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The greater the workforce consolidation, the more attractive the economic results. With a 30-per-cent workforce reduction, economic measures such as the payback period and annual operating savings are far more prominent. Most notably, with a 30-per-cent versus a 10-per-cent staff reduction, the EBITDA margin improves by 500 basis points.
In principle, cost savings arising from workforce reduction are easy to calculate. However, acquirers often underestimate the practical challenges in capturing these savings. For instance, certain positions could easily be eliminated by the stroke of a pen, but the people in those jobs may be moved to other departments due to their continuing value to the merged entity. Consequently, head count remains largely unchanged, so the merger does not deliver the targeted cost savings.