0

Prior studies found that synergy is one of the most important motives of M&As.
However, studies generally overlooked the investigation of the use and reporting of synergy value. The purpose of this study is to assess the disclosure practices and to analyse different factors behind the disclosure of synergy in M&A corporate reports.
First of all, we defined the information needed to effectively assess the synergy value. The following empirical analysis was performed in two stages: analysis of the data obtained through content analysis of M&A reports; analysis of the factors that influence the disclosure of synergy using a dependency model. Several variables were introduced to represent the features of companies and deals.
Companies usually report information regarding valuation models and synergy types. Information about synergy flows, timing and likelihood of achievement is seldom reported. The results show a significant relationship between the listing status, the involvement of strategic advisors and the disclosure on synergy value.
The findings emphasize that the companies characterized by higher disclosure pressure typically disclose information needed to effectively assess the synergy value. Moreover, the results suggest that companies utilize information on synergy value as a mechanism to persuade external stakeholders on the effectiveness of
M&As.
Keywords: synergy value, mergers and acquisitions, disclosure, content analysis
Index
1. Introduction
2. Synergy value information
3. Factors influencing the disclosure of information on synergy value: research hypotheses
4. Research methods
5. Results of empirical analysis
6. Discussion of findings
7. Conclusions
1

1. Introduction
One of the main challenges in M&As is developing a pre-acquisition process that indicates which acquisitions are “right” (Evans and Bishop, 2001). In this vein, before of the deal’s conclusion, the companies must provide reports to the market with information on the proposed mergers and acquisitions. The filing date of these reports comes after the announcement and before the merger date. These reports contain mandatory information on: involved firms, deal characteristics, the terms of the M&A, valuation models, future ownership, motives, expected effects, financial statements of involved firms, and future perspectives. However, prior studies found that one of the most important motives of M&As is synergy value (Mukherjee, 2004). The assessment of synergy value is a relevant issue in the M&A decision process. From the value of synergy often depends whether to complete or not the deal. Consequently, firms may voluntary provide information on synergy value to persuade stockholders and stakeholders on the effectiveness of the proposed M&A
(Campa and Hernando, 2004).
On the other hand, despite the existing body of knowledge (Bruner, 2004; Cartwright and
Schoenberg, 2006; Larsson and Finkelstein, 1999; Zollo and Meier, 2008), there is little agreement on the process of measurement and assessment of synergy value. Furthermore, scholars suggest the risk of “synergy trap” (Garzella and Fiorentino, 2010). Harding and Rovit (2005), building on the results of a research conducted by Bain&Company, affirmed that two-thirds of the executives responsible for acquisitions believe to have overestimated the synergic potential and underline the relevance of this error for the deal failure. Sirower (1997) observes that synergies are often promised but seldom realized and consequently consider synergy as a “trap”. As Eccles et al.
(1999:
136) emphasise, “many failures occur, though, simply because the acquiring company paid too much for the acquisition”.
In respect of this, the disclosure of synergy value is a very relevant issue in M&As: it could affect, first, the conclusion and, then, the success of the deals (Slusky and Caves, 1991). However, synergy value disclosure is voluntary and is not provided in all M&A reports. Unfortunately, different from
2

other relevant issues of voluntary disclosures - such as intangibles, intellectual capital or corporate social responsibility - studies generally overlooked the investigation of the use and reporting of synergy value. Although Healy and Palepu (1993, 1995) hypothesize that disclosure is relevant expecting to acquire another company in a stock transaction, few studies provide evidence on voluntary disclosure policies of mergers and acquisitions. This literature focuses on disclosure activity linked to predictable accounting releases (e.g. Baginski and Hassell, 1997), examined voluntary disclosure prior and during the announcement (Brennan, 1999), examined the impact of reporting incentives on voluntary disclose earnings estimates (Botosan and Harris, 2000), but generally overlooked synergy information between the announcement and the merger date.
In this vein, we examined the disclosure practices and the different factors behind the disclosure of synergy in corporate reports related to mergers and acquisitions. The reporting of a M&A deal involves disclosing specific and verifiable details about synergy value. The corporate reports may contains all the information of synergy value necessary to gain stockholders and stakeholders confidence.
In order to test whether different companies undertake disclosures related to synergy value, the current work aims to:
- find the information needed to effectively assess the synergy value;
- analyse the information disclosed about this issue on the corporate reports of 126 companies involved in M&As;
- study the influence of certain factors of the deals on the disclosure of information related to synergy value.
For achieving these aims, we reviewed the literature searching for, first, information content necessary to assess the synergy value and, second, the factors underlying the information revealed in relation to synergy value. With reference to first point, we refer to the quantitative and qualitative information related to valuation models and strategic factors that influence the assessment of synergy value. These factors are identified in: the several types of synergy; the synergy flows; the
3

timing needed for synergy achievement; the likelihood of realization (Accenture, 2007; Damodaran,
2005). With regard to the second point, we selected factors related to the characteristics of deals and companies and control variables among previously identified factors associated to quantity and quality of disclosure (Barako et al. 2006; Garcia-Meca et al., 2005; Prado et al., 2009). The explanatory variables proposed have to do with the method of payment, the involvement of companies of the same business group, the synergy as relevant deals’ motivation, the listing status of firms, the delisting by the deal, the involvement of financial advisors, the involvement of strategic advisors, the corporate size and the leverage. Indeed we control for variables that have been seen in the literature as important in explaining the disclosure levels in firms: activity sector, deals’ time, reports’ size and emphasis on synergy.
We empirically analyzed the disclosure of synergy value by a two stages project: 1) we explored disclosure practices through a content analysis based on M&A reports published from Italian listed companies during 2002-2010; 2) we tested a number of hypotheses relating to the reasons why the disclosure practices of firms vary systematically across different firms and deals using a dependency model, a multiple linear regression. Finally, we studied implications for scholars and potential improvements of the synergy valuation practices.
The next section reviews the literature on synergy value arising from our interest in M&As. Section
3 analyses the factors that affect synergy value disclosure and develops the hypotheses. Section 4 discusses methodological issues, providing a detailed description of the research methods used to address the research questions. Section 5 presents the results. Section 6 discusses the results and provides potential implications of our findings. The final section summarizes the conclusions.
2. Synergy value information
Based on value creation theories (Rappaport, 1986) and synergy studies (e.g., Damodaran, 2005;
Davis and Thomas, 1993), it is possible to argue that the value of synergy depends on the financial flows related to the potential M&A synergies, on their temporal distribution, and on the discount
4

