglomerate mergers, a corresponding critical level of synergies is made explicit, and moral hazard-induced effects are deducted which constitute genuine financial synergies of their own. It is shown that producing value at the corporate level on the one hand, and creating shareholder value on the other hand, may lead to different strategies though both policies create value. The results are applied for determining a bargaining range of mutual advantageous exchange ratios.