The fast pace of mergers and acquisitions of late seems to have overwhelmed a critical business practice: fixed-asset planning. The result, according to a recent study, is a sloppy bottom line and disappointing stock performance.
Wayne Shaw, an accounting professor at Southern Methodist University, examined 1,700 public companies that had experienced M&A activity between 1990 and 1994. Shaw and his colleagues measured postmerger performance through discretionary write-offs for such items as property, plant, and equipment, assuming that efficient consolidation led to enhanced earnings performance.
"What we found," says Shaw, "is that if companies that needed to consolidate operations waited too long to restructure, they wouldn't realize the synergies expected from the deal."
To Rick Douglas, executive vice president of The Staubach Co., a real estate strategy and services consultancy, the SMU study points to inadequate premerger planning. "Executives involved in these deals tend to focus on gross operating issues, not on the nuts and bolts of assessing value." But advance planning tends to improve the momentum of mergers in the long run, says Douglas.
Shaw agrees, and notes that the issue is as much psychological as strategic. If company decision-makers don't divest unnecessary assets immediately after an acquisition, they tend to develop a vested interest in the acquired company. "As time passes," he says, "the assets become yours, not the other company's, so liquidating equipment or laying off employees looks worse and is harder."