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| Darren Topp, chief executive of the British retailer BHS. Yui Mok/Press Association, via Associated Press |
For companies, failure and expansion could not be more different. For employees, they can feel the same. That uncomfortable truth ought to play more of a role in calculations over whether doing deals makes sense.
On the one hand, the collapse of British retailer BHS, with the potential loss of 11,000 jobs, has set off a witch hunt. On the other, the energy giants Shell and BG Group have merged, and expect to generate $4.5 billion of annual savings as a result. The cost is that 12,500 jobs worldwide get the chop. Here, investors have pushed the stock up. That’s rational. Fewer staff means more profit to go around.
The numbers tell the story. Breakingviews analyzed public filings for all the $30 billion-plus megadeals completed from 2002 to 2012 that involved American or British nonfinancial companies. Five years later, 14 of the 17 merged companies had fewer employees. On average, head count fell 15 percent. But 15 had higher revenue per employee, while 11 had higher operating profit per worker.
In other words, mergers work — insofar as their goal is to make human and financial capital work harder and generate higher returns. To an investor or economist, comparing Shell and BHS may thus seem ludicrous. Mergers are often economically beneficial. More profit per person should make the country richer.
But that connection is hard to see for those who are out of a job. The political-financial debate even in pro-market Britain is dominated by anxiety over the labor market, including the investigations into working conditions at the retailer Sports Direct and the uproar over plans to close Tata Steel’s pensions-burdened steel plant in South Wales.
None of this invalidates the case for cost savings and mergers that create them. If countries have flexible markets, workers can be reabsorbed. If they do not, profit-motivated layoffs can be a spur for change. But the increasing anxiety over protecting workers cannot be brushed off.
At the least, it may increase the discount investors apply to merger savings, on the basis that politics makes them hard to deliver. In some cases, deals that once would have looked appealing may not happen at all.
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