Two Can Live Cheaper Than One.

AuthorTHURMAN, PAUL W.

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...

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