rate (Brealey and Myers, 2003; Mohan et al., 1991). Consistently, the increase in performance delivered by synergies is the present value of net additional financial flows generated by the deal that firms could not produce without the operation itself. This synergy value can be indirectly calculated by the firms’ valuation models without any assessment of single synergies or directly assessed by calculating specific future synergy flows.
The assessment of synergy value is based on both qualitative and quantitative analysis. Qualitative analyses would be reduced to mere discursive exercises without the support of quantitative measurements, and the latter would constitute technical bookkeeping exercises without the former to confer significance to the valuation (Barker, 1999). Accounting valuations may be based on prior strategic analysis of the deal that requires forecasting post-merger cash flows according to the planned post-merger strategy (Gupta and Gerchak, 2002). Synergy value disclosure may contain both financial and non financial information placed within a valuation model.
To assess the financial flows related to the potential M&A synergies, corporate reports may provide disclosures: distinguishing cost-saving expectations from revenue growth opportunities; analysing financial margins with managerial valence; finding where synergies arise, at the SBU or corporate level (Chatterjee, 1986; Garzella and Fiorentino, 2010). These qualitative information could be completed by the monetary information on the overall value of synergy as well as on the value of each type of synergy flow. Indeed the net value of synergy derive from the difference between the overall value and the integration costs. Because the synergy value is affected by the temporal distribution of financial flows, information on the starting time, on the time when synergies will be achieved at full stretch, or even on a schedule of synergy achievement could be very useful for synergy assessment (Bert et al., 2003; Colombo et al., 2007; Homburg and Bucerius, 2006).
Furthermore the estimation of the discount rate is related to the risks and the likelihood of achievement of potential synergies (Garzella and Fiorentino, 2010).
5

Therefore the type, weight, timing and ease of realisation of each synergy must be considered to identify the synergy value that will be achieved. (Accenture, 2007; Barker, 1999; Damodaran, 2005;
Evans and Bishop, 2001; Garzella and Fiorentino, 2010; Harding and Rovit, 2004).
In order to have a comprehensive view on the value of synergy, corporate reports may answer to many questions, such as: What is the expected form of the synergy? What is the expected size of the synergy? When does the synergy start affecting cash flows? What is the likelihood of achievement of each synergy type? What valuation models are used? (e.g., Damodaran, 2005).
3. Factors influencing the disclosure of information on synergy value: research hypotheses
When the market is aware that companies have private information and the management choose not to share that information, the stakeholders infers that the undisclosed information is not convenient
(Dye, 1985; Know, 1998; Kimbrough and Louis, 2011). On the contrary, a voluntary disclosure of synergies arising from M&As removes uncertainty and links companies plans to the economics of the transaction providing information that can be monitored by the market (Draper and Paudyal,
2008; Lipin and Sirower, 2003). The well-documented cost of capital and the reputational benefits of disclosure provide incentives to the voluntary disclosure.
Specifically, at the time of the M&A prospectus, when the management of the two firms have negotiated and completed the post-merger compensation, an agency conflict may exist between management and shareholders because managers may have different incentives to merger conclusion than the shareholders (Jensen and Meckling, 1976).
In the divulgation of synergy value certain factors can have a notable influence; among them the method of payment, the involvement of companies of the same business group, the synergy as relevant deals’ motivation, the listing status of firms, the delisting by the deal, the involvement of financial advisors, the involvement of strategic advisors, the corporate size and the leverage can be highlighted since their influence can be particularly significant.
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3.1. Method of payment
Disclosure incentives are stronger for the average stock for stock deals because of the direct impact of its stock price on a merger’s cost and likelihood of completion and because, absent additional information, the market generally view the use of stock as a signal that managers have adverse private information (Travlos, 1987). Moreover, previous studies suggest a general presumption: stock for stock deals are often motivated by overvaluation as opposed to authentic business considerations (Rappaport and Sirower, 1999; Sheifer and Vishny, 2003). For that reason, the management who have valid economic rationales to embark on a stock for stock merger have incentives to provide additional information to counteract the otherwise adverse stakeholders reaction (Kimbrough and Louis, 2011).
In line with the above, the following hypothesis is proposed:
H1.Synergy value disclosure through M&A reports is positively related to stock for stock deals
3.2 Intra-group deals
The influence of ownership structure on corporate disclosure practices has been extensively studied
(Chau and Gray, 2004; Hossain et al., 1994). Agency theory suggest that managers may voluntarily disclose information as a means to reduce agency conflicts (Craswell and Taylor, 1992). When the companies involved in the deals are part of the same business group, this factor may impact on the disclosure of synergy value. The presence of subsidiaries reduce the information asymmetry between firms involved in the deals and generally make it possible to achieve most of the potential synergies between the companies also before a merger (Garzella, 2006). This may impact to the synergy disclosure due to the low level of secrecy between the companies and the smaller synergies to achieve. Indeed, the information on business groups relationships is disclosed in the M&A reports in the sections on companies features.
Taking into consideration these theoretical arguments, the following hypothesis is established:
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H2. Synergy value disclosure through M&A reports is negatively related to deals between companies in a business group
3.3 Synergy motive
Synergy may be the main motive of mergers and acquisitions ( Berkovitch, and Narayanan, 1993;
Garzella and Fiorentino, 2010; Trautwein, 1990). However, the management, or part of it, often follows distorted information processes that try to pursue objectives which do not totally or partly fit with the firms’ aims (Haspeslagh and Jemison, 1991; Simon, 1964). The managerialism hypothesis, a key tenet of agency theory, suggest that takeovers could be primarily motivated by the self interest of the acquirer management (Malatesta, 1983). In Lubatkin (1984) view, this happens because CEOs may engage in M&As to increase their own power or because managers maximize their own utility at the expense of firm’s value (Marris, 1964). In this way, management may voluntary disclose information on synergy value in order to “sell” the deal to the shareholders. If management is using information to “sell” the deal, the corporate report may provide information on synergy as a relevant motive to persuade shareholders to vote in favor of the merger (Sheifner and Vishny, 2003). We measured this variables checking for the presence of synergy instances among the reports’ section on deal motives.
Consequently, the following hypothesis is proposed:
H3. Synergy value disclosure through M&A reports is positively related to synergy as relevant motive for the deal
3.4. Listing status
Firms listed on equity markets are generally characterized by analyst coverage, higher disclosure pressure related to listing requirements, a larger and dispersed ownership structure (Lang and
Lundholm, 1996). In accordance with agency theory, there is likely to be greater discretionary information disclosure in order to: limit the monitoring and agency costs that come with more
8

