Given the economic importance of M&A transactions, this section asks whether M&A actually pays, on average. We start out with a brief overview of the academic literature that seems to show that M&A transactions, on average, lead to a small positive value creation.
Then we discuss the key challenges surrounding valuable M&A decisions: We show that managers often overestimate the synergies that are associated with a deal while they underestimate the merger integration costs. These two factors are potentially toxic for the acquiring firm.
We conclude by presenting a rule-of-thumb according to which the synergies from a deal have to amount to at least 50% of the target's stand-alone valuation for the transaction to make financial sense for the acquirer.
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