Chapter 6

Integration: Mergers, Acquisitions, and Business Alliances

Answers to End of Chapter Discussion Questions

6.1 Why is the integration phase of the acquisition process considered so

important?

Answer: If done correctly, the integration process can help to mitigate the loss
of key talent or managers and the potential deterioration in employee morale
and productivity. The potential loss of ‘‘human capital’’ is perhaps one of the
greatest risks associated with mergers and acquisitions (M&As). Although key
talent and managers do not represent the only value in most acquisitions, it is
widely recognized as among the most important.

6.2 Why should acquired companies be integrated quickly? What are the risks to
rapid integration?

Answer:
a. Why should acquired firms be integrated quickly? Integration
should be done quickly to minimize key employee turnover,
achieve expected productivity improvements, and to realize
cost savings. These factors accelerate the realization of cash
flows thereby contributing to the ability of the acquiring firm to
recover any premium paid for the target firm.
b. What are the risks to rapid integration? Rapid integration should
not be undertaken without adequate forethought. The
acquiring firm should have identified the highest priority actions
that must be taken that would result in the greatest and most
rapid realization of cash flow from expected synergy. There are
at least four risks associated with integration that is too rapid or
poorly executed. First, rapid integration may result in the
acquiring firm not undertaking what should have been the
highest priority projects first. Second, employee cuts may be
too deep or broad based or in the wrong areas. Third, declining
worker morale due to inadequate communication and excessive
job reduction may reduce productivity. Fourth, any deterioration
in customer service or product quality due to declining
employee morale/productivity could result in an increase in
customer turnover and a severe reduction in short-term
revenue.

6.3 Why is candid and continuous communication so important during the

integration phase?

Answer: Any merger or acquisition creates substantial anxiety among

employees, customers, and suppliers of the target firm and in some instances
among those of the acquiring firm. Target firm employees are immediately
concerned about job security, pay, and benefits. Customers are concerned
about product quality and on-time delivery. Suppliers are worried about the
potential for their elimination when the two firms are combined. During the
early stages of the integration, competitors attempting to lure away the target
firm’s key employees and most lucrative customers exacerbate their fears.
Honest and continuous communication is the best way to minimize
 stakeholder anxieties. All communications should be carefully tailored to allay
the fears of each constituent group.

6.4 What are the messages that might be communicated to the various
stakeholders of the new firm?

Answer: Questions about job security, pay, and benefits must be addressed
early in the integration. Job security concerns are best addressed by
communicating to the extent possible the plans for the combined businesses
and that the new firm will increase the likelihood of new jobs being created
due to accelerating growth. Any reduction in base pay or benefits should be
offset by an increase in incentive pay that could result in employees earning
more than before. The loss of benefits that are a significant cost to the firm
may be offset by offering employees a choice of benefits, which may satisfy
their specific needs while lowering the overall cost of the total benefits
package to the new firm. Customers must be assured that the target firm’s
previous commitments will be honored. Suppliers need to understand that the
combined firms will offer higher growth potential and the prospect for
increased purchases from suppliers. Suppliers may also be induced to offer
discounts in exchange for an increasing share of the potentially higher volume
of purchases by the new firm. Shareholders need to understand how the
combined firms will increase earnings growth and future dividend payments.

6.5 What are examples of difficult decisions that should be made early in the
integration process?

Answer: Tough decisions that should be made early in the integration process
include the organizational structure, reporting relationships, spans of control,
people selection, roles and responsibilities, and workforce reductions.

6.6 When Daimler Benz acquired Chrysler Corporation in 1998, it announced that
it could take 6 to 8
years to fully integrate the combined firm’s global manufacturing operations
and certain functions
such as purchasing. Why do you believe it might take that long?

Answer: Changing manufacturing operations requires changing union work rules, which are set
by contract. Such rules could only be re-negotiated when current contracts covering the plants
expire. Before any significant changes could be made, Daimler-Chrysler would have to
inventory/catalogue equipment and procedures by plant, benchmark performance, identify best
practices, and convince workers at the plant level to change their methods. Purchasing represented
both a significant opportunity and major challenge for Daimler-Chrysler. Spending on purchased
materials for automotive companies represents a major portion of their total cost of production.
Therefore, opportunities to buy in bulk offer substantial cost savings. However, integrating
purchasing, which is often dispersed across various countries or even plants, could only be done as
contracts with existing vendors expire.

6.7 In your judgment, are acquirers more likely to under-or-overestimate anticipated cost savings?
Explain your answer.

Answer: Acquirers are more prone to overestimate the amount of synergies and under-
estimate the time and money required to realize synergies. This conclusion is suggested by the
studies that show that buyers often tend to overpay for acquisitions. This overpayment is often
justified by overstating synergies, possibly reflecting over-optimism or hubris.
6.8 Cite examples of expenses you believe are commonly incurred in integrating target companies.

Answer: Common integration-related expenses include the following: severance, retraining, lease
buyouts, facility closing costs, merging IT centers, inventory and receivables write-downs,
implementing maintenance expenses deferred by the seller, new equipment purchases, employee
relocation expenses, advertising and signage expenses, and public relations expenditures.

6.9 A common justification for mergers of competitors is the potential for cross-
selling opportunities it would provide. Comment on the challenges that might
be involved in making such a marketing strategy work.

Answer: Cross-selling is a conceptually simple strategy, but it is often ferociously difficult to

implement. Marketing and sales people tend to sell that with which they are most comfortable.
Consequently, even if they are provided with a new array of products to offer their customers, they
may be very slow in doing so because it is simply easier to continue to sell what they have been
selling. Furthermore, sales people must be trained in how to sell the new products. This takes
both time and money. Finally, new incentive systems may be required to induce the sales forces of
each firm to sell aggressively the other firm’s products.

6.10 Why did Citibank and Travelers resort to a co-CEO arrangement when they
merged in 1998? What are the advantages and disadvantages of such an
arrangement?

Answer: The Citibank/Travelers transaction was billed as a merger of equals,

i.e., one in which neither party is believed to provide a disproportionate share
of anticipated synergy. The co-CEO arrangement was necessary to get
support from the Citibank management team. The advantages are that they
encourage cooperation from top management of the target firm in completing
the transaction. However, during the post-closing period, the disadvantages
become evident due to the need to generate consensus within the office of
the CEO for important decisions. Moreover, the lack of clearly delineated
authority exhausted management time and attention without resolving major
integration issues.

Solutions Chapter Case Study Questions

Men’s Wearhouse and Jos. A. Bank Stumble During Postmerger Integration

Discussion Questions:

1. How does the size of the premium paid for Jos. A. Bank affect the pace and extent of postmerger
integration?

Answer: The faster an acquirer can earn back the premium paid to target shareholders the greater the
likelihood that it can earn its cost of capital. Men’s Wearhouse paid a 56% premium for Jos. A. Bank,
valuing the firm’s equity value at $1.8 billion. The dollar value of the premium paid is $1,008 million
($1,800 – (1 -.56) x $1,800)). Failure to earn back the premium quickly will add to the amount of cash
the firm must generate to recover both the premium plus the cost of capital on that portion of the
remaining premium, that is, what could have been earned had the cash tied up in the premium been
invested elsewhere at the firm’s cost of capital. Consequently, the larger the premium the greater the
pressure on the acquirer’s management to accelerate the pace and extent of postmerger integration in
order to realize the synergies required to recover the premium and earn the firm’s cost of capital.

2. How did private equity investments in both firms affect the size of the premium paid for Jos. A. Bank?
Were the Private equity firms simply interested in getting a deal since it boosted the value of their
investment? Explain your answer.
 Answer: Private equity investors Eminence Capital and Golden Gate Capital stood to gain only if a
Jos. A. Bank were sold to Men’s Wearhouse. Consequently, they pressured aggressively Men’s
Wearhouse board and management to raise the offer price to the level necessary to get Jos. A. Bank
shareholders to push their board and management to accept the deal. Consequently, the influence of
these activist investors helped boost the premium paid to excessive levels that required Men’s
Wearhouse to become highly leveraged to finance the transaction. The excessive premium paid for the
Jos. A. Bank made it difficult for Men’s Wearhouse to earn its cost of capital, and the need to meet
substantial interest and principal repayments reduced the cash available for reinvestment in the
business to remodel stores, fund severance expense and lease buyouts, and make other investments
required to expedite the postmerger integration.

3. What key external and internal factors affected postmerger integration?

Answer: External factors impacting the integration process include the long-term decline in purchases
of men’s suits and the failure of consumer spending to fully recover from the 2008-2009 recession.
Internal factors included management’s inability to recognize earlier the extent to which Jos. A. Bank
customers were addicted to the overly generous sales and their unwillingness to accept less
discounting. Also, Eminence Capital in part drove Men’s Wearhouse to pay an excessive premium for
the business making it inordinately difficult to earn its cost of capital on the investment.

4. How does a hostile takeover impact the likelihood of a successful integration?

Answer: Generally, friendly takeovers in which the target’s management and board agree to the
proposed takeover terms provide for a smoother and more efficient postmerger integration. Why?
Because managers at both the acquirer and target firms are willing to cooperate in planning postmerger
integration before closing making it possible that the highest payoff or priority projects would be
undertaken in a timely fashion. Moreover, target managers, as insiders, who were slated to stay with
the combined firms as well as those on retention bonuses would more readily communicate more
candidly their beliefs in what needed to be done. Moreover, communication with employees and
suppliers often would be more effective if made by target firm managers with whom they were
familiar.

5. What is the key premise(s) underlying Men’s Wearhouse’s belief that the two firms can be successfully
integrated? Was each premise correct? Be specific.

Answer: Men’s Wearhouse management believed from the outset that Jos. A. Bank customers could be
“reeducated” to accept less discounting and higher average selling prices. In addition, management
assumed little migration of Jos. A. Bank customers to Men’s Wearhouse. The first premise was clearly
problematic as Jos. A. Bank customers left in droves. It is less clear how many of such customers
would go to Men’s Wearhouse which had a history of offering smaller discounts.

6. What is the fatal flaw in the integration effort?

Answer: After more than two years of losing customers at Jos. A. Bank, Men’s Wearhouse
management continued to stay the course with respect to their strategy of weaning customers away
from toxic discounting. They did not seem to have a contingency plan other than perhaps divesting or
spinning off the unit.

