DEFINITION of 'General And Administrative Leverage'

General and administrative leverage is the potential reduction in overall general and administrative expenses that would result from a merger, through synergies and cost-saving programs.

BREAKING DOWN 'General And Administrative Leverage'

One of the main justifications for mergers is to take advantage of synergies and economies of scale. Synergies occur when companies with similar businesses eliminate duplicate resources like branch and regional offices. So cutting general and administrative expenses would appear to be an easy way for mergers to add shareholder value — at least on paper.

Integrating operations is much more difficult in practice than in theory. It is easy to lose valuable members of staff after an acquisition, unless special care is made to maintain morale. That is why mergers seldom lead to big cuts in head-office jobs — though this was a feature of 1980s mergers.

Acquiring Companies Underperform the Market

In reality, mergers have extremely high failure rates – and have historically destroyed shareholder value more often than not. Instead of cutting costs, they sometimes increase them, due to clashes in corporate culture. A study of firms in the U.S. Russell 3000 Index, by Standard & Poor's Global Market Intelligence, has shown that acquirers’ shares underperformed the market, and industry rivals, between 2001 and 2017. Instead of massive cost savings and increased profits, net profit margins and returns on capital and equity fell.

Because new laws have made hostile takeovers difficult, unless the managers of the target firm put themselves into play, managers in friendly takeovers frequently stay in place these days. This means that potential synergies and economies of scale have to be even bigger to justify them.

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