Time’s up for merger and acquisition synergy

Meet Synergy, pagan spirit of Mergers & Acquisitions.

The objective of a firm is to find assets that have more value to the firm than cost.  The objective of a project is an investment in either something new or to improve something old in a process to realize more value than the combined project and continued operational cost. Merger and acquisition synergy is really value and cost.

How do projects present a business case for a go/no-go decision?  Projects answer the following:

• What will it cost?
• What return will it realize?
• When will it realize that return?

The objective of a firm is to find assets that have more value to the firm than the cost to acquire.  That is a rather vanilla statement, but important when discussing if mergers and acquisitions project classification.

The time value of money helps evaluate options and the time value of money is standard evaluator in corporate finance. In project management any one of the 3 project constraints of scope, time, and budget can not be modified without direct affect to the other 2.

In corporate finance the time value of money accounts for 2 of those 3 project constraints:  time and budget (value).  Both time and value are at the earliest stage of investment evaluation decisions.

When You Get Around

Without the time value of money in play an investment payoff is arbitrary and success evaluation impossible: a firm invests $1 in a project expected to pay $1.50 at a later date, without a set date for that return, how do we know if $1.50 is worth the $1 risk?

Let me borrow $100 from you. If you tell me, “no problem, but you have to give me $10 to borrow $100”.  I may make that deal, happily.  What would move my decision from “yay, here’s my off-shore account” to “nay, I reject your onerous usury fee?  Time.

If I don’t have to worry about when I need to pay you back, I’m a very happy borrower.  If I have to pay it back tomorrow perhaps I move along to another source.

When You Come Around

A merger or acquisition fails if it does not return the expected cash flows, above principle invested, within the time set for the investment decision.

A project fails if any 1 of the original project success measures of time, budget, and scope fails.

Original objectives have little to factor value without an element of time.

I expect a private equity firm, venture capitalist, or investment bank is rational, functional, and logical. In our example above, the time value of money offers a simple evaluation of failure as a pure financial decision without having to introduce any squishy or esoteric human capital factors.

However, if you thought human resources (HR) was squishy wait until the mergers and acquisitions (M&A) proves more squishy than human capital.  With one word, I bring the M&A pixie dust known as:  synergy.

Synergy is neither rational, functional, nor logical.

If HR used the word synergy in an accounting meeting?  Laughed out of the room.

If HR or human capital used the word synergy in a corporate finance discussion?  Sorry, only room for two at the table.

Ben McLure of Investopedia.com writes, “Synergy is the magic force that allows for enhanced cost efficiencies of the new business“.

Yikes!  Circle the wagons.

Mr. McLure goes on further to describe this fickle temptress:  synergy.

Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:

1. Staff reductions – As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.
2. Economies of scale – Yes, size matters. Whether it’s purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies – when placing larger orders, companies have a greater ability to negotiate prices with their suppliers.
3. Acquiring new technology – To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.
4. Improved market reach and industry visibility – Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies’ marketing and distribution, giving them new sales opportunities. A merger can also improve a company’s standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Synergy takes a final course off the rails of sanity when value continues to languish unrealized and finally the CEO and all the bankers involved in the riches of the original transaction use even more magic to create an image of enhanced value.

It is time to move from synergy and back to reality.

The reality is human capital risk is the real risk.  Human capital is the real beta in deals.  Discounted risk is human capital risk and a need for HR’s role in deal-making.