shareholders; satisfy equity markets requirements; to reduce conflicts among contracting parties.
Listing status may be a significant determinant of the disclosure level. Consequently, when all the firms involved in the deals are listed we may expect higher levels of disclosure of synergy value.
At the opposite, when the main motive of M&A is the delisting of involved firms, due to the potential reduction of listing costs, synergy could be a residual motive and there are not the determinant of disclosure levels due to the listing status (Thomsen and Vinten, 2007; Zhang, 2007).
Consequently, firms could show lower levels of synergy value disclosure.
Taking into consideration these theoretical arguments, the following hypotheses are established:
H4. Synergy value disclosure through M&A reports is negatively related to delisting
H5. Synergy value disclosure through M&A reports is positively related to the listing status of all the companies involved in the deal
3.5 Financial advisor involvement
The synergy assessment process conducted by the financial advisors is generally subject to conflicts of interest and biases. When the payment of the financial advisors who are involved in the deal is linked to the deal value, their analysis could be deliberately high to maximize their fees (Garzella and Fiorentino, 2010). The overpayment is depending on the incentive of advisors to negotiate the highest possible price (Haspeslagh and Jemison, 1991; Sirower, 1997). The level of disclosure of synergy value could be a result of the influence of financial advisors.
Consequently the following hypothesis can be formulated:
H6. Synergy value disclosure through M&A reports is positively related to the involvement of financial advisors
3.6 Strategic advisor involvement
The information on strategic factors affecting the synergy value is very relevant. However, these strategic factors are often inadequately quantified (Garzella and Fiorentino, 2010). Firms need to
9

integrate workers and tools from different backgrounds, from strategy to accounting, to effectively assess the synergy value, consistent with the call for cooperation between strategy and valuation
(Damodaran, 2005). In this vein, the involvement of strategic advisors could, from a side, to support the search for potential synergies, and, from the other, to provide additional information on synergy value. Since this may impact to the synergy disclosure, we can advance the following hypothesis:
H7. Synergy value disclosure through M&A reports is positively related to the involvement of strategic advisors
3.7. Firm size
Corporate size is one of the variables most used in the previous literature to explain the publication of voluntary information (Lang and Lundholm, 1993). In almost all disclosure studies, scholars found that company size is an important determinant of disclosure levels (Belkaoui-Riaahi, 2001;
Watson et al., 2002). Previous studies argue that agency costs increase with firm size (Chow and
Wong-Boren, 1987). Indeed, large companies are supposed to receive more public attention: the incentives to disclose are particularly strong for economically significant deals where the intensity of demand for supplemental information is pronounced (Jensen and Meckling, 1976).
Most of studies mentioned have used total assets, sales and market capitalization to measure firm size (Cooke, 1989; Wallace et al., 1994; Giner, 1997). In this work, we have used total assets of the larger firm involved in the deal, measured at the time of the deal. We obtained this information from the financial information disclosed in the M&A report.
Consequently, the following hypothesis can be formulated:
H8. Synergy value disclosure through M&A reports is positively related to firm size.
3.8 Leverage
From the agency theory perspective, the amount of leverage is another factor associated with a larger amount of disclosed information, especially as a result of conflicts stemming from leverage.
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In this sense, companies with more debt have greater agency costs, because there is a possibility of transference of wealth from debt holders to stockholders (Jensen and Meckling, 1976). By increasing the amount of information disclosed, companies can reduce agency costs and conflicts of interest between owners and creditors (Ahmed and Curtis, 1999).
Since our sample include both financial and non financial companies, we used different ratios to measure leverage for banks. Consistent to previous studies, we used: the ratio between total debt and stockholders’ equity for non financial companies; the ratio between stockholder’s equity and credits to customers for banks . In order to have homogeneous data, we defined leverage as a dummy variable which takes the value 1 if the leverage is higher than the average level of its own sector group.
Therefore, the following hypothesis is established:
H9. Synergy value disclosure through M&A reports is positively related to leverage
4. Research method
4.1. Sample selection and data source
In order to test the hypotheses proposed for this study, we selected as the target population the
Italian listed companies. The study covers mergers and acquisitions involving companies subject to the CONSOB (Italian security exchange commission) regulations introduced in 1999. We selected this target, because whenever there is an M&A relevant for CONSOB parameters, these companies must provides a Report with enough information on the proposed deal before the conclusion. A deal is relevant for CONSOB when, from a side, all the firms are listed or a listed firm is merged in a non listed firm, and, from the other side, one of these parameters is equal or higher than 25%: ratio total assets of merged-acquired firms/total assets of listed firm; ratio earns before taxes of mergedacquired firm/earns before taxes of listed firm; ratio stockholders’ equity of merged-acquired firm/stockholders’ equity of listed firm; ratio total debt of merged-acquired firm/total debt of listed firm; ratio acquisition value/market value of listed firm. The reports have to be published based on a
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CONSOB format: it allowed us to consider all the reports as being homogeneous in terms of structure.
Table 1 – Reports analysed
Year
2002 (YEAR 1)
2003 (YEAR 2)
2004 (YEAR 3)
2005 (YEAR 4)
2006 (YEAR 5)
2007 (YEAR 6)
2008 (YEAR 7)
2009 (YEAR 8)
2010 (YEAR 9)
Total
Number of annual reports
1
2
6
9
7
13
11
5
4
58
The selected reports contain mandatory information on: involved firms, deal characteristics, the terms of the M&A, valuation models, future ownership, motives, expected effects, financial statements of involved firms, and future perspectives.
The database used is that of “Borsa italiana”, the online database of the Italian equity markets. We selected all the reports published for CONSOB requirements, available between January 1, 2002 and December 31, 2010. The selection process result in a sample of 58 transactions involving 126 companies. As reported in Table 1, of the reports in our sample, 24 of 58 were published in 2007 and 2008.
4.2 Content analysis: creating and measuring a synergy disclosure index
In order to measure the disclosure of synergy value we created a disclosure index. Creating a disclosure index is one of the main techniques used to study the information provided by companies
(Prado-Lorenzo et al., 2009). Previous approaches to analysing disclosure classify topics to which the information items refer and often indicate the presence or absence of disclosure on a given topic. These approaches verify a set of issues in the information disclosed using binary values: 1 whether there is the presence of the information sought and 0 whether there is the absence of the
12

