Avoid Cost Synergies That Rob the Future for Today

Imagine this scenario… you’re running a media company, seeing nice growth, audience is happy, and revenue is up. You happen upon another media company—perhaps a direct competitor or in a tangentially related topic—and decide that you want to own it. So, you sit down, run the numbers, and determine what you should pay for it.

This, ultimately, becomes a discussion about potential synergies. And in most M&A, there are three main types of synergies:

• Revenue: The belief that by merging two companies, revenue will be greater than if left alone. This is a classic 1+1=3 scenario.
• Cost: The belief that by merging two companies, there will be inherent cost savings found. In other words, are there redundancies that exist when the two firms merge?
• Financial: The belief that by merging two companies, the finances of the business will be stronger, such as tax benefits, increased debt capacity, better funding, etc.

For most M&A discussion that I have been part of, much of the time is spent focused on the first two: revenue and cost.

I find that revenue synergies are the most straightforward. For example, if we look at the Dotdash Meredith deal, this unlocked a lot of additional scale that Dotdash needed to continue growing. And so, by acquiring the Meredith brands, I suspect it has been able to acquire larger budget than if either company remained on its own.

Another possible scenario is where you’ve identified a new audience that could be well monetized with your current advertisers, thus winning more wallet share. However, you don’t currently have said audience and determine that the amount of investment and time to get to the necessary scale is less than what you’d spend on a prospective acquisition.

Or maybe the addition of that new coverage area allows for nice cross promotion for your current audience. For example, if you have a large, highly engaged newsletter and buy another newsletter in a topic you know your audience would enjoy, you’d be able to monetize that one user twice. And that doesn’t take into consideration the audience the acquired newsletter might have for your core product.

In all three cases, there’s a belief that monetization will be stronger because of the acquisition than if the two companies stayed independent.

It’s with cost synergies that things can get particularly interesting and potentially dangerous. In these synergies, you’re exploring ways to cut costs. For example, if your company has operating expenses of $10 million a year and you then acquire a company with OpEx of $5 million. The simple math says that if you can end the integration with a combined OpEx under $15 million (the combined numbers), you’ll immediately boost profits.

But it’s important to be careful here. Not all cost synergies are created equal. To better articulate that, it helps to think about a media company like a barbell—for those that don’t lift weights, that’s a long pole that has a weighted plate on each end of the pole. Imagine one of those plates has the word “Editorial” on it and the other one has the word “Sales.” Those two sides are the most important part of a media company. One is creating the content that the audience wants and the other is monetizing said audience.

As you move toward the center of the barbell, you find additional departments of varying importance to the creation of content or revenue generation. On the editorial side, you might have teams tied to production or audience development. On the sales side, you might have account ops, ad ops, or other various teams. In the center, you have teams that are truly back office: finance, HR, product/engineering, etc. All of these teams are important, but they are increasingly farther from the core exercises of creating content or monetizing content.

When assessing cost synergies, it is important to ignore the two sides of the barbell to start. If you’re acquiring a media company believing that the additional audience is worthwhile, why would you cut the team that creates the content for said audience? Remember, in a media company, the editorial team is the asset. We don’t want to cut assets if we can avoid it. Equally, cutting the sales team only makes it harder to retain the revenue that you’ve acquired.

And so, we have to start looking in the center to find those synergies. If one company has an HR team of four people for 200 employees and the other has two people for 100 employees, do you need six people for 300? Could five suffice? The same question can be asked regarding accounting, finance, operations, etc. It is important to understand capacity of the employees on the teams to determine where people might be able to pick up slack.

You want to look at each and every department that is not editorial or sales. Does the merging of ad ops need to keep everyone? What about creative? Marketing? The list goes on.

Product and engineering can be a big one, especially if you also merge technology stacks versus supporting two. Back in 2020, I wrote about Dotdash’s acquisition strategy (this was before it merged with Meredith and changed its company name).

The next step is to have a similar technology stack. According to a reader who used to work at Dotdash, the migration to Dotdash’s tech stack and CMS can take anywhere from 3-6 months.

But once that happens, the site is completely templatized. This allows Dotdash to spread the cost of doing new work across multiple sites. If a new template is created for one site, that same template could, theoretically, be used on other sites.

That means you don’t need an engineering team to support different systems. It’s a hassle in the beginning, but being able to roll out technology updates across additional publications doesn’t necessitate additional people.

But, look… I’ve obviously been talking a lot about cost synergies tied to people. What about the cost synergies found elsewhere?

Let’s imagine one media company uses Sailthru as its email service provider and another uses Omeda. If those two merged, would they still need two ESPs? It’s unlikely. And by moving over to a single contract, the cost for each send could likely be negotiated down.

The same is true for every single piece of software in the ecosystem. Marketing automation, CDPs, ESPs, web hosting, ERP, HR software… each and every one of these can theoretically be combined to reduce the company’s total spend. Now, it’s not easy, because you effectively have to rip plumbing out and then lay new pipes. But that’s why Dotdash takes the 3-6 months to migrate (and in some cases, even longer). Because once it’s done, things are cleaner and cheaper.

I believe that every one of these departments and vendors should be analyzed and potentially reduced before touching editorial and sales. Once you start cutting edit, you’re effectively choosing today over the future. You want more cash today versus a longer-living asset. This is Alden Global Capital’s strategy with all of the local newspapers its acquired. By firing journalists today, it knows the asset will die, but there’s a delta between the short-term profit and the long-term death. In other words, you can make cuts today and death will take time. That arbitrage is monetizable.

This is why so many legacy b2b media companies are so average. They consistently cut editorial to maximize profits today to the point where they’ll have a publication with a single editor/reporter. I’ve seen some scenarios where one editor oversees three publications. How can that individual create good enough content to acquire and engage an audience? And yet they print money because there is no competition elsewhere, often because they bought it all up.

My ultimate point here is that there are certainly cost savings; however, if your goal is to acquire an asset to continue growing it, avoid cutting from the sides. Focus on the center and be intentional about it. It is very easy for businesses to allow costs to linger even when they’re unnecessary. By doing this and ignoring the sides, it’ll ensure that, over the long-term, the revenue synergies we discussed above really do become 1+1=3.

Thanks for reading today’s AMO. I really appreciate you being an AMO Pro member. If you have thoughts about today’s piece, hit reply or join the AMO Slack. I look forward to seeing you there. Have a wonderful weekend and see you next week.