Synergy Premium in Mergers and Acquisitions of Steel Companies

Global Steel Industry has been consolidating at a fast pace during the past decade as the industry is very fragmented. Several high value mergers and acquisitions have attracted coverage from the international media over the years during the transaction due to the economic, social and political importance of the industry. During a hostile takeover or bidding war Steel companies tend to pay significantly high synergy premium for the expected synergies. This research will identify the rent earning potential of the combined Steel companies, their synergistic benefits and competitive advantages gained by the merger or acquisition. This can be demonstrated by the added value created by the effective usage of the resources in the value chain of the combined companies Optimizing and aligning the value chains of two companies that the merger can generate significant reductions in costs and savings resulting from getting rid of overlapping activities and therefore enhance the willingness of customers to pay for the good or service. Here I argue that Steel companies should only engage in friendly mergers as they pay exceptionally high synergy premium in a bidding war or a hostile takeover.