information sought. The aggregation of different items into one disclosure index retain the disclosure level.
To create a disclosure index we considered the information needed to assess synergy value as provided in the section 2. Based on this analysis we found 5 relevant categories of information: valuation models’ disclosure; synergy types’ disclosure; synergy flows’ disclosure; the disclosure on the timing of synergies; the disclosure on the likelihood of achievement of expected synergies. In order to define the items included in the disclosure index, we considered the relevant information for each category. Therefore, the disclosure index of synergy value is made up of 14 items, which compile a relevant amount of information on the topic analysed (see Table 2)
Table 2 – Synergy value information items
ITEMS
Valuation model
1 Firm valuation model
2 Synergy valuation model
Description
The information on the valuation models used to assess the firm value
The information on the valuation models used to assess the synergy value
Synergy Types
3 Revenues/Costs approach The information on synergy types based on synergy revenues and synergy costs
4 Operating/Financial approach The information on synergy types based on a managerial perspective
5 SBU/Corporate approach The information on synergy types based on SBU synergies and corporate synergies
Synergy flows
6 Overall size
7 Relative size
The information on the overall size of synergy flows
The information on the relative size of synergy flows related to synergy types
8 Integration costs The information on the integrations costs of M&As
Timing of synergy
9 Timing estimation The information on the time when synergies will be achieved at full stretch
10 Estimation of starting time
11 Timing’ schedule
The information on the starting time of synergy achievement
The presence of a schedule on synergy achievement
Likelihood of achievement
12
13
Likelihood estimation (%)
Ease of realization
14 Risks
The information on the estimation of the likelihood of achievement of potential synergies
The information on the easy of realization of potential synergies
The information on the risks and achievement of potential synergies
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After defining the items in the index, we provided their quantification. When using a disclosure index to establish the volume of information disclosed, one can choose a binary variable, which takes a value of 1 of either 0, depending on whether the information on the item is reported or not, or otherwise one may attempt to measure a score ranging from 0 to 1. Although the latter solution is considered conceptually superior, there are risks of subjective evaluations. In this study, we choosed the binary variables.
Following the quantification, we opted for the aggregation of the scores obtained for each item in an unweighted index given that there could be some arbitrariness inherent to the use of any weighted index.
Finally, we performed a thorough analysis of the contents of M&A reports. A content analysis of corporate reports is an useful method to analyse synergy value disclosure. Despite some criticism of details in the application of this method (Beattie and Thomson, 2007; Guthrie et al., 2004), prior empirical studies tended to use content analysis as an empirically valid data collection method
(Cerbioni and Parbonetti, 2007; Hooks and van Staden, 2011; Krippendorf, 1980; Milne and Adler,
1999; Unermann, 2000). We read each report in order to identify and code every information corresponding with the items of the proposed index. This process involved the two authors.
The disclosure index of synergy value, measured by the content analysis, corresponds to the dependent variable of the dependency model that we formulated to test the hypotheses.
4.3 Measuring independent and control variables
Table 3 and 4 describes the explanatory and control variables proposed to test the hypotheses from the third section. Data pertaining to independent and control variables were collected from each
M&A report.
As for control variables, we control for four variables. The first variable represents the activity sector in which the companies involved in the deals operates. It has been suggested that voluntary disclosure policies differ across activity sectors because of different competitive and political costs
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(Cooke, 1991; Raffournier, 1995; Verrecchia, 1983): better disclosure might be expected for companies operating in the financial sector. Specifically, companies of the bank sector may be more used to synergy assessment. These companies are often involved as financial advisors in mergers and acquisitions. Consequently, based on the larger amount of skills on synergy assessment, these companies may also disclose more information on synergy value. We thus categorise firms as banks or non-banks.
Table 3 - Hypotheses and variables
Variable Description
Stock deals (STOCK) Dummy variable which takes the value 1 if the deal is stock for stock
Intra–group deals (GROUP) Dummy variable which takes the value 1 if the deal is between firms of the same group
Synergy motive (SYN)
Delisting (DEL)
Listing status (LIST)
Dummy variable which takes the value 1 if synergy is a relevant motivation of the deal
Dummy variable which takes the value 1 if the deal involves the delisting of firms
Dummy variable which takes the value 1 if
Strategic advisor (SADV)
Financial advisor (FADV) all the firms involved in the deal are listed
Dummy variable which takes the value 1 if the deal involves a strategic advisor
Dummy variable which takes the value 1 if
Firm Size (SIZE)
Leverage (LEV) the deal involves a financial advisor
Corporate size measured by total assets
Dummy variable which takes the value 1 if the ratio total debt/stockholder’s equity (the ratio stockholder’s equity/credits to customers for banks) is higher than the average level of its own firm group
Hypothesis Expected sign
H1 +
H2
H3
H4
H5
H6
H7
H8
H9
-
+
-
+
+
+
+
+
The second variable represents the overall size of the reports in terms of pages’ number. Because a firm’s disclosure policy will trade-off its need for a low cost of capital against other costs, companies may disclose less information on synergy value because of the lower costs of disclosure
(Healy and Palepu, 2001). The third variable represents the “emphasis on synergy” - measured as the volume of disclosure of the word synergy in the reports - related to the increasing relevance of synergy concept. In this way, management may voluntary emphasise the role of synergy in order to
“sell” the deal to the shareholders. If management is using information to “sell” the deal, the corporate reports may provide references to synergy to persuade shareholders to vote in favor of the merger (Sheifner and Vishny, 2003). The different emphasis on synergy may influence the
15

