For many of us it is hard to understand how breaking up a company will add value while a previous management group five years prior told us how much more money could be made by acquiring a company.
Without getting into a lengthy and complicated explanation I will try to share some basic thoughts with you.
Normally when an acquisition is made synergies are anticipated in a number of the following areas
Purchasing of raw materials and packaging – it is a commercial fact that greater quantities purchased normally generate lower prices.
Manufacturing – If some of the products of the targeted company can be produced on the machinery and in the factories of the acquiring company then volumes can again contribute to lowering costs as well as the redundant machinery can be sold off and in the ideal situation also the factory itself.
Research & Development – If the products are common to both companies then these costs can be reduced substantially.
Warehousing & Distribution – If the products of the targeted company can be handled within the same warehousing and distribution configuration then again this can be a major area for saving.
Administration – This is normally the greatest area of saving as the replacement of CFO’s, IT managers and departmental heads can be considerable before you even start on staff duplication within all functions.
When acquiring a company these potential areas of saving are identified during due diligence and financial benefits even after redundancy payments can be considerable. Normally at the time of acquisition management will often state no changes are anticipated while they plan them over the next six to twelve months. They don’t want an exodus of people before they have identified the ones they want to keep.
All this is easy to understand so why would it ever be necessary to break up what you have put together.
One major reason which is not always given consideration when putting two organisations together and that is the culture of the two organisations. Many senior managers don’t fully appreciate to what degree staffs relate to a company and its products/services at all different levels. I know of one acquisition where we tried to integrate the above functions between a Health company that had a great cosmetic range and a company with a history in hair cosmetics. When the service levels for the health company deteriorated to where it was effecting its relationships with its retailers and financial viability an in depth study revealed that staff within warehousing, distribution and administration were placing the health clients at the end of their priority list on the basis that they belonged to a Hair company and this was just a tack on and secondary consideration. Ultimately the health company was sold off.
A second major problem can arise when you try to integrate the Sales and Marketing functions of the two organisations as these are usually the point of difference between companies and organisations. The integration of these functions has been a contributor to the Fosters situation.
In the writers opinion one of the best companies in the world at handling integration of companies is L’Oreal. They in the main concentrate on Cosmetics and Toiletries which are seen as compatible with the history of L’Oreal by all staff involved and they allow the sales and marketing teams of the individual companies to compete within the market place.
Ken
