Comprehensive Determination of the Exchange Ratio in Mergers and Consolidations. Strategic Considerations and Insights

Mergers synergies are a powerful instrument to create value and to overcome crisis as well. Mergers allow a quick growth potentially without paying cash, yet through a special swap. The share exchange ratio (SER) is a conventional and complex measure to determine the number of shares the acquiring company must issue for each individual share of the target. The present article aims at providing an in-depth analysis with reference to the possible allocation of the controversial synergistic component of the value creation process inside SER, both for absorption-mergers and consolidation-mergers. Such strategic aspect in both cases is still a gap since it is not analyzed in complete and unitary manner. In fact, the economic principle very often assumed in merger valuations is the “stand alone” perspective, based on the current configuration and future prospects of the companies on an independent basis, that is, without taking into account any potential synergies deriving from the merger or amalgamation. Such synergies are somehow conservatively neglected; nonetheless, they keep on be still very critical and material since plausibly create added value for either one or the two groups of shareholders involved. For opposite reasons, it is neither prudent nor convenient the aggressive approach by which the synergies are attributed entirely on one party (usually the acquirer). Therefore, considering the rationales of mergers, we propose four interlocking ways to approach to synergies in SER range determination and define a synthesis formula based on potential splitting of synergies between the two parties based on reasonable criterion.