provided a high return to lenders (bond holders). Junk bonds offer relatively high rates, some as high as 18 to 20 percent during the 1980s. Inability to Achieve Synergy Acquiring firms also face the challenge of correctly identifying and valuing any synergies that are expected to be realized from the acquisition. This is a significant problem because, to justify the premium price paid for target firms, managers may overestimate both the benefits and value of synergy. To achieve a sustained competitive advantage through an acquisition, acquirers must realize private synergies and core competencies that cannot easily be imitated by competitors. Private synergy refers to the benefit from merging the acquiring and target firms that is due to the unique assets that are complementary between the two firms and not available to other potential bidders for that target firm. Firms experience transaction costs when using acquisition strategies to create synergy. Direct costs include legal fees and charges from investment bankers. Managerial time to evaluate target firms and then to complete negotiations and the loss of key managers and employees post-acquisition are indirect costs. Too Much Diversification In general, firms using related diversification strategies outperform those using unrelated diversification strategies. However, conglomerates (i.e., those pursuing unrelated diversification) can also be successful. In the drive to diversify the firm’s product line, many firms overdiversified during the 60s, 70s, and 80s. As detailed in Chapter 6, information processing requirements are greater for a related diversified firm (compared to its unrelated counterparts) due to its need to effectively and efficiently coordinate the linkages and interdependencies upon which value-creation through activity sharing depends. In addition to increased information processing requirements and managerial expertise, overdiversification may result in poor performance when top-level managers emphasize financial controls over strategic controls. Financial controls may be emphasized when managers feel that they do not have sufficient expertise or knowledge of the firm’s various businesses. When this happens, top -level managers are not able to adequately evaluate the strategies and strategic actions that are taken by division or business unit managers. As a result, When they lack a rich understanding of business units ’ strategies and objectives, top-level managers tend to emphasize the financial outcomes of strategic actions rather than the appropriateness of the strategy itself. This forces division or business unit managers to become short-term performance-oriented. The problem is more serious when manager compensation is tied to short-term financial outcomes. Long-term, risky investments (such as R&D) may be reduced to boost short-term returns.