Unchallenged Series #4: Cost synergies are worth more than revenue synergies

It’s remarkable how this concept has remained unchallenged for all the years that we’ve been doing post merger integration work. We suspect that the big 4 are to blame, in discounting revenue synergy prognosis to cost synergies when they give their ‘independent’ analysis of the deal. 

What’s it based on?

  • Familiarity on behalf of the big 4…and a great opportunity to pitch for the post deal work

  • Certainty of benefit…it’s relatively easy to work out what a reduction in workforce might do to the operating costs of the combined business

  • Relative certainty of the cost of implementation…whilst cost of redundancy is not set, there are market expectations and lots of history which one can use to calculate what this might be

  • A perception of minimal impact on the ongoing operations of the business…duplication of roles and or functions create a scenario where with some small adjustments (to the incumbent  / acquiring organisation) the duplicate function can be removed.

Why is all of that logic flawed?

  • People don’t do what it says on their job description or business card or indeed the glorious fiction that is the organisational design. I’ve had too many experiences where removing an individual turned out to be calamitous to the organisation because of some skill / experience / knowledge which the acquirer was not aware of.

  • Isolating a group of people from their colleagues and expecting redundancy of that group not to have an impact on those around them in terms of productivity is something only someone who has never done it before would believe. The vicious circle of removal…reduced productivity…poor performance…further removal…is alive and well.

So whilst you can calculate the costs and perceived benefits, you have no idea of the impact on the business…which is surely the point.

Why are revenue synergies challenging?

  • It takes longer to deliver them

  • It requires a company wide effort from marketing / research to product development, pricing and sales.

As in many things in life, challenging but ultimately a lot more rewarding!