7. George Zimmer, the founder of Men’s Wearhouse, argued that the integration was too fast. Why would
his argument to slow the integration make sense only if the premium paid had been smaller?

Answer: Larger premiums require more rapid integration if the acquirer is to achieve their cost of
capital. Slowing the integration effort may have foreclosed the ability to earn the cost of capital given
the 56% premium paid for Jos. A. Bank.
 Examination Questions and Answers

True/False Questions: Answer True or False to the following questions.

1. The integration process if done effectively can help to mitigate the potential loss of employees.
True or False
Answer: True

2. Integration is among the most important factors contributing to the success or failure of mergers
and acquisitions. True or False
Answer: True

3. Rapid integration helps to realize the planned synergies and may contribute to a higher present
value for the merger or acquisition. True or False
Answer: True

4. High employee turnover is rarely a problem during the integration of the target firm into the
acquirer. True or False
Answer: False

5. High employee defection during the integration period is an excellent way to realize cost savings?
True or False
Answer: False

6. Employees or so-called “human capital” are often the most valuable asset of the target firm. True
or False
Answer: True

7. Employees of both the target and acquiring firms are likely to resist change following a takeover.
True or False
Answer: True

8. Differences in the way the management of the acquiring and target firms make decisions, the pace
of decision-making, and perceived values are common examples of cultural differences between
the two firms. True or False
Answer: True

9. Focus on customers is generally considered a factor critical to the ultimate success or failure of the
merger or acquisition. True or False
Answer: True

10. Revenue growth is often sacrificed in an effort to engage in aggressive cost cutting during the
integration period. True or False
Answer: True

11. Divulging the true intentions of the acquiring firm to the target firm’s employees should be
deferred until it can be determined that such employees can be trusted. True or False
Answer: False

12. Communication plans should be developed for all stakeholder groups except for suppliers, because
they generally have a lower priority in the integration process. True or False
Answer: False

13. Developing staffing plans involves identifying staffing requirements and developing a
compensation strategy, among other things. True or False
Answer: True
14. Co-locating employees from the acquiring and target firms is rarely a good idea early in the
integration period because of the inevitable mistrust that will arise. True or False
Answer: False

15. So-called contract related transition issues often involve how the new employees will be paid and
what benefits they should receive. True or False
Answer: True

16. Employee health care or disability claims tend to escalate just before a transaction closes, thereby
adding to the total cost of the transaction. Who will pay such claims should be determined in the
agreement of purchase and sale. True or False
Answer: True

17. In hostile takeovers, the employees that are on the post-merger integration team should come from
the acquiring firm because of concerns that the target firm’s employees cannot be trusted.
True or False
Answer: False

18. The management integration team’s primary responsibilities should be monitoring the daily
operations of the work-teams assigned to complete specific tasks during the integration.
True or False
Answer: False

19. The management integration team’s primary responsibilities should be to focus on achieving long-
term profit goals, monitoring actual performance to the goals of the integration plan, and on cost
management. True or False
Answer: True

20. An acquiring firm that focuses heavily on integrating a target firm, which represents a sizeable
portion of its total operations, frequently sees deterioration in its own current operating
performance. True or False
Answer: True

21. It is generally more important to respond to current issues as they arise in your communication
plans even if it results in the appearance of a somewhat inconsistent theme throughout
communications made to stakeholders. True or False
Answer: False

22. Key stakeholders in the integration effort generally include employees, customers, suppliers,
communities, and regulators. True or False
Answer: True

23. A newly merged company will often experience at least a 5-10% loss of current customers during
the integration effort. True or False
Answer: True

24. Following an acquisition, long-term contracts with suppliers can generally be broken without
redress. True or False
Answer: False

25. In building a new organization for the combined firms, it is important to start with a clean sheet of
paper and ignore the organizational structures that existed prior to the merger or acquisition.
True or False
Answer: False
26. Highly decentralized organizational structures generally expedite the integration effort more so
than highly centralized structures. True or False
Answer: False

27. The extent to which compensation plans for the acquiring and acquired firms are integrated
depends on whether the two companies are going to be managed separately or fully integrated.
True or False
Answer: True

28. Benchmarking important functions such as the acquirer’s and the target’s manufacturing and
information technology operations and processes is a useful starting point for determining how to
integrate these activities. True or False
Answer: True

29. When two companies with very different cultures merge, the new firm inevitably adopts one of the
two cultures that existed prior to the merger. True or False
Answer: False

30. Sharing common goals, standards, services, and space can be a highly effective and practical way
to integrate disparate corporate cultures. True or False
Answer: True.

31. It is crucial to focus on the highest leverage issues in implementing post-merger integration. True
of False
Answer: True

32. A merger agreement should specify how the seller should be reimbursed for products shipped or
services provided by the seller before closing but not paid for by the customer until after closing.
True or False
Answer: True

33. Pre-closing integration planning is likely to be easier in friendly than in hostile transactions. True
or False
Answer: True

34. Customers of newly acquired firms are usually slow to switch to other suppliers even if product
quality deteriorates due to inertia. True or False
Answer: False

35. Decentralized management control usually facilitates the integration of a newly acquired business.
True or False
Answer: False

36. Merging compensation systems can be one of the most challenging activities of the integration
process. True or False
Answer: True

37. Benchmarking important functions such as the acquirer’s and the target’s manufacturing and IT
operations and processes is a useful starting point for determining how to integrate these activities.
True or False
Answer: True

38. Plant consolidation rarely requires the adoption of a common set of systems and standards for all
manufacturing activities. True or False
Answer: False
39. The extent to which the sales forces of the two firms are combined depends on their relative size,
the nature of their products and markets, and their geographic location. True or False
Answer: True

40. Enabling the customer to see a consistent image in advertising and promotional campaigns is often
the greatest challenge facing the integration of the marketing function. True or False
Answer: True

41. The speed with which two firms are merged is an important factor determining the long-term
success of the merger. True or False
Answer: True

42. Whenever possible, integration planning should begin before closing. True or False
Answer: True

43. Newly merged firms frequently experience a loss of existing customers as a direct consequence of
the merger. True or False
Answer: True

44. Integration planning involves addressing human resource, customer, and supplier issues that
overlap the change of ownership. True or False
Answer: True

45. Integration of a new business into an existing one rarely affects current operations of either
business. True or False
Answer: False

46. When news about the integration is bad, it is critical never to share it with employees. True or
False
Answer: False

47. The newly integrated firm must be able to communicate a compelling vision to investors. True or
False
Answer: True

48. An effective starting point in setting up a structure is to learn from the past and to recognize that
the needs of the business drive structure and not the other way around. True or False
Answer: True

49. Staffing plans should be postponed to relatively late in the integration process. True or False
Answer: False

50. The extent to which compensation plans are integrated depends on whether the two companies are
going to be managed separated or integrated. True or False
Answer: True

Multiple Choice Questions: Circle only one of the alternatives.

1. Rapid integration is usually important for all of the following reasons except for
a. Minimizes employee turnover
b. Improves the morale and productivity of current employees of both the acquiring and
acquired firms
c. Builds confidence in current employees in the competence of management
d. Dispenses with the need for pre-integration planning
e. Reduces customer turnover
Answer: D
2. All of the following are often cited as factors critical to the ultimate success of the integration
effort except for
a. Plan carefully, act quickly
b. The use of project management techniques
c. Early communication from the top of the organization
d. Salary and benefit reductions for many employees of the acquired company in order to
realize cost savings
e. Making the tough decisions as early as possible
Answer: D

3. Certain post integration issues are best addressed prior to the closing. These include all of the
following except for
a. Who will pay for employee severance expenses
b. How will employee payroll be managed during ownership transition
c. What will be done with checks from customers that the seller continues to receive after
closing
d. How will the seller be reimbursed for monies owed to suppliers for products sold prior to
closing
e. Who will pay for health care and disability claims that often arise just before a business is
sold?
Answer: D

4. Which of the following is not true about the primary responsibilities of the management
integration team (MIT)?
a. The MIT should direct the daily operations of the individual work teams set up to
implement certain activities.
b. Focus the organization on meeting ongoing business commitments and operational
performance targets
c. The creation of an early warning system to determine when performance targets are likely
to be missed.
d. Establish a rigorous communication program
e. Establishing a master schedule of what should be done by whom and by what date.
Answer: A

5. Which of the following is generally not true about communication during the integration period?
a. Communication should be as frequent as possible
b. Employees should be sheltered from bad news
c. The CEO of the combined firms should lead the effort to communicate to employees at
all levels
d. Regularly scheduled employee meetings are often the best way to communicate progress
to plan
e. The reasons for changing work practices and compensation must be thoroughly explained
to employees
Answer: B

6, Customer attrition following an acquisition is commonly related to uncertainty about

a. On time product delivery
b. Product quality
c. Pricing and payment terms
d. A and B only
e. A, B, and C
Answer: E

7. All of the following are generally considered stakeholders in the integration process except for
a. Suppliers
 b. Employees
c. Competitors
d. Regulators
e. Customers
Answer: C

8. All of the following are generally true about creating new organizations except for
a. Learn from prior organizational strengths and weaknesses
b. Business needs should drive structure and not the reverse
c. Centralized organizations facilitate the pace of the integration
d. The structure employed during the integration must be the one used in the long-run
e. Senior managers should be given responsibility for selecting their own subordinates
Answer: D

9. Developing staffing plans requires which of the following?

a. Identifying personnel requirements
b. Determining the availability of skilled employees to fill these requirements
c. Developing compensation plans
d. A and B only
e. A, B, and C
Answer: E

10. All of the following are true about the challenges of integrating firms with different corporate
cultures except for
a. Cultural issues can run the gamut from dress codes to compensation
b. The acquired firm’s overarching culture is generally rapidly accepted by the target firm’s
employees
c. Small companies are usually highly unstructured and informal
d. There are often differences in culture even between firms in the same industry
e. Integration may be inappropriate if acquirer and acquired firm’s cultures are extremely
different.
Answer: B

11. Which of the following represent commonly used techniques for integrating corporate cultures?
a. Employees are encouraged to share the same overall goals
b. “Best practices” in one department are employed in other departments
c. Multiple businesses share the same service such as the legal department
d. Employees are co-located
e. All of the above
Answer: E

12. Which of the following is not true about integrating business alliances?
a. Teamwork is the underpinning that makes alliances work.
b. Control is best exerted through coordination
c. Decisions are made at the top of the organization
d. Decisions are based on the premise that all participants to the alliance have had an
opportunity to express their opinions.
e. The failure of one party to meet commitments will erode trust
Answer: C

