Latent Value, Synergistic Effect and Merger Decision-Making: A Study on the Internet Industry

This paper studies the merger and acquisition ("M&A" hereafter) in the Internet industry, and constructs a theoretical model to anatomize the motivations of the M&A and the factors that impact the performance of M&A. The model analyzes three motivations on M&A: Synergistic Effect Motivation, Latent Value Motivation and Merger Timing Motivation. Among these three motivations, our study shows that the Latent Value motivation is the leading factor that causes the manager's decision on M&A in the case when the M&A result in a financial loss. For the first time, we quantify the synergistic effect and the latent value of M&A in the internet industry. We also develop the concepts of "development merger" and the "prevention merger", and use the model to deduct the optimal timing and price of the M&A in the internet industry.