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Sin and synergy

8 June 2016 By John Foley

For companies, failure and expansion couldn’t be more different. For employees, they can feel the same. That uncomfortable truth ought to play more of a role in future calculations over whether doing deals makes sense.

On the one hand, the collapse of British retailer BHS, with the potential loss of 11,000 jobs, has triggered a witch hunt. Meanwhile, energy giants Shell and BG Group have merged, and expect to generate $4.5 billion of annual savings, or synergies, as a result. The cost is that 12,500 jobs worldwide get the chop. Here, investors have pushed the stock up. That’s rational: fewer staff means more profit to go around.

The numbers tell the story. Breakingviews analysed public filings for all the $30 billion-plus megadeals completed between 2002 and 2012 that involved U.S. or UK non-financial companies. Five years later, 14 of the 17 merged companies had fewer employees. On average, headcount fell 15 percent. But 15 had higher revenue per employee, while 11 had higher operating profit per worker.

In other words, mergers work – insofar as their goal is to make human and financial capital work harder, and generate higher returns. To an investor or economist, comparing Shell and BHS may thus seem ludicrous. Mergers are often economically beneficial. More profit per person should make the country richer.

But that connection is hard to see for those who are out of a job. The political-financial debate even in pro-market Britain is dominated by anxiety over the labour market, from the investigations into working conditions at retailer Sports Direct to the uproar over plans to close Tata Steel’s pensions-burdened steel plant in South Wales.

None of this invalidates the case for cost savings and mergers that create them. If countries have flexible markets, workers can be reabsorbed. If they don’t, profit-motivated layoffs can be a spur for reforms. But the increasing anxiety over protecting workers can’t be brushed off.

At the very least, it may increase the discount investors apply to merger synergies, on the basis that politics makes them hard to deliver. In some cases, deals that once would have looked appealing may not happen at all.


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