Practice question · Multiple choice
Roughly half of large mergers destroy value for the acquirer's shareholders. Given that the buyers are sophisticated, what best explains the pattern?
Hints
- In a competitive auction, whose valuation wins? Ask whether that valuation is likely to be the accurate one.
- The synergies are often real. Ask who ends up capturing them.
Show the answer
D. The winner's curse plus overconfident synergy estimates
Why
Winning a contested auction is evidence you bid the most, and bidding the most is evidence you were the most optimistic, the premium hands the synergies to the seller before they materialise. This is why the deal announcement so often lifts the target's share price and drops the acquirer's.
Practise Mergers and Acquisitions
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