Pricing mergers with differential synergies

Mergers and acquisitions (M&A) transaction pricing is a negotiation between the acquirer (buyer) and the target firm (seller). Both these firms have a different estimate of the synergies that can be obtained from this merger and as a result the valuation of the target firm is different for the acquirer and the target firm. This perception of synergies can be easily impacted by the behavior of the acquirer and the target. This article analyzes the pricing of M&A transactions based on differential synergy perceptions, while looking at risk-averse–risk-taking behavior of acquirers and optimistic–pessimistic behavior of the target firm. Results show that the acquirer’s risk-taking behavior and perception of merger synergies determines the price offered for the M&A transaction. The target firm’s perception of synergies is less relevant (if at all) and their optimistic behavior is most useful, when the acquirer perceives high synergies existing in the potential M&A transaction.