Synergies or overpayment in European corporate M&A

Abstract

The purpose of this research is to test whether the price paid for corporate takeovers in Europe is related to the synergies expected or whether bidders are overpaying for acquisitions. We analyzed the relationship between the premium paid in 147 mergers and acquisitions, and the bidders’ abnormal returns around the date of the transaction from 1995 to 2004. A quadratic relationship between the premiums and returns was found. When the amount paid in a transaction does not exceed the value of the target organization by more than 39.69–40.03%, the premium becomes a sign of the future synergy and will have a positive effect on the bidders’ returns. However, when the premium exceeds these values, the relationship between premiums and returns become negative and therefore the market considers bidders are overpaying. This paper show the importance of the correct valuation of the targets and of the premiums paid to ensure value creation in M&A.