Measuring financial synergies in cross-border M&A transactions using diffusion processes

Tim J. Brailsford, Szu Lang Liao, Jack H. Penm

Research output: Contribution to journalArticleResearchpeer-review

1 Citation (Scopus)

Abstract

In a cross-border M&A framework, the question and measurement of financial synergy can be important in the analysis of the transaction and consideration needs to be given to whether the specific cross-border financial risks outweigh operational synergies. This paper develops a diffusion model to explore a set of optimal capital structures of the acquiring firm, target firm and merged firm. Differential taxes, bankruptcy costs, interest rate risk and foreign exchange risk are considerations of the model. The model results in a measure of pure financial synergy. Further, capital structure can impact on the structure of the offer and the model allows for the determination of an optimal stock exchange ratio. Worked examples reveal that the cross-border M&A of two symmetric firms can result in negative financial synergy, whereas the merger of two asymmetric firms can lead to positive financial synergy.

Original languageEnglish
Pages (from-to)276-292
Number of pages17
JournalInternational Journal of Services, Technology and Management
Volume8
Issue number4-5
DOIs
Publication statusPublished - 2007
Externally publishedYes

Fingerprint

Taxation
Synergy
Cross-border
Diffusion process
Costs
Mergers
Stock exchange
Interest rate risk
Bankruptcy costs
Optimal capital structure
Financial risk
Tax
Asymmetric firms
Foreign exchange risk
Diffusion model
Capital structure

Cite this

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abstract = "In a cross-border M&A framework, the question and measurement of financial synergy can be important in the analysis of the transaction and consideration needs to be given to whether the specific cross-border financial risks outweigh operational synergies. This paper develops a diffusion model to explore a set of optimal capital structures of the acquiring firm, target firm and merged firm. Differential taxes, bankruptcy costs, interest rate risk and foreign exchange risk are considerations of the model. The model results in a measure of pure financial synergy. Further, capital structure can impact on the structure of the offer and the model allows for the determination of an optimal stock exchange ratio. Worked examples reveal that the cross-border M&A of two symmetric firms can result in negative financial synergy, whereas the merger of two asymmetric firms can lead to positive financial synergy.",
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Measuring financial synergies in cross-border M&A transactions using diffusion processes. / Brailsford, Tim J.; Liao, Szu Lang; Penm, Jack H.

In: International Journal of Services, Technology and Management, Vol. 8, No. 4-5, 2007, p. 276-292.

Research output: Contribution to journalArticleResearchpeer-review

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