eThesis - Kauppakorkeakoulun sähköiset gradut

PURPOSE OF THE STUDY The purpose of this study is to examine the realization of cost synergies in horizontal acquisitions of private targets paid for with cash. Secondly, estimation errors between actual cost levels and cost forecasts including synergies are studied to find out if synergies are systematically over- or underestimated. Cost synergies are examined both on an individual cost item level and on aggregate levels (division to variable and fixed costs).

DATA The data set consists of eight acquisitions conducted in one common geographical area and closed between the years 2000 and 2009. Monthly level management account data on actual costs and the original estimates of cost synergies used in decision making are employed. All data in this study is on a branch level whereas in previous studies typically company or group level data is studied.

RESULTS The results indicate that cost synergies realize on individual and on aggregate cost item levels. If monthly cost levels before and after the closing of the transactions are studied the results show that costs decline between these two periods in median terms by 4.3% in field operatives’ wages (driven by redundancy), 20.6% in administrative employees’ salaries (redundancy), and 18.4% in selling and admin such as office rents or auditing fees (reduction of overlap). Similar results are found if differences between actual costs and stand-alone cost forecasts are studied. In median terms actual costs are lower than stand-alone cost forecasts by 12.4% in field operatives’ wages (at 1% significance level), 29.4% in administrative employees’ salaries (1%), 7.5% in variable (1%), and 28.2% in fixed costs (1%) providing evidence of synergy realization.

Contradicting the findings of previous studies the results also show that cost synergies are found to be systematically underestimated as actual costs are lower than cost forecasts including synergies i.a. in variable costs (by 11.1% in median terms, significant at 5% level) and in fixed costs (13.6%, 10%). We learn that horizontal relatedness and active challenging by the acquiring company’s senior management facilitate in preparing realistic synergy estimates. Also a detailed post-acquisition operating performance tracking would further enhance learning from previous acquisitions and improve the accuracy of synergy estimates.