After a merger, managers should ignore the usual advice to strive primarily for improving the bottom line through cost reductions. Instead they should make it a priority to strengthen sales and marketing in order to sustain profitable revenue growth. That’s because revenue growth is necessary for earnings growth, the most reliable engine for driving total shareholder returns over the long terms.
These insights came from our recent study of 270 mergers in various countries and regions. We found that in most cases sales growth had slowed dramatically after the merger—on average, it had dropped six percentage points. (The figures in this article are weighted averages adjusted for industry trends and refer to three years pre- or postmerger.) That decline led to a reduced rate of earnings growth, by 9.4 percentage points, and a consequent reduction in value creation: The firms’ market-capitalization growth decreased by 2.5 percentage points.
There’s no shortage of articles and books that say synergies are the key to a financially successful merger, and many executives seem to take the advice to heart. Indeed, in most of the mergers we studied, cost synergies such as consolidating manufacturing sites and centralizing administrative functions did boost profitability. But these efforts didn’t by themselves lead to growth and therefore didn’t create real value.
WHY MERGERS MAY NOT ADD VALUE
Earnings growth, our data show, has a strong effect on value creation, and the effect becomes more pronounced over longer periods of time. Therefore, the postmerger firms must throw themselves into preventing or offsetting the customer attrition (often the result of diminished trust) that usually follows a merger. Managers must devote sufficient resources to retaining current customers and gaining new ones. That typically involves improving the customer experience by streamlining processes; creating consistent marketing messages on how the merger will improve offerings; minimizing changes in sales-account managers; ensuring that the formerly distinct companies present a single face to the customer; and attending to trivial-sounding but important matters like making sure the merged sales force has the correct name for each contact.
A number of companies have shown that such tactics can even help improve postmerger growth, regardless of whether synergies yield cost improvement. For instance, the merger of two large construction-equipment companies led to a decline in the operating profit margin.
Synergies can be beneficial in many ways. A lower cost structure might allow a company to shift its emphasis to a more price-sensitive market segment, for example, generating new sources of revenue. But managers should seek synergies only after focusing intently on sales and marketing, for the quest to reduce redundancies and costs could draw their attention away from markets and customers—where real value lies.
Our Merger Integration Planning Practice can assist ECBFI Clients in preparing a detailed post-merger integration plan and managing your post-merger integration teams. We leverage a proven methodology that fosters speed, leadership, direction, accountability, and results. We believe this Pack provides an excellent complement to our due diligence capabilities, allowing us to connect the pre-deal phase directly to the post-deal phase at the earliest possible stage and thereby greatly increase the likelihood that the transaction will be successful.
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