Mergers and acquisitions as a finansal synergy increasing approach

One of the major controversial motives for Mergers and Acquisitions (M&As) is synergy. Along measurements of post-merger performance of combined firms, Hubris and Agency Theories, blamed for non-synergic mergers, also have been discussed in finance literature by many researchers. Synergy is the increase in efficiency of the merged firm over what the two firms are already expected or required to accomplish as individual firms. Financial, Operational, and Collusive Synergies are three types of synergy. While Operational Synergy is about economies of scale, Collusive Synergy is determined by the market share of merged firms. Financial Synergy is generated by enlarging size of a firm until a point where merger is expected to reduce the cost of borrowing funds and nonsystematic risks, stimulate financial leverage and co-insurance effect, and eventually provide tax advantages and increase price-earning ratios for sake of combined firms? value. Generating value through financial synergy is related to increase financial effectiveness through inputs that are proxy for financial synergy. Literature offers five approaches to measure M&As profitability: Event Studies, Accounting Studies, Surveys of Executives, Clinical Studies, and Predictive (Hypothetic) Studies. This study aims to measure financial synergy effects of hypothetic M&As by using Data Envelopment Analysis (DEA) for three non-financial sectors in Turkey. Four results are generated: M&As create financial synergy for both acquiring and acquired firms (first degree combinations), M&As result financial synergy only for one of the combined firms (second degree combinations), M&As create financial synergy only indirectly (third degree combinations), and finally M&As result dissynergy where Hubris and Agency Theories may be valid.