Does Financial Synergy Provide a Rationale for Conglomerate Mergers?

Abstract

We examine two sources of financial synergies — coinsurance effects and asset liquidity — in mergers and test whether financial synergy is greater in conglomerate mergers than horizontal mergers. We find that a reduction in cash flow volatility for consolidated firms helps enhance shareholder value. Consistent with theoretical predictions of earlier studies, our results indicate that a merger can increase shareholder value when the cash flow volatility of the consolidated firm is less than the current cash flow volatility of the acquiring firm. We present new evidence that the source of financial synergies in conglomerate mergers comes mainly from higher asset liquidity. Our test results also suggest that liquidation values are higher in conglomerate mergers than horizontal mergers holding the coinsurance effect constant, particularly when the target is financially constrained.

Impact of Cash Deals and Related Industry Merger on Synergies Gains: A Case of Indian M&A

“…Thus, the results of the empirical analysis of the study do support the generation of synergies in the case of horizontal mergers. These results are found to be in resonance with Barai and Mohanty (2014), Rozen-Bakher (2018) but in dissonance with Mooney and Shim (2015).…”

M&A Synergies in Domestic M&A Deals in Russia in 2006–2014

“…Недавние эмпирические исследования на основе этой модели (см., напр. : [Mooney, Shim, 2015]) показывают, что при высокой положительной корреля-ции денежных потоков компаний роста ем-кости долга после их объединения не про-исходит. Слияние компаний со слабой или отрицательной корреляцией денежных по-токов, в свою очередь, оказывает значимое положительное влияние на емкость долга.…”

The Effect of Corporate Governance on Post Reverse Merger Survival

“… On the other hand, Mooney and Shim () find that a decrease in cash flow volatility for consolidated firms after merger tends to enhance shareholder value. …”