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Synergy: Overused, Underrealized
G
ood things will come to those who wait. Patience is a virtue. Two heads are better than one. It seems that corporate executives, investors, and stock analysts may believe in one of these three statements. Although companies repeatedly profess the value of synergy—namely, the ability of two entities together to achieve an effect greater than the sum of them acting individually—few seem to have the patience to see any longterm results. Synergy is often cited as a key driver of mergers and acquisitions and part of an overriding strategy for business and technology management. But because the short-term effects tend to be asset rationalization and reductions in employment, synergy has become synonymous with cost-cutting. Anticipated synergy results are seldom quoted as increases in business and estimates for growth but are more often quoted as lump-sum reductions in expenses. Synergy sounds so good on the surface. It has overtones of energy, dynamism, growth, and innovation. True, there probably will be economies of scale, increased competitive strength, and redundancies in mergers and acquisitions. However, industry consultants say that the extensive use of mergers and acquisitions has not significantly improved industry structure, competitive dynamics, or long-term financial performance and that cost-cutting is a necessity just to stay in business. Statements about synergy have been overused for many years and come into play during industry transitions. For example, synergy has been evaluated when diversified companies were created, when they were split apart, and when other business mixes were tried. In the recent past, the idea has been used to justify combinations of basic chemicals and specialties, chemicals and pharmaceuticals, chemicals and agriculture, and agriculture and pharmaceuticals. Life science companies were expected to put the real synergy theory to the test. First, their management decided that traditional chemicals had no synergy with agriculture and
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drugs. So Monsanto jettisoned them; ICI did the same to form Zeneca, which later merged with drug producer Astra in April 1999; and Sandoz and Ciba-Geigy shed chemicals to merge and create Novartis. Hoechst and Rhone-Poulenc followed suit before joining to become Aventis. Synergies were, however, to come from the melding of agriculture, pharmaceuticals, and nutrition, in large part through bridging technologies such as genetic engineering, combinatorial chemistry, and high-throughput screening. Life science efforts were to be united by their focus on lowvolume, noncyclical, highmargin products derived from a low asset base
and high R&D investment Similar R&D strategies, resources, knowledge, and competencies were going to drive these businesses—together. In early 1996, when Novartis was announced, then-Ciba Chairman and Chief Executive Officer Alex Krauer said: "To combine two strong and successful companies into an even stronger and more successful new entity represents a fascinating vision. I consider this bold move as the futureoriented response to the challenges in global markets." Just three years later, Novartis and AstraZeneca want to combine their agrobusinesses and spin off the combination. Ironically, the separate company is to be called Syngenta (presumably a melding of synergy and genetics). Novartis now says: 'The benefits of concentrating on the health care businesses outweigh the modest synergies between health care and agribusiness activities." Other drug producers—Pharmacia (formed by the Pharmacia & Upjohn and Monsanto merger), American Home Products, and Abbott Laborato-
ries—are selling all or part of their agribusiness operations to focus on drugs and nutrition as well. Dow Chemical, DuPont, and Aventis are exceptions to these trends, still believing in the potential of fundamental, not just cost-cutting, synergies. Admittedly, Dow did get rid of pharmaceuticals in 1995, seeing no synergy with its chemical operations. But now it envisions connections between agriculture, biotechnology, and chemicals as exemplified by its polylactic acid investment (C&EN, Jan. 17, page 13). Likewise, DuPont has been beefing up its chemical, drug, and agriculture operations simultaneously. Calling itself a knowledge-intensive science company, DuPont believes that "in many ways, the strongest and most proven driver in sustainable growth is integrated science." Charles O. (Chad) Holliday Jr., DuPont's chairman and CEO, tells shareholders, "Historically, we have created value by integrating multiple scientific disciplines to develop unique technology platforms." He adds that the company is "retooling our traditional growth engine by adding modern biology to great chemistry... to [create] a step-change potential." And Aventis still has both crop science and drug operations, but company Chairman Jiirgen Dormann keeps hedging his bets. "For the time being, the life sciences concept is well-suited to our current situation," he told shareholders in March. "On the one hand, we are able to create value by integrating Aventis and exploiting possible synergies. On the other hand, we are in no way restricted in our capacity to pursue other sensible options. "In the life sciences, technology holds the key to the future and is changing our industry faster than ever before. We expect that the very dynamic developments under way right now in biotechnology and genetic engineering will eventually lead to entire ly new business opportunities at the interfaces between the health and agriculture sectors," Dormann continued. With patience that is uncharacteristic of current industry players, he added, "They will, however, take some time to materialize." Ann Thayer