13. Successfully integrated mergers and acquisitions are frequently those which
a. Communicate candidly and continuously
b. Appoint an integration manager and team with clearly defined goals and responsibilities
c. Establish well defined lines of authority
d. Focus on issues that have the greatest near-term impact
e. All of the above
 Answer: E

14. Post-closing integration may be viewed in terms of a process consisting of the following activities
a. Integration planning
b. Developing communication plans
c. Creating a new organization
d. Developing staffing plans
e. All of the above
Answer: E

15. The acquirer’s sales force sells very complex software solutions to its customers. The target firm
manufactures commodity hardware products. Customers of the two firms sometimes buy both
products. The benefits of integrating the sales force of both the acquirer and target firms includes
all of the following except for
a. Generates significant cost savings by eliminating duplicate sales representatives
b. Eliminates related sales support expenses
c. Minimizes potential customer confusion by enabling customers to deal with a single sales
representative
d. Facilitates communication of a consistent brand image
e. Makes product cross-selling more effective
Answer: E

16. The post-closing integration process consists of all of the following activities except for

a. Integration planning
b. Developing communication plans
c. Creating a new organization
d. Developing staffing plans
e. Identifying the acquisition vehicle
Answer: E

17. Which of the following activities are likely to extend beyond what is normally considered the
conclusion of the post-closing integration period?

a. Developing communication plans

b. Cultural integration
c. Integration planning
d. Developing staffing plans
e. None of the above
Answer: B

18. Delay in integrating the acquired business contributes to which of the following?

a. Employee anxiety
b. Customer attrition
c. Supplier anxiety
d. Deteriorating employee productivity
e. All of the above
Answer: E

19. Successfully integrated M&As are those that demonstrate leadership by candidly and continuously
communicating which of the following?

a. A clear vision
b. A set of values
c. Unambiguous priorities for each employee
 d. A & B only
e. A, B, & C
Answer: E

20. Which of the following represent important decisions that must be made early in the integration
process?

a. Identifying the appropriate organizational structure

b. Defining key reporting relationships
c. Selecting the right managers
d. Identifying and communicating key roles and responsibilities
e. All of the above
Answer: E

21. Poorly executed integration often results in high employee turnover. The costs of such turnover
include which of the following?

a. Declining morale among those that remain

b. Retraining costs
c. Declining productivity
d. Deteriorating customer service
e. All of the above
Answer: E

22. Which of the following factors affect customer attrition that normally accompanies post-merger
integration?

a. Customer uncertainty about on-time delivery

b. More aggressive pricing from competitors
c. Deteriorating customer services
d. Deteriorating product quality
e. All of the above
Answer: E

23. Which of the following is not true about the recommendation that integration should occur
rapidly?

a. All significant operations of the two firms must be integrated immediately.

b. Rapid integration helps to minimize customer attritition.
c. Rapid integration reduces unwanted employee turnover.
d. Rapid integration reduces employee anxiety.
e. None of the above
Answer: A

24. Key management integration team responsibilities include all of the following except for

a. Building a master schedule of activities that need to be accomplished

b. Establishing work teams
c. Tracking the daily operation of the firms
d. Monitoring and expediting key decisions
e. Establishing a rigorous communications program
Answer: C

25. When corporate cultures are substantially different, it may be appropriate to

a. Integrate the businesses as rapidly as possible

 b. Leave the businesses separate indefinitely
c. Initially leave the businesses separate but integrate at a later time
d. A or B
e. B or C
Answer: E

Case Study Short Essay Examination Questions

Has Proctor & Gamble Fully Recovered from Its 2005 Acquisition of Gillette?

Case Study Objectives: To illustrate

 The challenges in realizing revenue and cost-related synergies even when firms appear to be
substantially similar
 The potential long-term debilitating impact on corporate performance of a lengthy or incomplete
integration of a large acquisition.

Billed by pundits as a dream deal, the potential seemed limitless as Procter & Gamble Company (P&G)
announced that it had completed its purchase of Gillette Company (Gillette) in late 2005. The synergies
seemed obvious. The merger appeared poised to create the greatest consumer products company in history.

P&G’s chairman and CEO, A.G. Lafley, predicted that the acquisition of Gillette would add one percentage
point to the firm’s annual revenue growth rate and cost savings would exceed $1 billion annually, while
Gillette’s chairman and CEO, Jim Kilts, opined that the successful integration of the two best companies in
consumer products would be studied in business schools for years to come. Given the belief that the two
firms appeared culturally compatible and that both revenue and cost synergies could be realized in a
reasonable time period, P&G’s board of directors and management anticipated that the financial
performance of the combined firms would accelerate following postclosing integration.

Nine years later, things have not turned out as expected. While cost savings targets were achieved,
operating margins faltered. Gillette’s businesses, such as its pricey razors, were buffeted by the 2008–2009
recession and have been a drag on P&G’s top line. Most of Gillette’s top managers have left. P&G’s stock
price at the end of 2014 stood about 30% above its level on the acquisition announcement date, about one-
half the share price appreciation of such competitors as Unilever and Colgate-Palmolive Company during
the same period.

After retiring in 2009, Lafley was brought out of retirement in to replace Robert McDonald when he
retired in mid-2013 as Chairman and CEO, some say to restore investor confidence in the business. Under
McDonald’s direction, P&G was focused on cutting expenses and attempting to reinvigorate its product
development efforts.

But the firm’s lagging financial performance during this period annoyed investors. Bill Ackman, CEO of
Pershing Square Capital Management, with a $2.2 billion stake in the firm, railed against the firm’s poor
financial showing asking publicly if the firm had ever “fully integrated its 2005 purchase of Gillette.”
Moreover, despite a history of new product innovation such as Pampers, Febreze, and Swifter cleaners, the
years since the acquisition have been largely bereft of blockbuster new products, the firm’s hallmark.
Ackman openly criticized the firm’s inadequate financial returns and bloated organizational overhead.

While much has happened in the years since 2005, looking back at the past can be instructive. The great
fanfare that surrounded the announcement that the two firms would be combined may have been an
indication of the excessive confidence of those closest to the merger.
 The euphoria was palpable on January 28, 2005, when P&G enthusiastically announced that it had
reached an agreement to buy Gillette in a share-for-share exchange valued at $55.6 billion. The combined
firms would retain the P&G name and have annual 2005 revenue of more than $60 billion. Half of the new
firm’s product portfolio would consist of personal care, healthcare, and beauty products, with the remainder
consisting of razors and blades and batteries.

P&G had long been viewed as a premier marketing and product innovator of products targeted largely to
women. Consequently, P&G assumed that its R&D and marketing skills in developing and promoting
women’s personal care products could be used to enhance and promote Gillette’s women’s razors. In
contrast, Gillette’s marketing strengths centered on developing and promoting products targeted at men.
Gillette was best known for its ability to sell an inexpensive product (e.g., razors) and hook customers to a
lifetime of refills (e.g., razor blades). Although Gillette was the number 1 and number 2 supplier in the
lucrative toothbrush and men’s deodorant markets, respectively, it was less successful in improving the
profitability of its Duracell battery brand. It had been beset by intense price competition from Energizer and
Rayovac Corp., which generally sell for less than Duracell batteries.

Suppliers such as P&G and Gillette had been under considerable pressure from the continuing
consolidation in the retail industry due to the ongoing growth of Wal-Mart and industry mergers at that
time, such as Sears with Kmart. About 17% of P&G’s $51 billion in 2005 revenues and 13% of Gillette’s
$9 billion annual revenue came from sales to Wal-Mart. The new company, P&G believed, would have
more negotiating leverage with retailers for shelf space and in determining selling prices as well as with its
own suppliers such as advertisers and media companies.

The broad geographic presence of P&G was expected to facilitate the marketing of such products as
razors and batteries in huge developing markets, such as China and India. Cumulative cost cutting was
expected to reach $16 billion, including layoffs of about 4% of the new company’s workforce of 140,000.
Such cost reductions were to be realized by integrating Gillette’s deodorant products into P&G’s structure
as quickly as possible. Other Gillette product lines, such as the razor and battery businesses, were to remain
intact.

P&G’s corporate culture was often described as conservative, with a “promote-from-within” philosophy.
P&G also had a reputation for being resistant to ideas that were not generated within the company. While
Gillette’s CEO was to become vice chairman of the new company, the role of other senior Gillette
managers was less clear in view of the perception that P&G is laden with highly talented top management.
Gillette managers were perceived as more disciplined and aggressive cost cutters than their P&G
counterparts.

With this as a backdrop, what worked and what didn’t? The biggest successes appear to have been the
integration of the two firms’ enormously complex supply chains, cost reduction, and achieving general
acceptance of a uniform corporate culture; the biggest failures may be the inability to retain most senior
Gillette managers and to realize revenue growth projections made at the time the deal was announced. The
failure to achieve more aggressive revenue growth may explain the lackluster performance of P&G’s share
price.

Supply chains describe the activities required to get the manufactured product to the store shelf from the
time the orders are placed until the firm collects payment. Together the firms had supply chains stretching
across 180 countries. Merging the two supply chains was a high priority from the outset because senior
management believed that it could contribute, if done properly, $1 billion in cost savings annually and an
additional $750 million in annual revenue. Each firm had been analyzing the strengths and weaknesses of
each other’s supply chain operations for years in an attempt to benchmark industry “best practices.” The
monumental challenge was to determine how to handle the addition to P&G’s supply chain of 100,000
Gillette customers, 50,000 stock-keeping units (SKUs), and $9 billion in revenue. The two firms also
needed to develop a single order entry system for both firms’ SKUs as well as an integrated distribution
system to eliminate redundancies to achieve substantial efficiencies. P&G wanted to complete this process
quickly and seamlessly to avoid disrupting its customers’ businesses.

The integration process began with the assembly of teams of experienced senior managers from both
P&G and Gillette. Reporting directly to the P&G CEO, one senior manager from each firm was appointed
as coleaders of the project. The world was divided into seven regions, and coleaders from both firms were
selected to manage the regional integration. Throughout the process, more than 1,000 full-time employees
from the existing staffs of both firms worked from late 2005 to completion in late 2007.

