Page 70 - Azerbaijan State University of Economics

N.V. Abdullayeva: Value creation through mergers and acquisitions in energy sector

This theory views the company as a set of production opportunities where the

manager chooses the production plan that maximizes the present value of future cash

flows. Despite strong underlying logic, it lacks to provide the ways to resolve

conflict of interest among shareholders, managers and stakeholders. Berkovitch and

Narayanan (1993) have classified motives for M&A into three groups: synergy,

hubris and agency problems hypotheses. The classification was made on the basis of

expected value added in stock prices, accordingly positive in synergies, zero in

hybrids and negative in agency problem hypothesis.

Synergy hypothesis suggests that merger occurs when the combined value of

target and acquirer is greater than sum of the values of both companies separately.

Seth (1990) points out that synergies add value by enhancing the operating

efficiency, increasing the market share and create financial gains.

The main types of synergies are the following:

a. Financial synergies:

b. Operating synergies

c. Strategic considerations (entering new markets):

One of the main types of the operational synergy is economies of scale which

arise from the fact that cost in labour, fixed assets and technology is extended to a

larger production level. In energy sector, economies of scale may be achieved by

rationalizing Research and Development (R&D) expenses. Another type of

operating synergy proposed by Teece (1982) is economies of scope which arises

from intangible assets held by both companies. Those can be expertise of the labour,

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