disclosure of synergy value. Finally, the fourth variable represents the deals’ time in which the
M&A reports were published. Disclosure in M&A reports might be increased over 9-year period because of both the increasing relevance of corporate disclosure and the increasing diffusion of
CONSOB regulations. Indeed, the selected period of publication (2002-2010) include years of
M&A “booms” and “crisis” that may influence the disclosure of synergy value due to the larger or smaller amount of information necessary to persuade stakeholders and stockholders on the effectiveness of the proposed M&A.
Table 4 - Control variables
Variable Description
Bank sector (BANK) Dummy variable which takes the value 1 if the deal involve a company of bank sector
Disclosure size (RPAGE) Disclosure size measured by the number of pages of the M&A report
Emphasis on synergy (SREF)
The synergy references measured by the volume of disclosure of the word “synergy”
Deals’ time (YEAR) The year when the M&A report was published (from 2002 to 2010)
4.4. Regression analysis
To test the hypotheses presented in the paper, we have defined a model in which the amount of information on synergy value, disclosed by companies on M&A reports, is a function of the selected independent and control variables.
The model can be empirically estimated by using equation:
SDI i
= β
0
+ β
1
STOCK + β
2
GROUP + β
3
SIN + β
4
DEL + β
5
LIST + β
6
FADV + β
7
SADV +
β
8
SIZE + β
9
LEV + β
10
BANK + β
11
RPAGE + β
12
SREF k
+ ∑β
13
YEAR k
+
ε k = 1, …, 9
In which:
SDI i
is the synergy value disclosure index, obtained after analyzing deal reports
STOCK i
is the stock as method of payment, obtained after analyzing deal reports
GROUP i
is the involvement of companies in the same business group, obtained after
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analyzing deal reports
SIN i
is the synergy as relevant motivation of the deal, measured as the presence of synergy
in the deals’ motive section of M&A reports
DEL i
is the delisting of firms involved in the deal, obtained after analyzing deal reports
LIST i
is the listing status of all the firms involved in the deal
SADV i
is the involvement of strategic advisor, obtained after analyzing the deal reports
FADV i
is the involvement of financial advisor, obtained after analyzing the deal reports
SIZE i
is the size of involved companies, measured as the total assets of the larger firm
LEV i
is the leverage of involved companies measured as the ratio between total debt and
stockholders’ equity (the ratio stockholder’s equity/credits to customers for banks) of the
larger firm
BANK i
is the bank activity sector of involved companies
RPAGE i
is the report size measured as the number of pages of deal report
SREF is the emphasis on synergy, measured as the number of disclosures of the word synergy
YEAR k i
is the deals’ time measured as the year of filing of deal report
This model was checked through a linear regression, estimated by OLS. However restrictions are used in the linear regression in order to avoid statistical problems.
5. Results of empirical analysis
5.1 Descriptive statistics of the index on information disclosed about synergy value
Tables 5 and 6 summarize the descriptive statistics for the overall dependent variable (SDI). In addition, these tables compiles information on the absolute and relative frequencies of the specific items, which form the index. With regard to SDI, on average, companies report 6 out of 14 items considered, with a variability ranging from 0 to 13 items. Focusing on the single type of information which constitute the SDI, it is detected that companies disclose on average: 0.8 out of
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the two items of valuation models; 1 out of the three items of synergy types; 0.3 out of the three items of synergy flows; 0.4 out of the three items of timing; 0.5 out of the three items of likelihood of achievement.
Table 5 – Dependent variable: descriptive analysis
Indices
Synergy disclosure index
Valuation models
Synergy types
Synergy flows
Timing of synergies
Likelihood of achievement
Mean
3.0344828
0.84448276
1.0172414
0.3275862
0.3620690
0.4827586
Standard deviation
3.1117520
0.5232062
1.0172439
0.8457931
0.8725497
0.7312901
Min
0
0
0
0
0
0
Consequently, notable differences in the information reported are observed. While there is wider
Max
13
2
3
3
3
3 disclosure of valuation models and synergy types, the remaining information appears less frequently in the M&A reports. Specifically, the absence of information related to synergy flows, timing and likelihood of achievement makes it difficult to effectively assess the real value of potential synergies. In this sense, the analysis proposed will allow us to determine which factors mainly explain the inclusion of information needful to weight each type of expected synergy.
Table 6 – Dependent variable: descriptive analysis
ITEMS
Valuation model
Firm valuation model
Synergy valuation model
Synergy types
Revenues/Costs approach
Operating/Finalcial approach
SBU/Corporate approach
Synergy flows
Overall size
Relative size
Integration costs
Timing of synergies
Timing estimation
Estimation of starting time
Timing’ schedule
Likelihood of achievement
Likelihood estimation (%)
Ease of realization
Risks
Frequency
Absolute
45
4
9
6
4
18
32
9
1
7
20
9
9
3
Relative (%)
77.59
6.90
31.03
55.17
15.52
15.52
10.34
6.90
15.52
15.52
5.17
1.72
12.07
34.48
18

