Monday morning started off with a bang, as both Marriott and Sherwin Williams announced multi-billion dollar mergers with Starwood Hotels and Valspar respectively.
Assuming regulators allow the deals to go through, these companies are poised to be global hotel and paint giants.
But but companies don’t buy each other just to increase their footprints. They do it to increase value for shareholders.
One way managers do this is by cutting costs through “synergies.” That word should make every Marriott, Starwood, Sherwin Williams, and Valspar employee a little nervous.
In the press release announcing the acquisition, Sherwin Williams CEO John Morikis said (emphasis ours):
“Sherwin-Williams has a long track record of successfully integrating acquisitions. We are highly confident in the industrial logic of the transaction and, once closed, our ability to achieve $280 million of estimated annual synergies in the areas of sourcing, SG&A and process and efficiency savings within two years and our long-term annual synergy target of $320 million.”
Meanwhile, Marriott’s takeover of Starwood is actually its second attempt, as it was outbid by a Chinese insurance company last week, before increasing its bid on Monday. In the new statement, the company amended its original synergy plan (emphasis again ours):
“As a result of extensive due diligence and joint integration planning, Marriott is confident it can achieve $250 million in annual cost synergies within two years after closing, up from $200 million estimated in November 2015 when announcing the original merger agreement.”
What are these “synergies”?
Synergy is what you get when you eliminate redundancies to cut costs. It usually means the closing and combining of stores, warehouses, and offices: If the two pre-merger companies each had their own warehouse in a city, the post-merger company might only need one of those warehouses, and can save money by shutting down the other.
The reason synergies should scare employees is that these closures often come with job cuts.
Here’s a very rough, back of the envelope calculation that should be taken with a grain of salt illustrating the effect synergies could have on employees at these two companies. Assuming half of those potential synergies — $125 million at the hotel companies and $160 million at the paint companies — come from reduced headcount and each worker costs the company $75,000, we could see more than 1,600 employees being let go at the hotel chains and 2,130 at the paint companies.
The companies haven’t announced or quantified any reductions in headcount just yet. But those announcements are probably coming.
Business Insider Emails & Alerts
Site highlights each day to your inbox.