Implementation was done in phases. Latin America was selected first because the integration challenges
there were similar to those in other regions and the countries were small. This presented a relatively low-
risk learning opportunity. In just 6 months after receiving government approval to complete the transaction,
the integration of supply chains in five countries in Latin America was completed. In 2006, P&G merged
the two supply chains in North America, China, half of Western Europe, and several smaller countries in
Eastern Europe. The remaining Western and Eastern European countries were converted in early 2007.
Supply chain integration in Japan and the rest of Asia were completed by the end of 2007.

Creating a common IT platform for data communication also was critical to integrating the supply
chains. As part of the regional projects, Gillette’s production and distribution data were transferred to
P&G’s SAP software system, thereby creating a single IT platform worldwide for all order shipping,
billing, and distribution center operations.

While some of the activities were broad in scope, others were very narrow. The addition of 50,000
Gillette SKUs to P&G’s IT system required the creation of a common, consistent, and accurate dataset such
that products made in the United States could be exported successfully to another country. An example of a
more specific task involved changing the identification codes printed on the cartons of all Gillette products
to reflect the new ownership.

Manufacturing was less of a concern, since the two firms’ product lines did not overlap; however, their
distribution and warehousing centers did. As a result of the acquisition, P&G owned more than 500
distribution centers and warehouses worldwide. P&G sought to reduce that number by 50% while retaining
the best in the right locations to meet local customer requirements.

Integrating corporate cultures, once considered highly compatible, turned out to be a challenge. It was
not that the two firms had deeply rooted differences in terms of mission and values. Rather, it was the more
mundane things. Each firm had a significantly different way of communicating and decision making.
Gillette managers were inclined to communicate by sending memos, while P&G executives preferred to
meet face to face to reach consensus. Moreover, Gillette managers were inclined to make decisions rapidly,
while P&G decisions often were made only after lengthy deliberations.

While these differences were eventually resolved, it did require substantial time and expense. For
example, in 2009, Gillette completed a $50 million renovation of its headquarters in Boston and forced its
senior executives to move from their well-appointed offices at another location into the new “open layout
campus” similar to the P&G Cincinnati headquarters. Under this open layout concept intended to optimize
communication, not even senior executives have doors on their offices. The new office complex in Boston
has copious amounts of open or common space and world-class conferencing facilities to promote more
face-to-face communication as a means of bringing the two corporate cultures together.
 While the supply chain integration and its attendant cost reduction appear to have reaped significant
rewards and there appears to be a better melding of the two firms corporate cultures, revenue growth fell
short of expectations. This has been true of most of P&G’s acquisitions historically. However, in time,
revenue growth in line with earlier expectations may be realized. Sales of Olay and Pantene products did
not take off until years after their acquisition as part of P&G’s takeover of Richardson-Vicks in 1985.
Pantene’s revenue did not grow substantially until the early 1990s and Olay’s revenues did not grow until
the early 2000s.

The Gillette acquisition illustrates the difficulty in evaluating the success or failure of mergers and
acquisitions for acquiring company shareholders. Assessing the true impact of the Gillette acquisition
remains elusive. Though the acquisition represented a substantial expansion of P&G’s product offering and
geographic presence, the ability to isolate the specific impact of a single event (i.e., an acquisition)
becomes clouded by the introduction of other major and often-uncontrollable events (e.g., the 2008–2009
recession) and their lingering effects.

While revenue and margin improvement have been below expectations, Gillette has bolstered P&G’s
competitive position in the fast-growing Brazilian and Indian markets, thereby boosting the firm’s longer
term growth potential, and has strengthened its operations in Europe and the United States. Thus, in this
ever-changing world, it will become increasingly difficult with each passing year to identify the portion of
revenue growth and margin improvement attributable to the Gillette acquisition and that due to other
factors.

Case Study Discussion Questions

1. Why is it often considered critical to integrate the target business quickly? Be specific.
Answer: The acquirer’s ability to earn the premium paid for a target is heavily dependent of the
amount and timing of incremental cash flows due to cost and revenue related synergies since those
received early contribute more to firm value. Moreover, a protracted integration is likely to create
angst among employees, with the best ones prone to leave. Customer attrition may escalate as
uncertainty about the potential disruption to their businesses grows and competitors are able to
encourage them to change suppliers through improved credit terms and the promise of more
reliable on-time delivery.
2. Given the complexity of these two businesses, do you believe the acquisition of Gillette by P&G
made sense? Explain your answer.
Answer: Potentially, the acquisition of a competitor is more likely to be successful than of an
unrelated firm because of the potential for substantial synergies due to overlapping overhead,
duplicate facilities, and mutual understanding of their respective businesses. In this instance, both
firms understood how their respective supply chains worked since they had been benchmarking
each other’s operations for years looking to learn from a well-respected competitor.
3. Why did P&G rely heavily on personnel in both companies to implement post-closing integration?
Answer: The ultimate success of any acquisition ultimately depends on the quality of management
and employees. Both P&G and Gillette had important strengths. P&G was known as a marketing
and product innovator. Gillette had a widely recognized skill in brand management and in
generating recurring revenue from its products, e.g., to sell razors at cost and make money on
selling replacement razor blades. However, the two firm’s cultures were different with P&G
known largely as a “promote from within” operation and one subject to hubris in that it thought it
could readily apply its vaunted marketing skills to different products. Senior P&G managers
understood that, if they were to get the best of both firms’ cultures and to execute integration
 quickly and effectively, they would have to encourage employees from each firm to work together
and to develop trust and respect for their respective talents.
4. Why do you believe P&G was unable to retain most of Gillette’s top managers following the
acquisition?
Answer: P&G dwarfed Gillette in terms of revenue. In these situations, it often is difficult for
employees of a much larger acquirer not to feel more competent than those of the target firm and
to communicate a sense of superiority. It is possible that P&G’s top managers believed that their
creative and marketing talents exceeded those of their counterparts at Gillette. Rather than being
willing to learn from each other, egos may have clashed. Moreover, P&G had a “promote from
within” culture that may have been hard to change resulting in Gillette managers feeling that their
career options were limited in remaining with P&G.
5. Researchers routinely employ abnormal financial returns around the announcement date of a
merger or margin improvement subsequent to closing as ways for determining the success (or
failure) of a takeover. What other factors do you believe should be considered in making this
determination? Be specific.

Answer: Abnormal financial returns reflect investor expectations at a moment in time about a
specific takeover. Generally, investors will not have detailed access to the acquirer’s business
strategy and the likelihood of realizing synergies anticipated at the time of the takeover, as well as
the potential for identifying additional synergy during postclosing integration. By not viewing
takeovers in the context of the acquirer’s business strategy, the size of the announcement date
returns may be understated.

Google was heavily criticized as having overpaid in 2006 when it acquired YouTube for $1.65
billion. Google’s business strategy was to increase usage of its search engine and websites to
attract advertising revenue. Today, YouTube is widely recognized as the most active site featuring
videos on the internet and has attracted substantial additional web activity for its parent. Viewed
independently from the Google business strategy, YouTube may not exhibit attractive financial
returns, but as part of a larger strategy, it appears to have been wildly successful. Moreover,
announcement date financial returns may not adequately incorporate the potential beneficial
impact of defensive acquisitions. Facebook’s $19 billion acquisition in 2014 of WhatsApp with its
$20 million in annual revenue was in part justified because it kept this rapidly growing mobile
messaging business out of the hands of Google.

With respect to postclosing operating improvements, the number of factors that could impact
financial performance increases dramatically with the passage of time. Attempting to attribute
underperformance of the total firm to one, albeit large, merger is problematic and highly
conjectural.

The Challenges of Airline Integration

Key Points
 Postmerger integration often is a highly complex and lengthy process.
 The deal’s success often is determined by how smoothly postmerger integration occurs.
 Successful integration often is characterized by detailed preintegration planning and cross-
functional integration teams consisting of managers from both the acquirer and target firms.
 Prolonged integration tends to increase the cultural divide between the acquirer and target’s
employee groups.

More than a decade of ongoing airline consolidation in the United States culminated with the merger of
American Airlines and US Airways in late 2013. The new company will be named American Airlines. The
merger enabled American after more than 2 years under the protection of the US bankruptcy court to
emerge from bankruptcy as the largest global carrier on November 12, 2013. The merger might have taken
place sooner had it not been for a lawsuit filed by the US Justice Department alleging that the combination
of these two airlines would result in rising consumer fares. Following a series of concessions, the airlines
were allowed to complete the deal on December 9, 2013.

The new airline will be 2% larger than United–Continental Holdings in terms of traffic (i.e., the number
of miles flown by paying passengers) worldwide and will continue to be based in Dallas-Fort Worth, TX.
The merger is the fourth major deal in the US airline industry since 2008 when Delta bought Northwest
Airlines. United and Continental merged in 2010, and Southwest Airlines bought discount rival AirTran
Holdings in 2011.

The combination of American and US Airways will have more than 100 million frequent fliers, 94,000
employees, 950 planes, 6,500 daily flights, 8 major hubs, and total annual revenue of $39 billion. It will be
the market leader on the East Coast and in the Southwestern United States and in South America. But it
remains a smaller player in Europe, where United and Delta are stronger. The merger does little to bolster
American’s weak presence in Asia.

The combination is expected to generate more than $1 billion in annual net synergies by 2015. The new
company expects to incur $1.2 billion in one-time transition costs spread over the 3 years following
closing. The annual net synergies are expected to come by 2015 from incremental annual revenue of $900
million, resulting primarily from increased passenger traffic, taking advantage of the combined carrier’s
improved schedule and connectivity, a greater proportion of business travelers, and the redeployment of the
combined fleet to better match capacity to customer demand. Estimated cost synergies of about $150
million annually include the effects of the new labor contracts at American Airlines worked out as part of
the reorganization plan to get the support of American’s three major unions.
Despite the tumultuous events leading up to the closing, daunting challenges remain. The task of creating
the world’s largest airline will require combining two air carriers with vastly different operating cultures
and their own strained labor histories. The two airlines will be run by a single management team but kept
separate until the Federal Aviation Administration provides an aviation operating certificate, a process that
can take 18–24 months. Merging fleets of airplanes, maintaining harmonious labor relations, repainting
plans, planning new routes, and seamlessly combining complex computer systems are activities fraught
with peril.

