What Is M&A and Why Do Companies Do It?

Companies pursue M&A instead of relying purely on organic growth for several recurring reasons: to acquire capabilities or technology faster than building them in-house, to gain scale and negotiating power, to enter new markets or customer segments, to eliminate a competitor, or to capture cost and revenue synergies that neither company could achieve alone. Strategic buyers (typically other operating companies) pay for these synergies and often justify higher purchase prices because they can extract value the target couldn't generate on its own. Financial buyers (private equity firms) generally cannot rely on synergies with an existing business and instead focus on standalone cash flow, leverage, and a defined exit — which is why they typically bid lower than a well-matched strategic buyer for the same asset.

But paying a premium is only justified if the deal actually creates value. The example below tests that.

Step 1: Target Co.'s Standalone Value

Standalone Value = EBITDA × Market Multiple

Standalone Value = $50.0m × 10.0x = $500.0m

This is what Target Co. would be worth on its own, using the multiple the market already assigns to comparable companies — the baseline against which any premium must be judged.

Step 2: Premium Paid

Premium Paid = Purchase Price − Standalone Value

Premium Paid = $600.0m − $500.0m = $100.0m

This is the amount the acquirer is paying above and beyond what Target Co. is worth as a standalone business — it has to be earned back through synergies, or it destroys value for the acquirer's own shareholders.

Step 3: Value of Synergies

Value of Synergies = Annual Synergies × Market Multiple

Value of Synergies = $15.0m × 10.0x = $150.0m

Capitalizing the annual synergy at the same multiple the market uses for EBITDA converts a recurring cost saving into a one-time value figure that can be compared directly against the premium paid — this is the standard way bankers frame whether "the premium pays for itself."

Step 4: Net Value Created

Net Value Created = Value of Synergies − Premium Paid − Integration Costs

Net Value Created = $150.0m − $100.0m − $40.0m = $10.0m

A positive number means the deal is expected to create value once synergies are realized and integration costs are paid — but the margin here is thin. If synergies come in below plan, take longer than expected, or integration costs run over (all common in practice), this same deal tips into destroying value instead.

Final Results

• Premium Paid: $100.0m
• Value of Synergies: $150.0m
• Net Value Created: $10.0m

This value bridge is the core discipline behind every M&A rationale — whether the deal is framed around growth, scale, or market entry, it only creates value if the price paid is more than offset by what the combination can generate that the standalone businesses could not.

Would you like to walk through how this same logic changes when the buyer is a financial sponsor instead of a strategic acquirer?