Synergy in mergers and acquisitions: typology, life cycles, and value

Value in mergers and acquisitions derives from the synergistic combination of an acquirer and a target. We advance the existing conceptualization of synergy in three ways. First, we develop a theoretically motivated, parsimonious typology of five distinct sources of synergy based on two underlying dimensions: the level of analysis at which valuable activities occur and the orientation by which those activities are governed. The typology uncovers three novel synergy sources (relational, network, and nonmarket) arising from acquisition-induced changes in firms' external cooperative environments and classifies two other well-known synergies (internal and market power). Second, we introduce the concept of synergy life cycles to explore how the timing of initial realization and the duration of gains vary across the five synergies based on differences in the post-merger integration required and in the control the acquirer has over the assets and activities combined by the merger. Third, we consider how the synergy types interact, yielding co-synergies when they complement each other and dis-synergies when they substitute for one another. This enables us to expand the traditional conceptualization of the total value created by mergers and acquisitions as the sum of each of the synergy types, their co-synergies, and their dis-synergies.