Of these activities, labor and technology issues are likely to be the most challenging. The outlook for
labor is promising with a lot of trust existing between American’s management and labor union leadership
representing its three major employee groups: pilots, flight attendants, and ground workers. However,
major hurdles remain. Workers from the two airlines are represented by different unions and are subject to
different work rules. The more demanding challenge will be in merging complex reservation and computer
systems without disruption. In the area of information technology (IT) alone, the two firms have to
integrate hundreds of separate systems, programs, and protocols.

The labor terms Doug Parker, CEO of the new firm, needed to garner support from the unions will
eliminate some of the cost concessions won by American’s prior management. To make the merger work,
Parker will need to capture big revenue increases. One area of growth for American may be on Pacific
routes, where capacity could increase as much as 20% in the coming years. Almost all of the capacity
reductions planned for American and US Airways will be on domestic routes where there is more
competition from Southwest and smaller carriers such as JetBlue Airways Corp and Virgin American Inc.
Numerous interdisciplinary integration teams will be required to collectively make thousands of decisions
ranging from the fastest way to clean airplanes and board passengers to which perks to offer in the frequent
flier program. The teams will consist of personnel from both airlines. Members include managers from
such functional departments as technology, human resources, fleet management, and network planning. The
synergies will have to be realized without disruption to daily operations.

Nevertheless, despite the hard work and commitment of those involved and their attention to detail in
planning the integration effort, history shows that mishaps associated with any postclosing integration are
likely to arise. In the integration of Continental and United, United pilots have resisted the training they
were offered to learn the Continental’s flight procedures. They even unsuccessfully sued their employer due
to the slow pace of negotiations to reach new unified labor contracts. Customers have been confused by the
inability of Continental agents to answer questions about United’s flights. Additional confusion was created
on March 3, 2012, when the two airlines merged their reservation systems, websites, and frequent flyer
programs, a feat that was often accomplished in stages in prior airline mergers. As a result of alienation of
some frequent flyer customers, reservation snafus, and flight delays, revenue has failed thus far to meet
expectations. Moreover, by the end of 2012, one-time merger related expenses totaled almost $1.5 billion.

Anticipated synergies often are not realized on a timely basis. Many airline mergers in the past have hit
rough spots that reduced anticipated ongoing savings and revenue increases. Pilots and flight attendants at
US Airways Group, a combination of US Airways and America West, were still operating under separate
contracts with different pay rates, schedules and work rules, 6 years after the merger. Delta Airlines remains
ensnared in a labor dispute that has kept it from equalizing pay and work rules for flight attendants and
ramp workers at Delta and Northwest Airlines, which Delta acquired in 2008. The longer these disputes
continue the greater the cultural divide in integrating these businesses.

Assessing Procter & Gamble’s Acquisition of Gillette:

What Worked and What Didn’t
____________________________________________________________________________________
Key Points
Realizing synergies depends on how quickly and seamlessly integration is implemented.
Cost-related synergies often are more readily realized since the firms involved in the integration tend to
have more direct control over cost-reduction activities.
Realizing revenue-related synergies is more elusive due to the difficulty in assessing customer response to
new brands as well as marketing and pricing strategies.
____________________________________________________________________________________

The potential seemed limitless as Procter & Gamble Company (P&G) announced that it had completed its
purchase of Gillette Company (Gillette) in late 2005. P&G’s chairman and CEO, A.G. Lafley, predicted
that the acquisition of Gillette would add one percentage point to the firm’s annual revenue growth rate and
cost savings would exceed $1 billion annually, while Gillette’s chairman and CEO, Jim Kilts, opined that
the successful integration of the two best companies in consumer products would be studied in business
schools for years to come.

Six years later, things have not turned out as expected. While cost-savings targets were achieved,
operating margins faltered. Gillette’s businesses, such as its pricey razors, were buffeted by the 2008–2009
recession and have been a drag on P&G’s top line. Most of Gillette’s top managers have left. P&G’s stock
price at the end of 2011 stood about 20% above its level on the acquisition announcement date, less than
one-half the share price appreciation of such competitors as Unilever and Colgate-Palmolive Company
during the same period.
The euphoria was palpable on January 28, 2005, when P&G enthusiastically announced that it had
reached an agreement to buy Gillette in a share-for-share exchange valued at $55.6 billion. The combined
firms would retain the P&G name and have annual 2005 revenue of more than $60 billion. Half of the new
firm’s product portfolio would consist of personal care, healthcare, and beauty products, with the remainder
consisting of razors and blades and batteries.

P&G had long been viewed as a premier marketing and product innovator of products targeted largely to
women. Consequently, P&G assumed that its R&D and marketing skills in developing and promoting
women’s personal care products could be used to enhance and promote Gillette’s women’s razors. In
contrast, Gillette’s marketing strengths centered on developing and promoting products targeted at men.
Gillette was best known for its ability to sell an inexpensive product (e.g., razors) and hook customers to a
lifetime of refills (e.g., razor blades). Although Gillette was the number 1 and number 2 supplier in the
lucrative toothbrush and men’s deodorant markets, respectively, it was less successful in improving the
profitability of its Duracell battery brand. It had been beset by intense price competition from Energizer and
Rayovac Corp., which generally sell for less than Duracell batteries.
 Suppliers such as P&G and Gillette had been under considerable pressure from the continuing
consolidation in the retail industry due to the ongoing growth of Wal-Mart and industry mergers at that
time, such as Sears with Kmart. About 17% of P&G’s $51 billion in 2005 revenues and 13% of Gillette’s
$9 billion annual revenue came from sales to Wal-Mart. The new company, P&G believed, would have
more negotiating leverage with retailers for shelf space and in determining selling prices as well as with its
own suppliers, such as advertisers and media companies. The broad geographic presence of P&G was
expected to facilitate the marketing of such products as razors and batteries in huge developing markets,
such as China and India. Cumulative cost cutting was expected to reach $16 billion, including layoffs of
about 4% of the new company’s workforce of 140,000. Such cost reductions were to be realized by
integrating Gillette’s deodorant products into P&G’s structure as quickly as possible. Other Gillette product
lines, such as the razor and battery businesses, were to remain intact.

P&G’s corporate culture was often described as conservative, with a “promote-from-within” philosophy.
P&G also had a reputation for being resistant to ideas that were not generated within the company. While
Gillette’s CEO was to become vice chairman of the new company, the role of other senior Gillette
managers was less clear in view of the perception that P&G is laden with highly talented top management.
Gillette managers were perceived as more disciplined and aggressive cost cutters than their P&G
counterparts.

With this as a backdrop, what worked and what didn’t? The biggest successes appear to have been the
integration of the two firms’ enormously complex supply chains and cost reduction; the biggest failures
may be the inability to retain most senior Gillette managers and to realize revenue growth projections made
at the time the deal was announced. .

Supply chains describe the activities required to get the manufactured product to the store shelf from the
time the orders are placed until the firm collects payment. Together the firms had supply chains stretching
across 180 countries. Merging the two supply chains was a high priority from the outset because senior
management believed that it could contribute, if done properly, $1 billion in cost savings annually and an
additional $750 million in annual revenue. Each firm had been analyzing the strengths and weaknesses of
each other’s supply chain operations for years in an attempt to benchmark industry “best practices.” The
monumental challenge was to determine how to handle the addition to P&G’s supply chain of 100,000
Gillette customers, 50,000 stock-keeping units (SKUs), and $9 billion in revenue. The two firms also
needed to develop a single order entry system for both firms’ SKUs as well as an integrated distribution
system to eliminate redundancies. P&G wanted to complete this process quickly and seamlessly to avoid
disrupting its customers’ businesses.

The integration process began with the assembly of teams of experienced senior managers from both
P&G and Gillette. Reporting directly to the P&G CEO, one senior manager from each firm was appointed
as co-leaders of the project. The world was divided into seven regions, and co-leaders from both firms were
selected to manage the regional integration. Throughout the process, more than 1,000 full-time employees
from the existing staffs of both firms worked from late 2005 to completion in late 2007.

Implementation was done in phases. Latin America was selected first because the integration challenges
there were similar to those in other regions and the countries were small. This presented a relatively low-
risk learning opportunity. In just six months after receiving government approval to complete the
transaction, the integration of supply chains in five countries in Latin America was completed. In 2006,
P&G merged the two supply chains in North America, China, half of Western Europe, and several smaller
countries in Eastern Europe. The remaining Western and Eastern European countries were converted in
early 2007. Supply chain integration in Japan and the rest of Asia were completed by the end of 2007.

Creating a common information technology (IT) platform for data communication also was critical to
integrating the supply chains. As part of the regional projects, Gillette’s production and distribution data
were transferred to P&G’s SAP software system, thereby creating a single IT platform worldwide for all
order shipping, billing, and distribution center operations.
 While some of the activities were broad in scope, others were very narrow. The addition of 50,000
Gillette SKUs to P&G’s IT system required the creation of a common, consistent, and accurate data set
such that products made in the United States could be exported successfully to another country. An example
of a more specific task involved changing the identification codes printed on the cartons of all Gillette
products to reflect the new ownership.

Manufacturing was less of a concern, since the two firms’ product lines did not overlap; however, their
distribution and warehousing centers did. As a result of the acquisition, P&G owned more than 500
distribution centers and warehouses worldwide. P&G sought to reduce that number by 50% while retaining
the best in the right locations to meet local customer requirements.

While the supply chain integration appears to have reaped significant rewards, revenue growth fell short
of expectations. This has been true of most of P&G’s acquisitions historically. However, in time, revenue
growth in line with earlier expectations may be realized. Sales of Olay and Pantene products did not take
off until years after their acquisition as part of P&G’s takeover of Richardson-Vicks in 1985. Pantene’s
revenue did not grow substantially until the early 1990s and Pantene’s revenues did not grow until the early
2000s.

The Gillette acquisition illustrates the difficulty in evaluating the success or failure of mergers and
acquisitions for acquiring company shareholders. Assessing the true impact of the Gillette acquisition
remains elusive. Though the acquisition represented a substantial expansion of P&G’s product offering and
geographic presence, the ability to isolate the specific impact of a single event (i.e., an acquisition)
becomes clouded by the introduction of other major and often-uncontrollable events (e.g., the 2008–2009
recession) and their lingering effects. While revenue and margin improvement have been below
expectations, Gillette has bolstered P&G’s competitive position in the fast-growing Brazilian and Indian
markets, thereby boosting the firm’s longer-term growth potential, and has strengthened its operations in
Europe and the United States. Thus, in this ever-changing world, it will become increasingly difficult with
each passing year to identify the portion of revenue growth and margin improvement attributable to the
Gillette acquisition and that due to other factors.

