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Synergy and other lies

in context foc us Mergers and takeovers Key Dates 1890–1905 The first “takeover wave” occurs in the US and Europe, triggered by an economic depression and new legislation. 1960s Abraham Maslow applies the idea of “synergy” to the way that employees in organizations work together. 2001 US companies AOL and Time Warner merge in a deal worth $182 billion. It does not work out, and in 2009 the companies become separate entities. 2007 In the US alone, 144 takeover deals worth more than $1 billion take place. 2009 Only 35 takeover deals worth more than $1 billion take place in the US . Companies have to grow in order to survive. One way to make an organization bigger is to buy (acquire) another and make it part of the original company. Alternatively, two businesses can agree to merge, forming another organization with an entirely new identity. The purpose of an acquisition or merger is often to increase shareholder value beyond the sum of the two companies. These benefits are known as “synergy”; the concept being that one plus one equals three. The reasons for two businesses joining together might seem compelling. The new, combined company increases sales, market share, and revenue. It should also be a more efficient operation. Bigger companies also enjoy economies of scale: overhead costs are shared and money can be saved from increased buying power. Fixed costs can also be reduced because the combined business needs less staff in functions such as finance, human resources, and marketing, than the two separate entities. Companies’ also buy businesses to acquire new technology, reach new markets, or increase distribution. Corporate divorce In practice, takeovers and mergers are rarely marriages made in heaven, a fact underlined by Harold Geneen in the books he co-authored in 1997 and 1999 on the pretence of synergy. Mergers can fail to deliver the value promised, with one plus one often equaling less than two. There are many reasons for failure. Hidden Synergy is the additional value that is created when two business units are joined. A holy grail in business circles, academics Campbell and Goold concluded that “synergy initiatives often fall short of management’s expectations”.

problems might be discovered after the deal is done because of the limitations on sharing commercially sensitive information prior to common ownership. The focus at the time of the deal is often on the event of joining together rather than planning what will happen next. Effective integration requires quick, courageous decision making so that time and momentum are not lost. However, the most common reason for failure is that the two organizations have different approaches and lack synergy. In 1998, German car producer Daimler-Benz bought US automotive business Chrysler for $38 billion. The logic seemed obvious: create a trans-Atlantic powerhouse that would dominate motor markets. The new company, DaimlerChrysler, was dubbed a “merger of equals.” But the reality was a classic culture clash. Daimler was a formal, hierarchical organization, while Chrysler favored a more team-oriented approach. Chrysler operated in a market where low price and catchy design were important; high-end Daimler was focused on quality and luxury. Chrysler executives felt undermined in the new alliance because Daimler tried to dictate the terms on which the new business should work and to place its people in key positions. The result was a costly corporate divorce with Daimler-Benz selling Chrysler to a private-equity firm for a mere $7 billion in 2007.

Harold Geneen Harold Geneen was born in Dorset, UK, in 1910, but his parents emigrated soon after his birth and he was raised in the US. He studied accounting at NYU (New York University) and went on to become a highly successful businessman in the US. He is best known as the father of the conglomerate concept, where a large corporation is created from seemingly unrelated businesses. In 1959 he became president and CEO of International Telephone and Telegraph Corporation (ITT), and grew the company from a medium-sized business to a multinational conglomerate. His 18-year tenure included 350 acquisitions and mergers in more than 80 different countries, including Sheraton Hotels in the US, and telecommunications companies in Europe and Brazil. Despite his success and wealth, he was known for his no-nonsense values and plain talking. He died in 1997. Key works 1997 The Synergy Myth (with Brent Bowers) 1999 Synergy and Other Lies (with Brent Bowers)

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