Analysis of the frequencies of the 14 items comprising the SDI index yields the following significant frequencies:
- more than 77% of reports disclose on the valuation models of firms;
- the managerial categorization is the most used (55%) for synergy types;
- less than 7% of reports disclose on the valuation model of synergies;
- only one report disclose on the likelihood of achievement of potential synergies.
5.2 Univariate analysis
Tables 7 and 8 display the descriptive statistics of the independent and control variables; for the numerical variables, the mean and standard deviation are reported, and for the binary variables, the absolute and relative frequencies are given.
With reference to numerical variables we observed that: despite of the common structure of M&A reports, there was high variance in the number of pages of each report; the word synergy is disclosed, on average, six times in each report; there was high variance in the size of companies in our sample.
Table 7 – Independent and control variables: descriptive analysis
Numerical variables
SIZE
RPAGE
SREF
Mean
54022477012.00
78.00
6.05
Standard deviation
176147153623.00
33.16
7.69
Min Max
21721958.00 986340000000.00
11.00 161.00
0.00 39.00
Analysis of the frequencies of the binary variables yields the following significant frequencies:
- more than 68% of deals used as method of payment stock;
- more than 60% of deals involved firms in the same business group;
- most of the reports were published in the years of the M&A explosion, between 2006 and 2008;
- financial advisors are often involved in the deals (68.97%) while strategic advisors are involved only in 4 deals.
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Table 8 – Independent and control variables: descriptive analysis
Binary variables
STOCK
GROUP
SYN
DEL
LIST
SADV
FADV
LEV
BANK
YEAR 1
YEAR 2
YEAR 3
YEAR 4
YEAR 5
YEAR 6
YEAR 7
YEAR 8
YEAR 9
Frequency
Absolute
14
1
2
6
9
7
13
15
4
40
12
40
35
31
4
11
5
4
Relative (%)
24.14
1.72
3.45
10.34
15.52
12.07
22.41
68.97
60.34
53.45
6.90
25.86
6.90
68.97
20.69
18.97
8.62
6.90
In table 9 the bivariate correlations between the variables proposed in the analysis are summarised. There are significant correlations with more of the explanatory variables. The variables LIST, BANK and SREF show the highest positive correlations with the dependent variable SDI. The variable GROUP shows a significant negative correlation with SDI.
The highest positive correlations among the independent variables are detected between FADV and STOCK,
SIZE and BANK, STOCK and RPAGE and, finally, BANK and SREF. SREF is the variable most correlated to the other explanatory variables.
There are no collinearity problems. However, restrictions will be used in the different linear regressions estimated in order to avoid statistical problems.
20

Table 9 – Pearson correlation coefficients
SDI STOCK GROUP SYN DEL LIST FADV SADV SIZE LEV BANK RPAGE SREF YEAR1 YEAR2 YEAR3 YEAR4 YEAR5 YEAR6 YEAR7 YEAR8 YEAR9
SDI
STOCK
GROUP -0.35655** -0.08669 1
SYN 0.32417* 0.12109 -0.26193*
DEL
1
0.27328*
-0.17950
1
1
0.18257 0.08154 -0.15522
0.47844***
1
0.31109* -0.16515 0.15651 -0.16075 LIST
FADV
1
0.36993** 0.51667*** -0.23906 0.19580 0.03550 0.39620**
SADV
SIZE
0.15136
0.41575**
0.03550 0.08154 -0.01881 -0.07407 -0.00536 0.18257 1
0.16793 -0.03856 0.20503 -0.08364 0.36400 0.17196 0.08501 1
LEV -0.03330 -0.11738 0.06601 0.13535 -0.13901 -0.20446 -0.20938 -0.13901 -0.15678 1
BANK 0.49002*** 0.20421 -0.11929 0.28410 -0.15352 0.31095* 0.29130* 0.16449 0.52068*** -0.08918 1
0.31916* 0.53968*** -0.04396 -0.04837 -0.03933 0.07906 0.40249** 0.16146 0.06205 0.00259 0.32851* RPAGE
SREF 0.88043***
1
0.21476 -0.32737* -0.35092** -0.19820 0.40919** 0.28320* 0.05170 0.47547** 0.02445 0.52997*** 0.34581**
YEAR 1 -0.13029 -0.19745 0.10737 -0.14193 -0.03605 -0.07823 -0.19745 -0.03605 -0.04108 -0.06765 -0.07471 -0.19745 -0.10514 1
YEAR 2 -0.09401 0.12677 -0.03996 -0.01306 -0.05143 -0.11162 0.12677 0.32147* -0.05832 -0.09652 -0.10660 0.10349 -0.13762 -0.02503 1
-0.13226 0.10549 -0.07183 -0.02348 0.13097 -0.07133 0.10549 -0.09245 -0.10064 0.24578 -0.05931 -0.12573 -0.14340 -0.04499 -0.06419 YEAR 3
YEAR 4 0.07239 0.08163 -0.04196 0.20904 -0.11664 0.18187 0.08163 -0.11664 0.19256 0.01621
1
-0.01919 -0.07388 0.01583 -0.05677 -0.08099 -0.14558
-0.05561 0.13412 0.08394 -0.07866 -0.10083 0.26466 0.01972 0.10803 -0.01494 -0.18922
1
1
0.03838 -0.12720 -0.09277 -0.04907 -0.07001 -0.12585 -0.15878 YEAR 5
YEAR 6 0.34246** 0.09245 -0.07140 0.17006 -0.14628 0.06023 0.18182 -0.14628 0.07492 0.13374
1
0.17991 0.27672* 0.46818** -0.07119 -0.10157 -0.18257 -0.23035 -0.19913
-0.20500
1
-0.15079 0.03255 -0.16570 0.21546 -0.18529 -0.15079 0.04189 -0.10240 -0.13852
1
-0.06734 0.01070 -0.21097 -0.06408 -0.09143 -0.16433 -0.20733 -0.17923 -0.26002* YEAR 7
YEAR 8 0.13596 -0.05952 0.12341 0.04034 0.15883 -0.04112 -0.05952 0.15883 0.04253 0.14642
1
0.11385 0.12895 0.13490 -0.04068 -0.05805 -0.10433 -0.13163 -0.11379 -0.16509 -0.14859
YEAR 9
Notes:
-0.13538 -0.25865 -0.05756 -0.15522 -0.07407 -0.16075 -0.25865* -0.07407 -0.08386 -0.13901
1
-0.15352 -0.16767 -0.17143 -0.03605 -0.05143 -0.09245 -0.11664 -0.10083 -0.14628 -0.13167 -0.08359 1
- Pearson correlation;
- N = 58;
- * p < 0.05; ** p < 0.01; *** p < 0.0001
21

