Cover Story: Mergers & Aquisitions

Two Can Live Cheaper than One
By Paul W. Thurman

After an M&A, expense management can help you to increase shareholder value and manage higher costs.

In 1999, there was over $1.4 trillion in transaction volume from domestic M&A deals, vs. $356 billion in 1995, according to Mergerstat. And, surpassing the predictions of many analysts, merger and acquisition activity continues to expand after a decade of unprecedented growth, creating significant challenges and opportunities for corporate expense management.

Immediately following a merger, companies experience tremendous pressure to increase earnings performance. At the same time, their indirect costs, or selling, general and administrative (SG&A) expenses, often grow enormously through simple consolidation of these cost baselines.

For financial executives, the challenge then is to design a comprehensive plan that will consistently reduce bloated expenses - in turn helping to boost your company's earnings. What's more, if you're a financial executive at a public company, a good expense-management strategy can help you prove increased shareholder value. If executed properly, this strategy can reduce post-merger SG&A significantly enough to measurably improve net income and earnings per share.

Pop the Balloon
It's not easy to reduce indirect expenses quickly and rationally. But - as with many other things - there's a right way and a wrong way.

The wrong way is to focus only on cutting costs, for instance in corporate travel and entertainment (T&E) budgets, or purchasing outlays for office supplies and temporary labor. Blind cost cuts may work in a pre-merger environment, when indirect expense levels grow somewhat predictably from year to year. But on its own, this strategy won't work for long when two companies wed - and indirect expenses suddenly balloon.

Furthermore, even if there are quick-hit reductions, you still need an ongoing strategy addressing other areas of expense management that have been changed by a merger or acquisition - for instance, internal expense policies, processes and procedures.

What you need is a management program that comprehensively reduces expenses through a variety of focused, coordinated solutions. For example, in the area of corporate purchasing, an integrated expense-management strategy should offer solutions for more creative negotiations with suppliers to reduce, let's say, the price of staplers. But beyond that, it should also contain solutions - including technology - to reengineer administrative processes to cut the total cost of processing each purchasing transaction. In addition, performance assessment tools will enable you to gauge and prove savings resulting from the program. They'll also help you monitor how employees across varied cultures are embracing changes.

Also, unlike quick-hit cost cuts, an integrated expense-management plan puts the right solutions in place to keep producing savings year after year - even as expense volume rises after a merger. Thus, the goal shifts from expense reduction to cost management. Your new strategy should address these post-merger business imperatives:

• Increase earnings performance (for example, strengthen leverage with suppliers to garner more and deeper discounts);
• Create and demonstrate synergies with people, processes and information while maintaining and even improving service (for example, redesign expense report processing for increased efficiencies)
• Integrate disparate information systems (put e-commerce technology to work to reduce travel or industrial supply prices as well as their related administrative/transaction costs)
• Manage and alleviate internal confusion and conflict caused by changing culture and roles (develop incentives to encourage change among employees)
• Create tools that assess performance and demonstrate sustained improvement (for example, survey travelers to track acceptance of new expense management techniques; survey purchasing managers to gauge how you've affected industrial supply prices).

With assessment tools in place to keep abreast of the savings your expense- management program is producing, you can monitor the company's return on investment in this new strategy. If you're a CFO, controller or other financial executive at a publicly held company, you'll be able to trace how improved management of expense baselines has positively affected net income - and, thus, shareholder value.

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