There can be a few factors behind consolidation. For example, massive economies of scale. Or … well, I’m afraid this is a bit delicate, but I can’t let it go unmentioned: Industries consolidate to reduce the number of players in the market, giving the remaining players more pricing power. Antitrust regulators tend to put on their big frowny face if companies cite the latter reason, so the public statements made by companies in consolidating industries tend to focus on more superficially attractive reasons like cost savings and “broader industry reach,” or more ethereally vague words like “synergies.”
True to form, Anthem is claiming that nearly $2 billion in synergy savings will be realized by the merged entities. This is probably true, to some extent. But you should keep in mind that mergers are themselves extremely costly. And I don’t just mean the fabulous fees that investment bankers and consultants collect to facilitate them. Joining two entities into one is really difficult: Corporate cultures clash, turf wars damage morale and profits, IT systems never do work right together, key employees leave, customers are alienated. So in general, these sorts of statements should be taken, not just with a grain of salt, but while sitting next to a salt lick with a big bag of Mr. Salty Pretzels and some cocktail peanuts to wash the whole thing down.
Megan McArdle, “No Wonder Insurers Want to Merge”, Bloomberg View, 2015-07-24.
April 6, 2017
QotD: The “real” “synergies” of corporate mergers
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