A measure of the synergy in mergers under a competitive market for corporate control

Summary and Conclusion This note developed a possible measure of the anticipated synergy in mergers under the assumption that the market for corporate control is competitive. By applying Tobin'sq theory of investment, a measure which is composed of three potentially measurable variables is derived. The three variables are: the acquisition premium paid by he buying firm, the market value, and the replacement costs of the target firm. This measure may be utilized to do empirical studies involving the synergy in mergers regardless of the type of the merger and the source of the synergy. When the market for corporate control is not necessarily competitive, the inequality version of the measure gives the lower bound of the anticipated synergy and upper bound of the premium. In the special case of conglomerate mergers where economies of scope is the only source of synergy, the measure may also be interpreted as the present value of the anticipated economies of scope.