This paper discusses sources of value in acquisitions. Using the discounted cash-flow valuation method, we develop a model that explains sources of economic gains that can be attained through mergers. The model identifies three major sources of value in mergers, each of which can reduce or contribute to the combined wealth effect of a takeover deal. The overall value of the deal is a sum of the impacts of these factors on the combined value. The main contribution of this study is to highlight the role of the difference between the combined firm’s weighted average cost of capital and that of the acquirer and the target in value creation through mergers. The model suggests that this difference, along with the operating synergies, can explain total value effects of mergers.