Why do companies merge and acquire other companies? Synergy is the textbook answer. Typically, the stockholders of the target company see an appreciation in the value of their stock, while stockholders in the initiating firm see a downtick. The reason why is simple: corporations typically overpay. The value-added of the anticipated synergy must be greater than not only any overpayment, but also the intangible costs in aligning the corporate cultures. Yet another factor—an opportunity cost, really—is frequently overlooked: that of whether the extra cash on hand should be returned to the stockholders as dividends.
The complete essay is at “Mergers and Acquisitions”