Corporate divorce expenses matter beyond activism

June 2, 2015

By Robert Cyran and Richard Beales

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Dis-synergies aren’t just a defense against activist shareholders. Acquisitive corporate chieftains love to talk about synergies from the deals they’re planning while playing down the costs. Meanwhile, managers under pressure to split companies may overstate the negative effects. But they’re still real.

The potential benefits of combining two firms are easy to identify. Redundant offices are shut, overlapping employees fired and spare capacity used more intensively. Yet there are also downsides. Cultures clash, for example, customers leave, systems don’t fit together well or research functions don’t scale. Warren Buffett once said he had never heard the word “dis-synergies” mentioned, but had witnessed plenty after deals have closed.

Take one example: Pfizer. The company spent more than $200 billion all-in to buy Warner Lambert, Pharmacia and Wyeth between 2000 and 2009. Despite the massive cost cuts each deal delivered, Pfizer suffered as R&D productivity stalled. The company’s market capitalization in 2010 was less than $140 billion.

Dis-synergies can, however, work in a board’s favor when directors aren’t minded to follow an activist investor’s urging to carve a company up.

The $64 billion DuPont’s argument that splitting would incur costs worth more than $10 billion in present value terms helped persuade shareholders to reject activist investor Nelson Peltz’s recent attempt to gain board seats. Jamie Dimon, chief executive of JPMorgan, argued earlier this year that dissecting the mega-bank would forgo $15 billion a year of cross-selling revenue – over 15 percent of last year’s top line – and add $3 billion of operating expenses.

Executives may overdo it when they are trying to resist action. Hewlett-Packard last week revealed that its planned breakup would cost less than half the $1 billion a year it estimated a few years ago when CEO Meg Whitman rejected a slightly different split. EBay argued that spinning off PayPal would create “significant distraction and dis-synergies” until it decided, under shareholder pressure, to do just that.

Even so, there are still costs, which offset the likely benefit of splits. Companies are justified in pointing them out – but maybe the quid pro quo should be that they are more honest about the downsides of combining companies.

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