It’s known as the winner’s curse. When companies merge, most of the shareholder value created is likely to go not to the buyer but to the seller. Indeed, on average, the buyer pays the seller all of the value generated by a merger, in the form of a premium of from 10 to 35 percent of the target company’s preannouncement market value. The fact is well established, but the reasons for it are less clear.

Our exploration of postmerger integration efforts points to the main source of the winner’s curse: the fact that the average acquirer materially overestimates the synergies a merger will yield. These synergies can come from economies of scale and scope, best practice, the sharing of capabilities and opportunities, and, often, the stimulating effect of the combination on the individual companies. However, it takes only a very small degree of error in estimating these values to cause an acquisition effort to stumble.

Acquirers must undoubtedly cope with an acute lack of information. To help them assess synergies and set targets, they usually have little data about the target company; limited access to its managers, suppliers, channel partners, and customers; and insufficient experience. Even highly seasoned buyers rarely capture data systematically enough to improve their estimates for the next deal. And external transaction advisers—usually investment banks—are seldom involved in the kind of detailed, bottom-up estimation of synergies that would be needed to develop meaningful benchmarks before a deal. Fewer still get involved in the postmerger work, when premerger estimates come face-to-face with reality.