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June,  2007
Volume III   Issue 6

"First Grade Math"
by Jack Miller

Have you seen the TV show, “Are You Smarter Than a Fifth Grader”?

Contestants have to answer questions from grades one through five in
subjects like math, animal science, and world geography. It’s fun to see
smart, well educated adults struggle with some of the questions, and it's
even more amusing, with the wit of host Jeff Foxworthy added to the mix.
Fortunately for the contestants, they’re allowed to cheat and copy from the
fifth graders.

So let’s try a little first grade math.

Just two questions:

How much is 2 plus 2?
How much is 1 plus 1?

The first question actually refers to an old joke in which the CFO of a major
corporation is interviewing accounting candidates. He asks, “How much is 2
plus 2?”  The first candidate answers “four” and is dismissed. The second
candidate, sensing that this is a trick question, hesitates, but finally answers
“four”, and is also dismissed. The third candidate, however, thinks a
moment, and says, “How much do you want it to be?”

So now that you understand that these questions are not quite so simple,   
we’ll move on to the second question, which is actually a bit harder.
Sometimes, one plus one equals two, but some times it’s less than two. The
trick is to make it be more than two. I’m referring, of course, to synergy, an
often used and often abused term when it comes to mergers and

There’s been a lot of consolidation in many industries, including the paper
industry which I’m quite familiar with. Hundreds of millions in synergies
have been reported – billions if you add it all up. According to one
investment analyst, if the companies had all realized all these synergies, the
industry would be quite profitable today, but in fact, the industry continues
to struggle.

What went wrong?

Sometimes one plus one equals less than two.

When two merging companies have overlapping products and customers, it
can be difficult or impossible to hold on to all the business. Customers of
both merging companies may not want to be so dependent on what is now
one supplier. Or, customers of one of the merging companies may not
prefer to do business with the other. In addition, some of the synergy comes
from simplifying and rationalizing product lines, but this, too, can result in
reduced volume.  All of these things can result in negative synergies. And,
too, IT integration costs are enormous. These negative synergies are not
publicized like the positive synergies are, and the net may not be so positive.

But, sometimes one plus one equals more than two.

Often, synergies occur from cost reduction due to rationalization of
redundant assets, including facilities and people. But real synergies come
when one plus one equals more than two. If two companies merge, and
have complementary product and service offerings, with little overlap, there
can be real opportunities:  company A’s products  find new opportunities
with the customers of company B, and  vice versa. Soon the sales of the
combined company are greater than the combined sales of the two
companies pre-merger. One plus one equals more than two.

Need help with this “first grade math”? Call  Jack Miller at 203 925 0326 or

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Copyright 2007, Jack Miller

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