Employee layoffs after an acquisition mean that an agency has serious management issues.
A recent press release announced the restructuring of a large financial institution that resulted in 7,500 job cuts. The CEO was quoted as saying, “We will be positioning ourselves in banking and insurance business so that we can offer our clients an expert and excellent service that also provides good value.”
This piqued my curiosity and caused me to wonder if a company — or an insurance agency — can make such drastic cuts and still provide the same quality service to the same number of clients. If not, why would the stock price rise on news of a corporate layoff? It seems to me that if service doesn’t get better with a lot fewer employees, then growth will be stymied for many years; and poor growth prospects usually drive stock prices down.
For the stock price to rise, then, it would seem that the layoffs did not curb the growth rate. Maybe the reason the company can lay off so many people is because productivity has improved dramatically; but such significant productivity gains are rare in financial services and when achieved, they occur in small increments.
If an agency’s growth prospects are not injured after a merger and a huge jump in productivity wasn’t the cause, it means that the business had been employing unnecessary people. Many people believe the layoffs in such mergers result from eliminating duplicate positions — but most often, I don’t believe that’s the reason.
If the people being laid off were redundant, then profit margins should improve as revenue per employee increases. To determine if this occurs, I conducted a multiple regression analysis of financial results for the public brokers (the vast majority of whose growth has come through acquisitions) to learn if any correlation exists between their revenues per employee and profit margins. The result? There is no correlation. For publicly traded employees, higher revenues per person do not necessarily generate higher profits.
Many agencies buy other agencies (particularly small agencies) for a premium because they know that they can add their volume without adding as much expense. Although this sounds like a great strategy, it means that the buyer was running an inefficient shop with lots of excess capacity and wasting resources by employing people who didn’t have enough to do. When a buyer runs a highly efficient shop, it’s unlikely that they can achieve any synergy through acquisition. When a buyer is running at full capacity, how can any of its employees be redundant? If it buys an inefficient agency, maybe some of these employees could be laid off — but that isn’t synergy. Synergy is achieved when two or more parts are combined to produce a result that’s greater than the sum of its parts. Laying off excess people is not synergy.
Inefficiency in the buyer’s shop causes some buyers to believe they have a competitive advantage and can offer a higher price to sellers. In other words, their mismanagement creates an illusion that they can pay more than necessary for an acquisition. By absorbing their prior waste, they’re perceived as having created efficiencies. But wouldn’t it make more sense to run an efficient agency all along?
They say that “the victors write war histories,” but in business, it’s management that writes the history and as a result, the true reasons for layoffs are often blurred. When an agency lays off employees after making an acquisition, it’s often because that agency’s management made mistakes. Either they weren’t able to grow the agency adequately, they lost a lot of business, they made many poor hires, they allowed employment to grow excessively over time without recognizing it, their strategy was deficient and/or or they failed to execute it successfully.
If management doesn’t recognize their errors and hides behind a veil of acquisitions, the issues are likely to arise again and again. If, rather than putting a spin on the problem, management took responsibility for being the cause of the problem, I’m positive that most agencies would be run more effectively.