Case Study Discussion Questions:

1. Why is it often considered critical to integrate the target business quickly? Be specific.
Answer: The acquirer’s ability to earn the premium paid for a target is heavily dependent of the
amount and timing of incremental cash flows due to cost and revenue related synergies since those
received early contribute more to firm value. Moreover, a protracted integration is likely to create
angst among employees, with the best ones prone to leave. Customer attrition may escalate as
uncertainty about the potential disruption to their businesses grows and competitors are able to
encourage them to change suppliers through improved credit terms and the promise of more
reliable on-time delivery.
2. Given the complexity of these two businesses, do you believe the acquisition of Gillette by P&G
made sense? Explain your answer.
Answer: Potentially, the acquisition of a competitor is more likely to be successful than of an
unrelated firm because of the potential for substantial synergies due to overlapping overhead,
duplicate facilities, and mutual understanding of their respective businesses. In this instance, both
firms understood how their respective supply chains worked since they had been benchmarking
each other’s operations for years looking to learn from a well-respected competitor.
3. Why did P&G rely heavily on personnel in both companies to implement post-closing integration?
Answer: The ultimate success of any acquisition ultimately depends on the quality of management
and employees. Both P&G and Gillette had important strengths. P&G was known as a marketing
and product innovator. Gillette had a widely recognized skill in brand management and in
generating recurring revenue from its products, e.g., to sell razors at cost and make money on
selling replacement razor blades. However, the two firm’s cultures were different with P&G
 known largely as a “promote from within” operation and one subject to hubris in that it thought it
could readily apply its vaunted marketing skills to different products. Senior P&G managers
understood that, if they were to get the best of both firms’ cultures and to execute integration
quickly and effectively, they would have to encourage employees from each firm to work together
and to develop trust and respect for their respective talents.
4. Why do you believe P&G was unable to retain most of Gillette’s top managers following the
acquisition?
Answer: P&G dwarfed Gillette in terms of revenue. In these situations, it often is difficult for
employees of a much larger acquirer not to feel more competent than those of the target firm and
to communicate a sense of superiority. It is possible that P&G’s top managers believed that their
creative and marketing talents exceeded those of their counterparts at Gillette. Rather than being
willing to learn from each other, egos may have clashed. Moreover, P&G had a “promote from
within” culture that may have been hard to change resulting in Gillette managers feeling that their
career options were limited in remaining with P&G.

Steel Giants Mittal and Arcelor Adopt a Highly Disciplined Approach to Postclosing Integration

Key Points

Successful integration requires clearly defined objectives, a clear implementation schedule, ongoing and
candid communication, and involvement by senior management.
Cultural integration often is an ongoing activity.
_____________________________________________________________________________________

The merger of Arcelor and Mittal into ArcelorMittal in June 2006 resulted in the creation of the world’s
largest steel company.1 With 2007 revenues of $105 billion and its steel production accounting for about
10% of global output, the behemoth has 320,000 employees in 60 countries, and it is a global leader in all
its target markets. Arcelor was a product of three European steel companies (Arbed, Aceralia, and Usinor).
Similarly, Mittal resulted from a series of international acquisitions. The two firms’ downstream (raw
material) and upstream (distribution) operations proved to be highly complementary, with Mittal owning
much of its iron ore and coal reserves and Arcelor having extensive distribution and service center
operations. Like most mergers, ArcelorMittal faced the challenge of integrating management teams; sales,
marketing, and product functions; production facilities; and purchasing operations. Unlike many mergers
involving direct competitors, a relatively small portion of cost savings would come from eliminating
duplicate functions and operations.

ArcelorMittal’s top management set three driving objectives before undertaking the postmerger
integration effort: achieve rapid integration, manage daily operations effectively, and accelerate revenue
and profit growth. The third objective was viewed as the primary motivation for the merger. The goal was
to combine what were viewed as entities having highly complementary assets and skills. This goal was
quite different from the way Mittal had grown historically, which was a result of acquisitions of turnaround
targets focused on cost and productivity improvements.

The formal phase of the integration effort was to be completed in six months. It was crucial to agree on
the role of the management integration team (MIT); the key aspects of the integration process, such as how
decisions would be made; and the roles and responsibilities of team members. Activities were undertaken in
parallel rather than sequentially. Teams consisted of employees from the two firms. People leading task
forces came from the business units.

1
This case relies on information provided in an interview with Jerome Ganboulan (formerly of Arcelor)
and William A. Scotting (formerly of Mittal), the two executives charged with directing the postmerger
integration effort and is adapted from De Mdedt and Van Hoey (2008).
 The teams were then asked to propose a draft organization to the MIT, including the profiles of the
people who were to become senior managers. Once the senior managers were selected, they were to build
their own teams to identify the synergies and create action plans for realizing the synergies. Teams were
formed before the organization was announced, and implementation of certain actions began before
detailed plans had been developed fully. Progress to plan was monitored on a weekly basis, enabling the
MIT to identify obstacles facing the 25 decentralized task forces and, when necessary, resolve issues.

Considerable effort was spent on getting line managers involved in the planning process and selling the
merger to their respective operating teams. Initial communication efforts included the launch of a top-
management “road show.” The new company also established a website and introduced Web TV. Senior
executives reported two- to three-minute interviews on various topics, giving everyone with access to a
personal computer the ability to watch the interviews onscreen.

Owing to the employee duress resulting from the merger, uncertainty was high, as employees with both
firms wondered how the merger would affect them. To address employee concerns, managers were given a
well-structured message about the significance of the merger and the direction of the new company.
Furthermore, the new brand, ArcelorMittal, was launched in a meeting attended by 500 of the firm’s top
managers during the spring of 2007.

External communication was conducted in several ways. Immediately following the closing, senior
managers traveled to all the major cities and sites of operations, talking to local management and
employees in these sites. Typically, media interviews were also conducted around these visits, providing an
opportunity to convey the ArcelorMittal message to the communities through the press. In March 2007, the
new firm held a media day in Brussels. Journalists were invited to go to the different businesses and review
the progress themselves.

Within the first three months following the closing, customers were informed about the advantages of
the merger for them, such as enhanced R&D capabilities and wider global coverage. The sales forces of the
two organizations were charged with the task of creating a single “face” to the market.

ArcelorMittal’s management viewed the merger as an opportunity to conduct interviews and surveys
with employees to gain an understanding of their views about the two companies. Employees were asked
about the combined firm’s strengths and weaknesses and how the new firm should present itself to its
various stakeholder groups. This process resulted in a complete rebranding of the combined firms.

ArcelorMittal management set a target for annual cost savings of $1.6 billion, based on experience with
earlier acquisitions. The role of the task forces was first to validate this number from the bottom up and
then to tell the MIT how the synergies would be achieved. As the merger progressed, it was necessary to get
the business units to assume ownership of the process to formulate the initiatives, timetables, and key
performance indicators that could be used to track performance against objectives. In some cases, the
synergy potential was larger than anticipated while smaller in other situations. The expectation was that the
synergy could be realized by mid-2009. The integration objectives were included in the 2007 annual budget
plan. As of the end of 2008, the combined firms had realized their goal of annualized cost savings of $1.6
billion, six months earlier than expected.

The integration was deemed complete when the new organization, the brand, the “one face to the
customer” requirement, and the synergies were finalized. This occurred within eight months of the closing.
However, integration would continue for some time to achieve cultural integration. Cultural differences
within the two firms are significant. In effect, neither company was homogeneous from a cultural
perspective. ArcelorMittal management viewed this diversity as an advantage in that it provided an
opportunity to learn new ideas.

Case Study Discussion Questions:

1. Why is it important to establish both” top-down” and “bottoms-up” estimates of synergy?

 Answer: The “top-down” estimate comes from senior management and is intended to set high
expectations or “stretch” goals. The “bottoms-up” estimate comes from those most familiar with
the operations and tests the feasibility of realizing these estimates. Also, the individuals in the
operations must also have some degree of confidence in these estimates as they will be responsible
for implementing the plans.

2. How did ArcelorMittal attempt to bridge cultural differences during the integration? Be specific.

Answer: The management integration team (MIT) and supporting task forces were staffed with
people from both organizations to infuse the activity with cross-organizational thinking, to achieve
better cooperation, and to establish best practices.

3. Why are communication plans so important? What methods did ArcelorMittal employ to achieve
these objectives? Be specific.

Answer: Clear, consistent, and substantive plans are important to allay fears among those within
the two organizations as well as other stakeholders such as customers, communities, suppliers and
shareholders. The new firm sent top managers on a “road show” immediately following closing to
assuage concerns among employees and customers. The firm also employed a media day to
communicate to communities through the press.

4. Comment on ArcelorMittal management’s belief that the cultural diversity within the
combined firms was an advantage. Be specific.

Answer: Different ideas about what constitutes “best practices” forces internal debate which can
result in significant innovation, cost reduction, and productivity improvement. Moreover, cultural
differences can result in more effective marketing to customers within specific geographic areas
since employees familiar with indigenous ways of doing business can better satisfy customer
requirements. However, cultural differences also represent huge challenges in terms of
communication and implementation of appropriate policies and practices. The “way things are
done” must be tailored to meet the special needs of each culturally distinct group, adding
significantly to costs, and increasing the likelihood of miscommunication.

5. The formal phase of the post-merger integration period was to be completed within 6
months. Why do you believe that ArcelorMittal’s management was eager to integrate rapidly
the two businesses? Be specific. What integration activities were to extend beyond the
proposed 6 month integration period?

Answer: Rapid integration is important to earn back any premium. The sooner synergies can
be realized, the greater their contribution to the net present value of the deal. Rapid
integration also tends to shorten the time period during which employees, customers, and
suppliers experience stress. By reducing stress and uncertainty, employee, customer and
supplier attrition is likely to be less. Activities that are likely to continue indefinitely would
include communication to the various stakeholder groups and efforts to forge a common
corporate culture.

