Say Hey for M&A

Implications: This article is based on a survey of corporate executives that states that there is evidence that M&A doesn’t necessarily greatly translate into shareholder value, but there are mergers that do, and that is why people keep at it. Of those surveyed only about half thought that there were either revenue or cost synergies. The strongest agreement in the poll was that it helped mergers helped retain the right people both for the buyer and seller, increased customer satisfaction.

Changes in the tax situation are important too, and were not noted in the article

Analysis: This is one of the most useful articles on the subject that I have seen.

First it places the concept of synergy in context: it simply didn’t turn out to be a particularly important result, in the most recent merger for the people surveyed. I have stated at other times, that the whole concept of synergy is like time travel: if it existed we would have seen evidence of it by now. More specifically, if it existed, then private equity firms would be consistently out bid where synergy might be a possibility and that really hasn’t happened.

The next encouraging area was related to people and customers. For both buyers and sellers both valuable people were retained and there were positive impact on the customers of both. These outcomes show that such soft issues are important. If done properly the human actors are consciously better off after a merger. It should also be remembered that for certain functions, people are not fungible either within an organization or an industry. If nothing else it appears that there is perception that mergers produce job enrichment and service enhancement all around. I audited Shearson during its time of high merger-driven growth. What I saw was real satisfaction both on the part of new and old people who felt, with justice, that they were both contributing more and being properly rewarded.

The study ignored tax-related issues, which are also important. In the electric utility industry, these issues have been the driving consideration in many mergers. A merger can allow companies to radically revalue assets up or down, without having to qualify for quasi-reorganization. The first one of these related to the creation of FirstEnergy. Because of deregulation and other issues, the book values of many assets did not reflect actual economic value. The merger allowed the necessary changes, and especially very valuable ones relating to new tax basis and associated depreciation, all of which had a real impact on cash flow.

In summary, merger success seems to come from increased employee and customer satisfaction, which may be the cause of what synergies were noted. Also though, the tax incentives can have a very important impact on the success of any merger.