Estimating Operating Improvements  603 research and development reductions were estimated at 33 percent, as the two companies consolidated new-product development, paring down the number of expected offerings. This reduction also had a follow-on effect in manufac- turing, as product designs would move toward a common platform, lower- ing overall manufacturing costs. Finally, while sales and distribution expenses could be lowered, management decided to preserve the combined company’s marketing budget. Estimating Revenue Improvements Although it is tempting to assume that revenues for the newly combined com- pany will equal stand-alone sales plus new cross-selling, the reality is often quite different. First, the merger often disrupts existing customer relation- ships, leading to a loss of business. Also, smart competitors use mergers as a prime opportunity to recruit star salespeople and product specialists. Some customers may have used the acquirer and target as dual sources, so they will move part of their business to another company to maintain a minimum of two suppliers. Finally, customers who decide to stay during the merger will not be shy in asking for price and other concessions that salespeople will be eager to offer, for fear of losing the business. Make sure to develop estimates of pricing power and market share that are consistent with market growth and competitive reality. As in the process for estimating cost savings, calibrate the pro forma assumptions against the realities of the marketplace. One global financial company estimated that an acquisition would net €1 billion in sales improvements within the next five years, including double-digit profit growth in the first year. However, overall market growth was limited, so the only way to achieve these sales goals was to lower prices. Actual profit growth was a mere 2 percent. When estimating revenue improvements, be explicit about where any growth in revenues beyond base case assessments is expected to originate. Revenue improvements will typically come from one or more of four sources: 1. Increasing each product’s peak sales level 2. Reaching the increased peak sales faster 3. Extending each product’s life 4. Adding new products (or features) that could not have been developed if the two companies had remained independent Alternatively, revenue increases could come from higher prices, achiev- able because the acquisition reduces competition. However, antitrust regula- tions are in place precisely to prevent companies from using this lever, which would transfer value from customers to shareholders. Instead, any increase in price must be directly attributable to an increase in value to the customer and not to reduced choice. 604  Mergers and Acquisitions We also suggest you project revenue improvements in absolute amounts per year or as a percentage of stand-alone revenues, rather than as an increase in the revenue growth rate. With the growth rate approach, you can easily overestimate the true impact of revenue improvements. Implementation Costs, Requirements, and Timing Although performance improvements often result from doing more with less, making a change or combining systems always involves some costs. Some are obvious, such as the costs to decommission a plant and the severance that must be paid to employees being let go. Others are more subtle, such as rebranding campaigns when the name of the target is changed, integration costs for different information technology (IT) systems, and the retraining of employees. But these costs, often forgotten, must also be identified and esti- mated. It is not unusual for total implementation costs to be equivalent to a full year of cost savings or more. Bear in mind that acquirers often make overly optimistic assumptions about how long it will take to capture improvements. Reality intervenes in many ways: ensuring stable supplies to customers while closing a plant can be more complicated than the acquirer expects, disparate customer lists from multiple sources can be tricky to integrate, and examining thousands of line items in the purchasing database almost always takes more hours than esti- mated, just to name a few possibilities. Moreover, timing problems can affect whether the improvements are cap- tured at all. Our experience suggests that improvements not captured within the first full budget year after consolidation may never be captured, as the drive to capture them is overtaken by subsequent events. Persistent manage- ment attention matters. Neglecting the “use by” date of certain savings can be equally problem- atic. Many potential savings do not stay on the table forever. For example, one source of cost savings is eliminating cyclical excess capacity in a grow- ing industry. But in these circumstances, the excess capacity will eventually be eliminated through natural growth. Thus, reducing capacity can achieve incremental savings only if the reduction comes during the expected duration of any capacity overhang. How to Pay: With Cash or Stock? Should the acquiring company pay in cash or in shares? Research shows that, on average, an acquirer’s stock returns surrounding the acquisition announce- ment are higher when the acquirer offers cash than when it offers shares. We hesitate, however, to draw a conclusion based solely on aggregate statistics; after all, even companies that offer cash can pay too much.