The Challenges of Integrating United and Continental Airlines

______________________________________________________________________________

Key Points
Among the critical early decisions that must be made before implementing integration is the selection of
the manager overseeing the process.
Integration teams commonly consist of managers from both the acquirer firm and the target firm.
Senior management must remain involved in the postmerger integration process.
Realizing anticipated synergies often is elusive.
______________________________________________________________________________________

On June 29, 2011, integration executive Lori Gobillot was selected by United Continental Holdings, the
parent of both United and Continental airlines, to stitch together United and Continental airlines into the
world’s largest airline. Having completed the merger in October 2010, United and Continental airlines
immediately began the gargantuan task of creating the largest airline in the world. In the area of
information technology alone, the two firms had to integrate more than 1,400 separate systems, programs,
and protocols. Workers from the two airlines were represented by two different unions and were subject to
different work rules. Even the airplanes were laid out differently, with United’s fleet having first-class
cabins and Continental’s planes having business and coach only. The combined carriers have routes
connecting 373 airports in 63 countries. The combined firms have more than 1,300 airplanes.

Jeffry Smisek, CEO of United Continental Holdings, had set expectations high, telling Wall Street
analysts that the combined firms expected to generate at least $1.2 billion in cost savings annually within
three years. This was to be achieved by rationalizing operations and eliminating redundancies.

Smisek selected Lori Gobillot as the executive in charge of the integration effort because she had
coordinated the carrier’s due diligence with United during the period prior to the two firm’s failed attempt
to combine in 2008. Her accumulated knowledge of the two airlines, interpersonal skills, self-discipline,
and drive made her a natural choice.

She directed 33 interdisciplinary integration teams that collectively made thousands of decisions,
ranging from the fastest way to clean 1,260 airplanes and board passengers to which perks to offer in the
frequent flyer program. The teams consisted of personnel from both airlines. Members included managers
from such functional departments as technology, human resources, fleet management, and network
planning and were structured around such activities as operations and a credit card partnership with
JPMorgan Chase. In most cases, the teams agreed to retain at least one of the myriad programs already in
place for the passengers of one of the airlines so that at least some of the employees would be familiar with
the programs.

If she was unable to resolve disagreements within teams, Gobillot invited senior managers to join the
deliberations. In order to stay on a tight time schedule, Gobillot emphasized to employees at both firms that
the integration effort was not “us versus them” but, rather, that they were all in it together. All had to stay
focused on the need to achieve integration on a timely basis while minimizing disruption to daily
operations if planned synergies were to be realized.

Nevertheless, despite the hard work and commitment of those involved in the process, history shows
that the challenges associated with any postclosing integration often are daunting. The integration of
Continental and United was no exception. United pilots have resisted the training they were offered to learn
Continental’s flight procedures. They even unsuccessfully sued their employer due to the slow pace of
negotiations to reach new, unified labor contracts. Customers have been confused by the inability of
Continental agents to answer questions about United’s flights. Additional confusion was created on March
3, 2012, when the two airlines merged their reservation systems, websites, and frequent flyer programs, a
feat that had often been accomplished in stages in prior airline mergers. As a result of alienation of some
frequent flyer customers, reservation snafus, and flight delays, revenue has failed thus far to meet
expectations. Moreover, by the end of 2012, one-time merger-related expenses totaled almost $1.5 billion.

Many airline mergers in the past have hit rough spots that reduced anticipated ongoing savings and
revenue increases. Pilots and flight attendants at US Airways Group, a combination of US Airways and
America West, were still operating under separate contracts with different pay rates, schedules, and work
rules six years after the merger. Delta Airlines remains ensnared in a labor dispute that has kept it from
equalizing pay and work rules for flight attendants and ramp workers at Delta and Northwest Airlines,
which Delta acquired in 2008. The longer these disputes continue, the greater the cultural divide in
integrating these businesses.
 Alcatel Merges with Lucent, Highlighting Cross-Cultural Issues

Alcatel SA and Lucent Technologies signed a merger pact on April 3, 2006, to form a Paris-based
telecommunications equipment giant. The combined firms would be led by Lucent's chief executive officer
Patricia Russo. Her charge would be to meld two cultures during a period of dynamic industry change.
Lucent and Alcatel were considered natural merger partners because they had overlapping product lines and
different strengths. More than two-thirds of Alcatel’s business came from Europe, Latin America, the
Middle East, and Africa. The French firm was particularly strong in equipment that enabled regular
telephone lines to carry high-speed Internet and digital television traffic. Nearly two-thirds of Lucent's
business was in the United States. The new company was expected to eliminate 10 percent of its workforce
of 88,000 and save $1.7 billion annually within three years by eliminating overlapping functions.

While billed as a merger of equals, Alcatel of France, the larger of the two, would take the lead in
shaping the future of the new firm, whose shares would be listed in Paris, not in the United States. The
board would have six members from the current Alcatel board and six from the current Lucent board, as
well as two independent directors that must be European nationals. Alcatel CEO Serge Tehuruk would
serve as the chairman of the board. Much of Ms. Russo's senior management team, including the chief
operating officer, chief financial officer, the head of the key emerging markets unit, and the director of
human resources, would come from Alcatel. To allay U.S. national security concerns, the new company
would form an independent U.S. subsidiary to administer American government contracts. This subsidiary
would be managed separately by a board composed of three U.S. citizens acceptable to the U.S.
government.

International combinations involving U.S. companies have had a spotty history in the
telecommunications industry. For example, British Telecommunications PLC and AT&T Corp. saw their
joint venture, Concert, formed in the late 1990s, collapse after only a few years. Even outside the telecom
industry, transatlantic mergers have been fraught with problems. For example, Daimler Benz's 1998 deal
with Chrysler, which was also billed as a merger of equals, was heavily weighted toward the German
company from the outset.

In integrating Lucent and Alcatel, Russo faced a number of practical obstacles, including who would
work out of Alcatel's Paris headquarters. Russo, who became Lucent's chief executive in 2000 and does not
speak French, had to navigate the challenges of doing business in France. The French government has a big
influence on French companies and remains a large shareholder in the telecom and defense sectors. Russo's
first big fight would be dealing with the job cuts that were anticipated in the merger plan. French unions
tend to be strong, and employees enjoy more legal protections than elsewhere. Hundreds of thousands took
to the streets in mid-2006 to protest a new law that would make it easier for firms to hire and fire younger
workers. Russo has extensive experience with big layoffs. At Lucent, she helped orchestrate spin-offs,
layoffs, and buyouts involving nearly four-fifths of the firm's workforce.

Making choices about cuts in a combined company would likely be even more difficult, with Russo
facing a level of resistance in France unheard of in the United States, where it is generally accepted that
most workers are subject to layoffs and dismissals. Alcatel has been able to make many of its job cuts in
recent years outside France, thereby avoiding the greater difficulty of shedding French workers. Lucent
workers feared that they would be dismissed first simply because it is easier than dismissing their French
counterparts.

After the 2006 merger, the company posted six quarterly losses and took more than $4.5 billion in write-
offs, while its stock plummeted more than 60 percent. An economic slowdown and tight credit limited
spending by phone companies. Moreover, the market was getting more competitive, with China's Huawei
aggressively pricing its products. However, other telecommunications equipment manufacturers facing the
same conditions have not fared nearly as badly as Alcatel-Lucent. Melding two fundamentally different
cultures (Alcatel's entrepreneurial and Lucent's centrally controlled cultures) has proven daunting.
Customers who were uncertain about the new firm's products migrated to competitors, forcing Alcatel-
Lucent to slash prices even more. Despite the aggressive job cuts, a substantial portion of the projected $3.1
billion in savings from the layoffs were lost to discounts the company made to customers in an effort to
rebuild market share.

Frustrated by the lack of progress in turning around the business, the Alcatel-Lucent board announced in
July 2008 that Patricia Russo, the American chief executive, and Serge Tchuruk, the French chairman,
would leave the company by the end of the year. The board also announced that, as part of the shake-up, the
size of the board would be reduced, with Henry Schacht, a former chief executive at Lucent, stepping
down. Perhaps hamstrung by its dual personality, the French-American company seemed poised to take on
a new personality of its own by jettisoning previous leadership.

Discussion Questions:

1. Explain the logic behind combining the two companies. Be specific.

Answer: The two firms have overlapping product lines and complementary strengths. As
competitors, the combined firms are expected to generate annual cost savings of about 10% by
eliminating redundant resources and duplicate positions. Such savings will come from the
elimination of overlapping sales forces, back offices, and R&D activities.

2. What are the major challenges the management of the combined companies are likely to face?
How would you recommend resolving these issues?

Answer: Billed as a merger of equals, Alcatel quickly asserted itself by installing Alcatel
managers in all senior management positions except for the CEO. Such actions may alienate many
former Lucent managers and generate a “brain” drain. Other challenges include language and
cultural differences due to the firm’s headquarters centered in France. Moreover, the French
government remains a major shareholder in Alcatel and given the reluctance of French unions to
accept layoffs, most of the terminations are likely to be centered in Lucent’s U.S. operations.
Despite these considerations, Alcatel will have to move quickly to avoid the paralysis that beset
Daimler-Chrysler immediately following their merger. Some of the resentment from layoffs may
be mitigated by introducing generous severance packages for employees subject to layoff.
Continuous and candid communication as to why the firm is taking certain actions may also help
to reduce lingering employee anxiety.

3. Most corporate mergers are beset by differences in corporate cultures. How do cross-border
transactions compound these differences?

Answer: Differences in corporate cultures when the firms involved had been competitors can
result in especially great challenges during integration due to a lack of trust and cooperation. Such
differences are likely to be exacerbated due to cultural differences that are not well understood by
managers and employees alike. Consequently, explaining why certain actions are being taken
needs to be done in great detail and with the utmost honestly and clarity.

4. Why do you think mergers, both domestic and cross-border, are often communicated by the
acquirer and target firms’ management as mergers of equals?

Answer: The rationale for a merger of equals may be more for public relations than for substantive
reasons. Mergers dubbed “mergers of equals” are those in which the firms are relatively alike in
size, market value, product offering, etc., and where it is unclear which party is likely to contribute
the most to value creation as a result of the merger. Moreover, by dividing up board representation
between the two firms or by establishing co-CEOs, the merger is more likely to be supported by
their respective boards and management.

5. In what way would you characterize this transaction as a merger of equals? In what ways
should it not be considered a merger of equals?
 Answer: While the board of the new company will consist of six members from each of the former
boards, it is clear that Alcatel will play the dominant role. Alcatel is larger than Lucent and the
shares of the two firms will be listed in Paris, not in the U.S. As a significant shareholder, the
French government will influence many strategic decisions. Moreover, the senior management of
the new firm will be dominated by former Alcatel managers.

