The pursuit of growth through takeover or merger (TOM) has made a small, select group of executives, investment banks and consultants very wealthy while diminishing the wealth of a vast number of shareholders. Why do so many TOMs fail to deliver the perceived synergies and cost savings?
- Synergies. First of all, the synergy calculations are flawed. KPMG’s research, published in 1999, found that ‘83% of mergers were unsuccessful in producing any business benefit as regards shareholder value’. The simplistic view that savings can easily be made by removing duplication (finance, HR and IT etc) is flawed logic. It can take up to four years to merge the information technology platforms together, and even when this is achieved, many of the future efficiency and effectiveness IT initiatives have been put on the back burner.
- Customer focus. There is no better way to lose sight of the goal than a merger. Merging the operations will distract management and staff from the basic task of making money. While meeting after meeting occurs and sales staff focus on their futures, customers are left vulnerable to your competitors’ approaches.
- Culture clash. Managing the aftermath of a TOM is like herding wild cats. Where have you seen cultures merged successfully? In reality, one culture tends to take over another. This is fine when one is fundamentally flawed. However, in many mergers, both entities have cultures that work. Now you have a problem. Many competent staff members may choose not to stay in a culture that does not suit their working style.
- Heartless. How long does it take for a company to develop a heart? This is more than just the culture; it includes the living and pumping lifeblood of the organisation. In my opinion it takes years. The merged organisation can be kept on life support but, just like a critical patient, it is effectively bedridden and will be in intensive care for some time.
- Survival of the unfittest: I have a theory that the main beneficiaries of a merger are the piranhas – those managers who like to stick the knife in. Some could say they are addicted to this behaviour. The result is quite interesting; the merged company very soon becomes dysfunctional as more and more of these caustic managers rise to the top. These managers do not live and breathe the organisation; the ones who did have long since left.
- Salary costs. There are many financial time bombs that impact shareholder value. Severance packages can create further waste, as staff members – especially the talented staffers – leave before generous severance terms disappear. So to retain such people, further salary incentives need to be made that create further pressure on the bottom line.
- Lack of time. A merger is like an auction where the buyer rarely has more than a cursory look at the goods before bidding. It is important not to limit due diligence in the haste to close the deal, as you tend to know less about each other than you think. The dirty laundry often takes years to discover and clean.
The CFO and financial controller are very often too far removed from the action when a restructuring is proposed. If anyone is to talk sense to the board and senior management team, it has to be the CFO, who can be the authority on the potential costs.
A major reorganisation, with its multiple steps, consultations and political dynamics, is as complex as putting in a new runway at a major international airport while keeping the airport operational. The CFO needs to ascertain the costs of such an exercise.
Here’s what typically happens in a reorganisation.
- Loss of key staff in the lower-tier management ranks. There is often a period of chaos where staff are disillusioned and many key employees in the third- and fourth-tier management ranks walk out of the door with a golden parachute, straight into employment elsewhere. A reorganisation can leave you with the also-rans and piranhas.
- Ex-employees come back as contractors. The bedding-in process starts to kick in somewhere between month seven and month 12. The completion of all the redundancies takes longer than expected and, yes, more than a few will come back as contractors at a higher cost. These costs must not be ignored.
- Consultancy costs rise. Consultancy costs go through the roof, as assistance will be needed with counselling staff, culture change and communication.
- Branding is redesigned. Look back to the last time this was done for a reasonable estimate.
- Recruiting activity. As all staff affected are likely to need to reapply for their jobs, additional HR resources will be required.
- Work on property leases. Releasing surplus property can take up to three years, especially in an economic downturn. About two years after the restructuring is announced, productivity is likely to be back to normal; up until then, you have effectively been going backward. In the period two to three years after, advantages may begin to kick in.
When faced with a contracting business, there are a number of options you need to explore before undertaking a reorganization and making everybody reapply for their jobs.
Discuss the issues with the affected operational units and ask them to find new initiatives that can help part-fund their salaries. Often there are a number of income-generating possibilities that have not been explored.
- Consider buying some time by redeploying staff so that some have the chance to seek further employment while still employed. This is a managed staff-reduction process and will save a huge amount of money on redundancies, while at the same time giving your staff an opportunity to find new jobs.
- Work with the human resources team to design a voluntary redundancy program. You have to be prepared to lose some top employees, as you can’t directly target staff members with lower skillsets. As CFO, you shouldn’t underestimate the long-term impact of staff reductions. Where possible, the CFO should argue that it is better to fund the shortfall out of retained earnings. The cost of firing and rehiring is often much higher than holding on to the staff. An organisation with 500 full-time employees that is contemplating dismissing between 50 and 70 staff members would, by my calculations, be no worse off if the staff members were kept on and redeployed, where possible, within the organisation for up to two to three years.
1. Read KPMG’s Mergers and Acquisitions: Global Research Report 1999
2. Email me (email@example.com) and I will send you a ‘takeover or merger scorecard’ and a checklist to put you off a reorganisation and a spreadsheet to work out the hidden costs of dismissals.
3. Analyse the last restructuring performed in the organisation so you have a benchmark cost available.
4. If pressured to undertake a TOM, investigate the investment bank’s success rate and critique their dubious cost saving calculations; they may well be wrong.