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It’s another huge Merger Monday as multibillion-dollar deals have been announced in the oil and communications businesses.
General Electric announced a deal to combine its oil and gas business with Baker Hughes, an oil field services firm, while CenturyLink said it will acquire Level 3 Communications in a deal with a total transaction value of $34 billion.
In both of the deals, it appears that cost-cutting will be the order of the day.
As part of both deals, the companies emphasized one word in their press releases that should get employees at the combining firms nervous: synergies.
Baker Hughes and GE used the word in announcing the reasons behind their combination:
“The combination produces substantial synergies through combined efficiency and growth. The companies expect to generate total runrate synergies of $1.6 billion by 2020, which has a net present value of $14 billion. While this is primarily driven by cost out, we believe that the new company is positioned for growth as the industry rebounds.”
Level 3 and CenturyLink also used it:
“Both companies have a proven ability to integrate and meet or exceed synergy targets. The increased scale afforded by the combined company is expected to generate $975 million of annual run-rate cash synergies, primarily from the elimination of duplicative functions, systems consolidation, and increased operational and capital efficiencies.”
Synergies are typically areas that the companies, or their investment banking advisers, have identified as redundancies within the combined company that can be eliminated to save the firm money.
Put another way, people will probably be laid off.
While synergies can also mean cutting redundancies in things like software and machinery, a large chunk of the savings typically comes from reduced employee headcounts.
If the newly combined company has two teams doing the same job, it can decide to cut one. This saves the firm money, but also means that people find themselves out of work.
In fact, in a presentation detailing the news, GE said that around $400 million of its synergies would come from “SG&A consolidation,” in which the firm said it would “right-size the back office, eliminate duplication.”
As we’ve pointed out, these synergies often aren’t what they’re cracked up to be and don’t help earnings after mergers. Many of these cost-cutting measures may never come to fruition.
That may come as little relief, however, for employees of the combining companies.