A Framework for Value Creation  587
value of Company B to Company A is $1.4 billion. Subtracting the purchase 
price of $1.3 billion from the value received of $1.4 billion leaves $100 million 
of value created for Company A’s shareholders.
In the case where the stand-alone value of the target equals its market 
value, value is created for the acquirer’s shareholders only when the value of 
improvements is greater than the premium paid:
Value Created
Value of Improvements
Acquisition Premium
=
−
Examining this equation, it’s easy to see why most of the value created from 
acquisitions goes to the seller’s shareholders: if a company pays a 30 percent 
premium, then it must increase the value of the target by at least 30 percent 
to create any value.
Exhibit 31.2 shows the value created for the acquirer’s shareholders rela-
tive to the amount invested in acquisitions at different levels of premiums 
and operating improvements. For example, Company A, from the example 
just considered, paid a 30 percent premium for Company B and improved 
Company B’s value by 40 percent, so the value created for the acquirers’ share-
holders represents 8 percent of the amount Company A invested in the deal.
If we further assume that Company A was worth about three times Com-
pany B’s worth at the time of the acquisition, this major acquisition would be 
expected to increase Company A’s value by only about 3 percent: $100 million 
of value creation (see Exhibit 31.1) divided by Company A’s value of $3 bil-
lion. As this example shows, it is difficult for an acquirer to create a substantial 
amount of value from acquisitions.
While a 40 percent performance improvement sounds steep, that’s what 
better acquirers often achieve. Exhibit 31.3 presents estimates of the value 
EXHIBIT 31.2  Value Creation for Given Performance Improvements and Premium Paid
Value creation as % of deal value
10
20
0
30
10
20
30
40
50
0
9
18
27
36
–8
0
8
17
25
–15
–8
0
8
15
Value of performance improvements,
% of stand-alone target value 
20
30
40
10
50
Premium paid, 
% of stand-alone 
target value

588  Mergers and Acquisitions
created from a sample of deals over the past 20 years. To estimate the gross 
value creation, we discounted the announced actual performance improve-
ments at the company’s weighted average cost of capital (WACC). The per-
formance improvements were substantial, typically exceeding 50 percent of 
the value of the target. In addition, Kellogg and PepsiCo paid unusually low 
premiums for their acquisitions, allowing them to capture more value.
Empirical Results
Acquisitions and their effects on value creation are a perennial topic of interest 
to researchers. Empirical studies of acquisitions have yielded useful insights 
into when they occur, whether they create value, and for whom they create 
value.
When Do Acquisitions Take Place?
Acquisition activity tends to occur in waves, as shown in Exhibit 31.4. Several 
factors drive these waves. First, we tend to see more acquisitions when stock 
prices are rising and managers are optimistic (though to maximize the amount 
of value created, they should really make acquisitions when prices are low). 
Low interest rates also stimulate acquisitions, especially heavily leveraged ac-
quisitions by private-equity firms. Finally, one large acquisition in an industry 
encourages others in the same industry to acquire something, too.
Do Acquisitions Create Value?
For decades, academics and other researchers have studied the question of 
whether acquisitions create value. Most studies have examined the stock price 
reaction to the announcement of acquisitions. One effect of this approach is 
EXHIBIT 31.3  Selected Acquisitions: Significant Improvements
%
Year
Value of improvements 
relative to target value1
Premium paid
Net value created 
relative to price2
Abbott Labs/Alere
2016
45–55
35
10–20
Tesoro/Western Refining
2016
45–55
35
10–20
RF Micro Devices/Triquint Semiconductor
2014
60–70
10
50–60
InBev/Anheuser-Busch
2008
35–45
20
15–25
Henkel/National Starch
2007
60–90
55
5–25
Kellogg/Keebler
2000
45–70
15
30–50
PepsiCo/Quaker Oats
2000
35–55
10
25–40
Clorox/First Brands
1998
70–105
60
5–25
1 Present value of announced performance improvements divided by target value.
2 Net value created from acquisition divided by purchase price.