Merger Gains to Shareholders

Shareholders of the Target: The value paid for the target’s shares in excess of the pre-merger market price is the takeover premium. The amount of the takeover premium is a gain for the target’s shareholders.

Shareholders of the Acquirer: The shareholders of the acquiring company are assuming greater risk in the merger because their gains hinge on the ability of management to create synergy value that exceeds the takeover premium.

Gains for Shareholders acquirer = Synergies – Takeover Premium

If synergies do not exceed the takeover premium, then value for shareholders of the acquirer will be negative (i.e. a decline in share price).

Post Merger Valuation

Assuming that the acquiring firm has made correct estimates in the valuation process, the following formula will calculate the post merger value of the acquirer:

V Acq. Post-merge = V Acq. Pre-merge + V Target pre-merge + Synergies – Cash paid to target firm shareholders