5.3 Multivariate analysis
The results obtained in the estimation of the regression model proposed are synthesised in Table 10.
The model that attempts to determine the explanatory factors of the overall practices in the disclosure of information on synergy value shows a relatively high explanatory power: 82,46 per cent.
Table 10 – Regression results
Independent and control variables
Estimated coefficient
Standard error t Pr > |t|
Intercept
STOCK
GROUP
SYN
DEL
LIST
FADV
SADV
SIZE
LEV
BANK
RPAGE
SREF
Year1
Year2
1.39286
0.59190
-0.38435
-0.08306
-0.16874
0.77964
0.48561
0.99385
0.71001
0.51580 -0.75
0.50067 -0.17
1.02256 -0.17
0.65367
0.65261
1.40
0.83
1.19
0.74
0.1694
0.4098
0.4609
0.8691
0.8698
0.2406
0.4615
1.43256 0.99058 1.45 0.1565
-1.1462E-12 1.64167E-12 -0.70 0.4894
0.08182
0.13940
-0.00632
0.33285
-0.82521
-1.01242
0.64934
0.68612
0.00993 -0.64
0.04703
0.13
0.20
7.08
0.9004
0.8401
0.5286
<.0001
1.84092 -0.45 0.6566
1.56496 -0.65 0.5217
Year3
Year4
Year5
Year6
Year7
Year8
R-square = 0.8246; F = 8.70
-0.91397
-0.29183
-0.95883
-0.84807
-0.57229
-0.23810
1.21651 -0.75 0.4572
1.09897 -0.27 0.7921
1.13561 -0.84 0.4039
1.12040 -0.76 0.4539
0.99685 -0.57 0.5694
1.26150 -0.19 0.8513
Notes: Year 9 was removed because of multicollinearity problems among dummy variables
From the 9 independent variables proposed to test the hypotheses, none of them turn out to be statistically significant. However, the analysis of p-value shows the lowest results for the variables
LIST and SADV. The variables STOCK, LIST, FADV, SADV E LEV display a positive effect on the dependent variable SDI. The variables GROUP, SYN, DEL and SIZE have a statistically non
22

significant and negative effect. The coefficients of SYN and SIZE are near the zero. As for the control variables, all of them, except for BANK and SREF, show a negative relationship with the synergy value reporting. Nonetheless, only the variable SREF is statistically significant for confidence level of 99 per cent.
Since the significance of the regression is affected from the relative small size of the sample, we developed a backward elimination.
Table 11 – Regression results by backward elimination
Independent and control variables Estimated coefficients Standard error
Intercept
LIST
SADV
SREF
R-square = 0.8040; F = 73.83
0.68083
1.02464
1.33894
0.32988
0.24745
F Pr > F
7.57 0.0081
0.46538 4.85 0.0320
0.73476 3.32 0.0740
0.02677 151.90 <.0001
Applying a backward elimination (19 steps), a sequential elimination of independent and control variables, we found that the three variables LIST, SADV and SREF turn out to be statistically significant for a confidence level of 90 per cent (see Table 11). Although the model show a relatively high explanatory power: r-square 0.8040 and F-value 73.83. This results confirm the potential high statistical significance of the variables LIST and SADV for larger samples.
Table 12 – Summary of the results of the hypotheses tested
Regression hypotheses
H1 H2 H3 H4 H5
Expected
+ sign
Regression
+ sign
Significance NS
-
-
NS
+
-
NS
-
-
NS
+
+
SS
Notes: NS = not significant; SS = strongly significant (p < 0.1)
H6
+
+
NS
H7
+
+
SS
H8
+
-
NS
H9
+
+
NS
The overall results obtained allow us to accept H1, H5, H6, H7 and H9 related to a positive relationships between stock for stock deals, the listing status of all firms, the involvement of
23

