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Beware the Synergy Scalpel
6:37 AM Wednesday July 23, 2008
I love accountants. Heck, my grandfather is in the Accounting Hall of Fame (I'm not kidding, check out the Web site). But when I see an article pairing an acquisition of a company with a widely lauded culture with plans to achieve substantial cost savings, my blood runs cold.
The article in question described Roche Holding AG's $44 billion bid for full ownership of Genentech. For close to 20 years, Roche has masterfully managed a controlling economic interest in the biotech pioneer. One key to success has been allowing Genentech to follow its own course and reaping the benefits of products that would never have come out of Roche's labs.
Today, Roche hopes that tighter integration will help to spur its own development process. And, of course, it hopes to achieve substantial cost savings "by combining the two companies ' clinical research teams and sales, manufacturing, and administrative departments in the U.S."
So-called cost synergies make perfect sense--on paper. Through an accountant's eyes it appears wasteful to duplicate functions that perform the same basic task.
What's hidden however is how combining functions can destroy what's unique about a company.
You see, a company's capabilities go beyond the human beings it employs. A company's capabilities rest in its process (how it goes about doing its work), its priorities (the mechanisms by which it allocates resources), and the underlying, often unstated assumptions on which the business rests. It's hard to quantify these things, but they are real, and can be unintentionally destroyed in the name of cost savings.
Everyone agrees that one reason Genentech is special is its culture. Perhaps Genentech and Roche have been working together long enough that Roche can wield the synergy scalpel surgically enough to maintain Genentech's unique culture as it combines processes. If not, Roche's move is going to end up being a dud.
If you find yourself in a situation where a strategic decision rests on quantified cost savings, at least ask whether you are destroying anything to achieve the savings. Just because you can't quantify something doesn't mean that it isn't important.
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Scott Anthony
Scott D. Anthony is the president of Innosight, an innovation consulting and investing company with offices in Massachusetts, Singapore, and India. He has consulted to Fortune 500 and start-up companies in a wide range of industries. During 2005–2006 he spearheaded a yearlong project to help the newspaper industry grapple with industry transformation (Newspaper Next).
Anthony is the lead author on The Innovator’s Guide to Growth: Putting Disruptive Innovation to Work (Harvard Business School Press, 2008). He previously coauthored (with Harvard professor Clayton Christensen) Seeing What’s Next: Using the Theories of Innovation to Predict Industry Change (Harvard Business School Press, 2004).
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Comments
Excellent perspective and dead on. How can we find out more about this idea to build a case for our executives so they can have this new perpsective on their decisions. Any research to cite, case studies, texts, articles, etc.?
- Posted by Eric Johnson Wildbear
August 5, 2008 2:02 PM
Scott,
This summer I interned at Brilliont, a consulting and advisory firm which specializes in cost optimization, organic growth and innovation. One of my projects was an extensive M&A Mega-deals Analysis (we defined a mega-deal to be one in which the target was worth over $10 billion). As suspected, a year after the announcement date the majority of the deals resulted in value destruction and on average the deals consistently resulted in negative returns. We explored further and took a look at practical and strategic characteristics of the deals that might help explain the poor performance, such as price bidding, how integration was handled, cost synergies, macro-economic factors, timing, etc. As you've noted, we found that buyers and targets often grossly overestimated cost savings, underestimated merger expenses, and didn't consider the full range of integration issues they might run into (technological, managerial, cultural, etc). Even the few deals that outperformed the market often did so because of economic factors beyond their control, and we found it was often better "to be lucky than good". If you are interested, more detailed findings from the analysis will be released on the Brilliont website soon. Thanks for a great post!
Juhi Heda
www.brilliont.com
Brilliont
- Posted by Juhi Heda
August 17, 2008 3:35 PM
Scott,
This summer I interned at Brilliont, a consulting and advisory firm which specializes in cost optimization, organic growth and innovation. One of my projects was an extensive M&A Mega-deals Analysis (we defined a mega-deal to be one in which the target was worth over $10 billion). As suspected, a year after the announcement date the majority of the deals resulted in value destruction and on average the deals consistently resulted in negative returns. We explored further and took a look at practical and strategic characteristics of the deals that might help explain the poor performance, such as price bidding, how integration was handled, cost synergies, macro-economic factors, timing, etc. As you've noted, we found that buyers and targets often grossly overestimated cost savings, underestimated merger expenses, and didn't consider the full range of integration issues they might run into (technological, managerial, cultural, etc). Even the few deals that outperformed the market often did so because of economic factors beyond their control, and we found it was often better "to be lucky than good". If you are interested, more detailed findings from the analysis will be released on the Brilliont website soon. Thanks for a great post!
Juhi Heda
www.brilliont.com
Brilliont
- Posted by Juhi Heda
August 17, 2008 3:36 PM