From a ﬁnancial point of view, two ﬁrms are related when the net present value (NPV) of the cash ﬂow of the combination of these ﬁrms is greater than the sum of the NPVs of the cash ﬂows of these ﬁrms acting indepen- dently (Copeland and Weston 1983):

NPV (A + B) *> *NPV (A) + NPV (B) (10.1)

where NPV (X) is the discounted NPV of the cash ﬂows generated by ﬁrm X (Copeland and Weston 1983). When the inequality in equation (10.1) holds, a synergistic cash ﬂow is created if ﬁrm A acquires ﬁrm B.

A variety of possible sources of relatedness and synergy in mergers and acquisitions have been cited in the literature (Williamson 1975; Benston 1980; Eckbo 1983; Jensen and Ruback 1983; Stillman 1983; Harrison et al. 1991; Goold and Campbell 1998; Hitt, Harrison, and Ireland 2001) Salter and Weinhold (1979), for example, argued that key business skills and product market positions are two potentially important sources of relatedness. From a broader perspective, Lubatkin (1983) classiﬁed nine types of relatedness between bidding and target ﬁrms into three categories: technical economies (e.g. marketing and production economies), pecu- niary economies (e.g. market power), and portfolio economies (e.g. risk reduction). Jensen and Ruback (1983) identiﬁed eleven potential sources of strategic relatedness between bidding and target ﬁrms. In this chapter, relatedness between two ﬁrms can reﬂect any one, or any combination, of these sources, as long as equation (10.1) is satisﬁed.

Mergers or acquisitions between related ﬁrms will have no impact on the wealth of shareholders of bidding ﬁrms when the price paid for a target ﬁrm is exactly equal to the diﬀerence between the NPV of the cash ﬂow of the target and bidder ﬁrms combined, and the NPV of the cash ﬂow of the bidding ﬁrms alone. This price, *P *, is simply the value added to the bidding ﬁrm by acquiring a target:^{1}

*P *= NPV (A + B) − NPV (A) (10.2)

Note that *P *does not depend on the value of the target ﬁrm acting as an independent business, but rather on the value that the target ﬁrm creates when it is combined with the bidding ﬁrm. If a bidding ﬁrm pays *P *+ *k *for a target, then that ﬁrm has acquired a ﬁrm that adds *P *dollars in additional value (i.e. NPV (A + B) − PV (A)) for the price *P *+ *k*. If *k *= 0, then a bidding ﬁrm has paid the price *P *for an addition to its cash ﬂow worth exactly *P**, *and thus the wealth of bidding ﬁrm’s shareholders is unaﬀected. If *k **> *0, then this acquisition represents a real economic loss to the shareholders of the bidding ﬁrm. If *k **<* 0, then the shareholders of the bidding ﬁrm will obtain a positive economic return. Thus, specifying the conditions under which a bidding ﬁrm’s shareholders will obtain superior returns from mergers and acquisitions reduces to specifying the conditions under which the price of an acquisition or merger will be less than *P *, that is, specifying the conditions under which *k **< *0.

Source: Barney Jay B., Clark Delwyn N. (2007), *Resource-Based Theory: Creating and Sustaining Competitive Advantage*, Oxford University Press; Illustrated edition.