Synergy is an M&A phenomenon that looks great on paper but is usually a different story in practice. So valuation analysts need to be careful not to overvalue it.

Very slippery: “Typically, in the transactions we look at there is an overly inflated view of synergies,” says Jeff Litvak (FTI Consulting). “You may think that combining administrative departments and deriving synergies from complementary clientele would be easy,” he says, speaking at a recent BVR webinar. “But what you find is that they take time to realize, and sometimes they just never come to fruition—yet you paid for them.”

How much is paid? Buyers pay, on average, 31% of the average capitalized value of expected synergies to the sellers, according to recent research from the Boston Consulting Group.

Why not keep quiet about synergies and pay nothing to the seller? Because sellers anticipate the buyers’ synergies and demand to be paid for them. In addition, when cost synergies are announced, the market reacts favorably and boosts the value of the acquirer. Of course, this increase in value may vanish if the synergies don’t materialize, as is often the case.

The bottom line is that the value that is actually realized from synergy is most often much less than expected. Says Litvak: “The idea here is for buyers not to overpay for synergies.”