How much are synergies actually worth?

In most mergers involving listed companies, a projection of synergies is put out that is meant to serve as an argument for the deal. In theory, the synergies are equal to the maximum control premium that a buyer is willing to pay without destroying value for its own shareholders. Announced synergies often go out to three years, but do not always include the cost of restructuring necessary to unlock those synergies, costs that normally should be subtracted from the value of synergies to determine the theoretically ceiling control premium.
These synergies are often valued by multiplying their projected amount, once cruising speed is reached and after deducting tax, by the buyer's P/E, or the average P/E of the buyer and the target.
In our experience this overstates synergies by far, as investors estimate them to be much lower than what emerges from these calculations:

• Synergies announced when the projected merger is made public are only an estimate, and those who announce such figures have an interest in making them high, to persuade shareholders to approve the deal. In reality, the technical execution of a merger or other link-up is complex. Getting former competitors to work together, creating a new culture, avoiding losing clients who want to retain a diversity in suppliers, etc.
  Experience shows that more than one merger in two fails from this point of view, and synergies are actually lower than initially announced and take longer than expected to achieve;
• Sooner or later, some of the unlocked synergies must be passed on to customers, employees, suppliers and so on, as this merger will probably be followed by others. For M&A runs in waves, and competitors will be pushed into a similar deal in order to unlock synergies themselves, synergies that will allow them to remain competitive. This tends to put downward pressure on prices, and it is the customer who benefits.

How investors estimate synergies can be seen through the share prices in the days after the deal is announced, as long as the announcement is a true surprise (with no leaks beforehand), that there is no uncertainty over execution risk (e.g. opposition of certain shareholders or possible veto of anti-trust authorities). Indeed, the differential between the cumulative value of the two groups before and after deal, adjusted for market variations in the interval, corresponds to the value of synergies estimated by investors after they have deducted restructuring costs.
A study of the world's biggest mergers of listed companies of similar size since 1998 shows that, in about 40% of the cases, market perception is initially negative, that the control premium is about 22%, and that shareholders of the target company receive, on average, 70% of the value created by the synergies. The synergies themselves are valued at only about half the sector's P/E, which clearly shows the market's view that they are not sustainable or that they worsen the company's risk profile.