The Winner's Curse in Mergers and Acquisitions

Many mergers and acquisitions actually destroy shareholder value.  We understand that it's challenging to make a deal work.   Integration can be difficult.  Cultures clash.   Most importantly, though, we have to understand that acquirers often overpay.  They are subject to the winner's curse, as described by economist Richard Thaler.  Basically, if you think about an acquisition as the result of an auction, then you can understand why acquirers tend to overpay.  In an auction of a target firm, you will see a range of bids.  The average bid tends to mirror the actual underlying value of the target company.  However, the winning bid is naturally well above the average.  Thus, the winner is "cursed" - they tend to pay more than the true value of the assets.   

As you think about this bidding process, you begin to realize why acquiring firms often do not achieve the synergies that they project at the time of the deal.  Yes, synergies are hard to achieve.  However, it may also be the case that acquirers rationalize paying a higher price than they might have liked.  They up their estimate of the synergies during the bidding process, to justify the higher price that they have chosen to bid.  Meanwhile, acquirers often do not think about the "anti-synergies" as one firm described them to me.  Anti-synergies represent the losses associated with meshing two firms together, as well as the costs to be incurred so as to achieve some of the real synergies that may exist.