financial and strategic advisors, the leverage and the disclosure of a larger volume of information on synergy value. The effect of GROUP and DEAL on the synergy disclosure index allows us to accept H2 and H4.
6. Discussion of findings
The analysis of the reporting practices shows that companies disclose a limited set of all the information need to effectively assess the synergy value. The 75 per cent of firms disclose not more than 3 of 14 items useful to assess the synergy value. This means that external stakeholders cannot generally develop a pre-acquisition process that indicates the real value of synergy.
The results of univariate analysis provide interesting findings:
- the emphasis on synergy is strongly correlated to the completeness of information on synergy value;
- stock for stock deals, correlated to financial advisors involvement (due to the need of deeper firm valuation), provide wider reports;
- comparing data in the 9-year sample period, there is not a marked increase in the disclosures practices of companies;
- there is a significant correlation between the synergy disclosure index and YEAR6 (2007), the year with more M&A reports in our sample.
The regression analysis regarding the independent variables allow us to affirm that the volume of information on synergy value significantly depends on the listing status of all the companies involved in M&As and on the involvement of strategic advisors. The effect of the listing status on the disclosure of voluntary information has been widely analysed in previous studies (Lang and
Lundholm, 1996; Thomsen and Vinten, 2007; Zhang, 2007). Consistent with these studies, our results suggest that companies disclose greater information on synergy value in order to satisfy wider information demand. In this vein, it is possible to explain the positive relation between the disclosure of synergy value and, from a side, the stock for stock deals, and, from the other side, the
24

leverage. Indeed, this confirms the relevance of the items advanced to disclose information on synergy value: companies provide disclosures about these items when they need to persuade external stakeholders on the effectiveness of M&As.
On the contrary, the involvement of strategic advisor is a theme generally overlooked in previous literature. The presence of strategic advisors facilitate the individuation and measurement of strategic factors related to the assessment of synergy value. The higher volume of information depends on the availability of additional information. Furthermore this suggest that the low level of disclosure on synergy value in firms’ practices may depend on the lack of information for companies themselves. Different from our expectations, the influence of SYN (synergy as a relevant motive of the deal) on the disclosure of synergy value is not significant and, different from evidence of previous studies, the corporate size shows a negative not significant influence.
The findings regarding the control variables allow us to affirm that the synergy disclosure index significantly depends on the emphasis on synergy. The need or opportunity of highlighting the role of synergy in the deal push companies to disclose more information on the synergy value.
Moreover, this suggest that the increasing body of knowledge on synergy (Cartwright and
Schoenberg, 2006; Larsson and Finkelstein, 1999; Zollo and Meier, 2008) have improved the agreement on what synergy means. Different from the past, synergy is not a “screwball buzzword” yet (Lietdka, 1998). Thus, the process of synergy value disclosure forces the management to become aware of the real synergy value and to explicitly disclose this information
Instead, there is not any relation between the disclosure of synergy value and the disclosure size. It means that costs of disclosure probably do not affect the information on synergy value (Healy and
Palepu, 2001).
7. Conclusions
This study examines the reporting of synergy value in M&A reports with regard to: the information content; the practices of Italian companies; the impact that deal characteristics and important
25

reporting incentives have on the disclosure level. This is the first time that a comprehensive investigation of synergy value disclosure in mergers and acquisitions has been developed. Our study expands the empirical voluntary disclosure literature by demonstrating the usefulness of voluntary disclosure generally and synergy value disclosure specifically.
Traditionally the empirical voluntary disclosure literature overlooked synergy information and focuses on disclosure activity linked to predictable accounting releases (e.g. Baginski and Hassell,
1997). By contrast, our research highlights the need to warn firms of the potential risks of inaccurate synergy disclosure and, at the same time, suggest that an helpful synergy disclosure have to be developed to persuade external stakeholders on the usefulness of M&As as well as to constrain managers to effectively assess the synergy value.
Our findings offer useful preliminary evidence to improve both academic and business synergy knowledge. We find several mismatches and high variance in the disclosure practices of synergy value. Companies usually report information regarding valuation models and synergy types.
Information about synergy flows, timing and likelihood of achievement is seldom reported. This results suggest the need to provide more relevance to synergy value in M&A reports in order to disclose all of the information required. In addition, the likelihood of achievement of potential synergy is seldom disclosed. This result implies that more rigorous estimation and disclosure of the risks related to synergy achievement process would be beneficial. Otherwise, the synergy trap is ever in ambush. Consequently, future studies may also deepen the knowledge of “synergy trap”
(Garzella and Fiorentino, 2010; Sirower, 1997). In this vein, the items advanced for synergy disclosure index may lead managers towards a better knowledge of all the factors affecting the synergy value.
Searching for factors that influence different disclosure practices, the regression analysis show a significant relationship between the listing status, the involvement of strategic advisors and the disclosure on synergy value. The involvement of strategic advisors, suggest that firms should integrate workers and tools from different backgrounds, from strategy to accounting, to effectively
26

assess and disclose the synergy value, consistent with the call for cooperation between strategy, valuation and reporting studies (Damodaran, 2005).
The findings emphasize that the companies characterized by higher disclosure pressure typically disclose information needed to effectively assess the synergy value. Moreover, the results suggest that companies utilize information on synergy value as a mechanism to persuade external stakeholders on the effectiveness of M&As. In this vein, future studies may deepen the voluntary disclosure of synergy value besides the typical studies on disclosure activity linked to predictable accounting releases. At the same time, supranational organizations as well as national equity markets commissions may provide guidelines for the reporting of synergy value.
Since we clarified the content and the explanatory factors of the disclosure on synergy value future research may provide evidence on the relationship between synergy value disclosure and the market value of firms involved in M&As by research methods typical of event studies.
27

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