Chasing synergies in a downturn

One of the arguments for mergers and acquisitions (M&A) is the synergies that come from sharing value chain activities (economies of scope). Coupled with better parenting, this should see M&As produce cost savings and efficiencies. It can all fall apart, however, if you paid too much for the acquisition, or the costs of funding the purchase leap considerably.

This Economist piece highlights the dramas facing six of the world’s largest materials and mining firms (Xstrata, ArcelorMittal, Tata Steel, Rio Tinto, Lafarge and Cemex) as they try to bed down some very significant M&As from past year or so.

As the article notes, with debt refinancing a whole lot harder to get, and share prices tumbling, these firms are finding life a hell of lot more difficult than they were. It certainly demonstrates the dangers of buying at (or near) the top of the boom, and reminds us again that firms too regularly overestimate the ease of realising such synergies. One hopes that these experienced multinationals have also accurately assessed the complexities of chasing such syenergies across borders.

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2 Responses to “Chasing synergies in a downturn”

  1. Tom Osegowitsch Says:

    This highlights that the success of strategies — or particular aspects such as M&A integration skills and the realisation of particular synergies — are very much tied to a place and time. Just a few short months ago Lakshmi Mittal was lauded for his integration and synergy skills and his company seemed to reap some enormous benefits from recent tie-ups. (see http://www.economist.com/people/displaystory.cfm?story_id=10688840)

    But it appears all of those gains are (easily) being negated by exploding funding costs (and severe drop offs in demand). Even more so than the possibility of “overpaying” by acquiring near the top of the cycle, the recent and unfolding crisis is showing up some of the many unforseen (and indeed unforseeable) costs associated with synergy initiatives.

  2. Stephen Says:

    Appreciate the help! Love the site!

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