Cost Reductions: A Common Synergy in Aquisitions Synergy in acquisitions takes many forms, real and imagined. A common type of synergy, and perhaps the most real and easily quantifiable, are the savings that will result from cost reductions. In public deals in the chemical industry, cost savings synergies are frequently mentioned in press releases. Rohm & Haas/Morton - $200 million……….Hercules/BetzDearborn - $125 million………Witco/Crompton & Knowles - $60 million. And while the illustration above takes a somewhat morbid view of this subject, there can be and very often are positive repercussions for employees. In the article that follows, we will discuss this subject in more detail. Cost-Reduction Synergies Cost-reduction synergies in acquisitions take several forms. Job eliminations, plant consolidations and cutting raw material costs are common ways such synergies are achieved. In three recent transactions in the chemical industry, we see how these types of savings can significantly improve the operating income of the combined entity after the deal is completed. Hercules/BetzDearborn – As a result of its acquisition of BetzDearborn last year, Hercules became a company with sales in the $3.4 billion range. At the time of the acquisition, the companies said that they would achieve over $100 million in cost savings, a number which was subsequently increased to $125 million. On sales of $3.4 billion, these savings would amount to an increase in margins of over 3.5% of sales. Not an insignificant improvement. How will this be accomplished? Consolidation of manufacturing sites and staff cuts are two of the cost reduction actions cited. Rohm & Haas/Morton – This acquisition by Rohm & Haas will make it a $6.5 billion specialty chemicals company, one of the world’s largest. Rohm & Haas has said that it will achieve cost savings as a result of the acquisition in the range of $200 million. If achieved, this will amount to an increase in operating margins somewhere in the range of 3% of sales. Again, not an insignificant improvement. How will Rohm & Haas get there? Staff reductions, reductions in raw material costs and savings in freight costs. Witco/Crompton & Knowles – This recent deal will create an entity with combined sales of $3.2 billion. Factor in $60 million of cost savings that the companies say they will achieve and the result would be an improvement in operating margins of almost 2% of sales. On top of a pre-acquisition blended margin of around 15%, this additional 2% will be significant. C&K Witco will get there in the familiar fashion: job cuts, raw material cost reductions and manufacturing efficiencies. Job cuts……..often have a silver lining The layoffs and job eliminations that frequently are associated with acquisitions and cost reduction "synergies" inevitably do have a negative and disrupting effect on the lives of employees involved. There are however many positive ramifications for employees of companies that are involved in the transaction: Severance packages offered to employees have become quite generous and often include sweetened pensions and outplacement. Instead of facing termination, many employees will be eligible for promotions that arise out of the combination of functions and departments, or the termination of others. Employees with stock options frequently see a healthy increase in value as a result of a merger. "Please…..sever me" is not an uncommon feeling among many employees who desire to leave the company and opt for the severance package offered. Even among those who want to stay but are terminated nevertheless, there are many cases when such employees, a year or so later, are happy with the way things turned out.