Panasonic Moves to Consolidate Past Acquisitions

Key Points:
 Minority investors may impede a firm’s ability to implement its business strategy by slowing the
decision making process.
 A common solution is for the parent firm to buy out or “squeeze-out” minority shareholders

______________________________________________________________________________

Increased competition in the manufacture of rechargeable batteries and other renewable energy products
threatened to thwart Panasonic Corporation’s move to achieve a dominant global position in renewable
energy products. South Korean rivals Samsung Electronics Company and LG Electronics Inc. were
increasing investment to overtake Panasonic in this marketplace. These firms have already been successful
in surpassing Panasonic’s leadership position in flat-panel televisions.

Despite having a majority ownership in several subsidiaries, Sanyo Electric Company and Panasonic
Electric Works Company that are critical to its long-term success in the manufacture and sale of renewable
energy products, Panasonic has been frustrated by the slow pace of decision making and strategy
implementation. In particular, Sanyo Electric has been reluctant to surrender decision making to Panasonic.
Despite appeals by Panasonic president Fumio Ohtsubo ’s for collaboration, Panasonic and Sanyo
continued to compete for customers. Sanyo Electric maintains a brand that is distinctly different from the
Panasonic brand, thereby creating confusion among customers.

Sanyo Electric, the global market share leader in rechargeable lithium ion batteries, also has a growing
presence in solar panels. Panasonic Electric Works makes lighting equipment, sensors, and other key
components for making homes and offices more energy efficient.

To gain greater decision-making power, Panasonic acquired the remaining publicly traded shares in
both Sanyo Electric and Panasonic Electric Works in March 2011 and plans to merge these two operations
into the parent. Plans call for combining certain overseas sales operations and production facilities of Sanyo
Electric and Panasonic Electric Works, as well as using Panasonic factories to make Sanyo products.

The two businesses were consolidated in 2012. The challenge to Panasonic now is gaining full control
without alienating key employees who may be inclined to leave and destroying those attributes of the
Sanyo culture that are needed to expand Panasonic’s global position in renewable energy products.

This problem is not unique to Panasonic. Many Japanese companies consist of large interlocking
networks of majority-owned subsidiaries that are proving less nimble than firms with more centralized
authority. After four straight years of operating losses, Hitachi Ltd. spent 256 billion yen ($2.97 billion) to
buy out minority shareholders in five of its majority-owned subsidiaries in order to achieve more
centralized control.
Discussion Questions

1. Describe the advantages and disadvantages of owning less than 100 percent of another company.
2. When does it make sense to buy a minority interest, a majority interest, or 100 percent of the
publicly traded shares of another company?

HP Acquires Compaq—The Importance of Preplanning Integration

The proposed marriage between Hewlett-Packard (HP) and Compaq Computer got off to a rocky start when
the sons of the founders came out against the transaction. The resulting long, drawn-out proxy battle
threatened to divert management's attention from planning for the postclosing integration effort. The
complexity of the pending integration effort appeared daunting. The two companies would need to meld
employees in 160 countries and assimilate a large array of products ranging from personal computers to
consulting services. When the transaction closed on May 7, 2002, critics predicted that the combined
businesses, like so many tech mergers over the years, would become stalled in a mess of technical and
personal entanglements.

Instead, HP's then CEO Carly Fiorina methodically began to plan for integration prior to the deal
closing. She formed an elite team that studied past tech mergers, mapped out the merger's most important
tasks, and checked regularly whether key projects were on schedule. A month before the deal was even
announced on September 4, 2001, Carly Fiorina and Compaq CEO Michael Capellas each tapped a top
manager to tackle the integration effort. The integration managers immediately moved to form a 30-person
integration team. The team learned, for example, that during Compaq's merger with Digital some server
computers slated for elimination were never eliminated. In contrast, HP executives quickly decided what to
jettison. Every week they pored over progress charts to review how each product exit was proceeding. By
early 2003, HP had eliminated 33 product lines it had inherited from the two companies, thereby reducing
the remaining number to 27. Another 6 were phased out in 2004.

After reviewing other recent transactions, the team recommended offering retention bonuses to
employees the firms wanted to keep, as Citigroup had done when combining with Travelers. The team also
recommended that moves be taken to create a unified culture to avoid the kind of divisions that plagued
AOL Time Warner. HP executives learned to move quickly, making tough decisions early with respect to
departments, products, and executives. By studying the 1984 merger between Chevron and Gulf Oil, where
it had taken months to name new managers, integration was delayed and employee morale suffered. In
contrast, after Chevron merged with Texaco in 2001, new managers were appointed in days, contributing to
a smooth merger.

Disputes between HP and former Compaq staff sometimes emerged over issues such as the different
approaches to compensating sales people. These issues were resolved by setting up a panel of up to six
sales managers enlisted from both firms to referee the disagreements. HP also created a team to deal with
combining the corporate cultures and hired consultants to document the differences. A series of workshops
involving employees from both organizations were established to find ways to bridge actual or perceived
differences. Teams of sales personnel from both firms were set up to standardize ways to market to
common customers. Schedules were set up to ensure that agreed-upon tactics were actually implemented in
a timely manner. The integration managers met with Ms. Fiorina weekly.

The results of this intense preplanning effort were evident by the end of the first year following closing.
HP eliminated duplicate product lines and closed dozens of facilities. The firm cut 12,000 jobs, 2,000 more
than had been planned at that point in time, from its combined 150,000 employees. HP achieved $3 billion
in savings from layoffs, office closures, and consolidating its supply chain. Its original target was for
savings of $2.4 billion after the first 18 months.

Despite realizing greater than anticipated cost savings, operating margins by 2004 in the PC business fell
far short of expectations. This shortfall was due largely to declining selling prices and a slower than
predicted recovery in PC unit sales. The failure to achieve the level of profitability forecast at this time of
the acquisition contributed to the termination of Ms. Fiorina in early 2005.

Discussion Questions

1. Explain how premerger planning aided in the integration of HP and Compaq.

2. What did HP learn by studying other mergers? Give examples.
3. Cite key cultural differences between the two organizations. How were they resolved?

Integrating Supply Chains: Coty Cosmetics Integrates Unilever Cosmetics International

In mid-August 2005, Coty, one of the world's largest cosmetics and fragrance manufacturers, acquired
Unilever Cosmetics International (UCI), a subsidiary of the Unilever global conglomerate, for $800
million. Coty viewed the transaction as one in which it could become a larger player in the prestigious
fragrance market of expensive perfumes. Coty believed it could reap economies of scale from having just
one sales force, marketing group, and the like selling and managing the two sets of products. It hoped to
retain the best people from both organizations. However, Coty's management understood that if it were not
done quickly enough, it might not realize the potential cost savings and would risk losing key personnel.

By mid-December, Coty's IT team had just completed moving UCI's employees from Unilever's
infrastructure to Coty's. This involved such tedious work as switching employees from Microsoft's Outlook
to Lotus Notes. Coty's information technology team was faced with the challenge of combining and
standardizing the two firms' supply chains, including order entry, purchasing, processing, financial,
warehouse, and shipping systems. At the end of 2006, Coty's management announced that it anticipated that
the two firms would be fully integrated by June 30, 2006. From an IT perspective, the challenges were
daunting. The new company's supply chain spanned ten countries and employed four different enterprise
resource planning (ERP) systems that had three warehouse systems running five major distribution
facilities on two continents. ERP is an information system or process that integrates all production and
related applications across an entire corporation.

On January 11–12, 2006, 25 process or function "owners," including the heads of finance, customer
service, distribution, and IT, met to create the integration plan for the firm's disparate supply chains. In
addition to the multiple distribution centers and ERP systems, operations in each country had unique
processes that had to be included in the integration planning effort. For example, Italy was already using
the SAP system on which Coty would eventually standardize. The largest customers there placed orders at
the individual store level and expected products to be delivered to these stores. In contrast, the United
Kingdom used a legacy (i.e., a highly customized, nonstandard) ERP system, and Coty's largest customer in
the United Kingdom, the Boots pharmacy chain, placed orders electronically and had them delivered to
central warehouses.

Coty's IT team, facing a very demanding schedule, knew it could not accomplish all that needed to be
done in the time frame required. Therefore, it started with any system that directly affected the customer,
such as sending an order to the warehouse, shipment notification, and billing. The decision to focus on
"customer-facing" systems came at the expense of internal systems, such as daily management reports
tracking sales and inventory levels. These systems were to be completed after the June 30, 2006, deadline
imposed by senior management.

To minimize confusion, Coty created small project teams that consisted of project managers, IT
directors, and external consultants. Smaller teams did not require costly overhead, like dedicated office
space, and eliminated chains of command that might have prevented senior IT management from receiving
timely, candid feedback on actual progress against the integration plan. The use of such teams is credited
with allowing Coty's IT department to combine sales and marketing forces as planned at the beginning of
the 2007 fiscal year in July 2006. While much of the "customer-facing" work was done, many tasks
remained. The IT department now had to go back and work out the details it had neglected during the
previous integration effort, such as those daily reports its senior managers wanted and the real-time
monitoring of transactions. By setting priorities early in the process and employing small, project-focused
teams, Coty was able to integrate successfully the complex supply chains of the firms in a timely manner.
Discussion Questions

1. Do you agree with Coty management's decision to focus on integrating "customer-facing" systems first?
Explain your answer.
2. How might this emphasis on integrating "customer-facing" systems have affected the new firm's ability
to realize anticipated synergies? Be specific.
3. Discuss the advantages and disadvantages of using small project teams. Be specific.

Culture Clash Exacerbates Efforts of the Tribune Corporation

 to Integrate the Times Mirror Corporation

The Chicago-based Tribune Corporation owned 11 newspapers, including such flagship publications as the
Chicago Tribune, the Los Angeles Times, and Newsday, as well as 25 television stations. Attempting to
offset the long-term decline in newspaper readership and advertising revenue, Tribune acquired the Times
Mirror (owner of the Los Angeles Times newspaper) for $8 billion in 2000. The merger combined two firms
that historically had been intensely competitive and had dramatically different corporate cultures. The
Tribune was famous for its emphasis on local coverage, with even its international stories having a
connection to Chicago. In contrast, the L.A. Times had always maintained a strong overseas and
Washington, D.C., presence, with local coverage often ceded to local suburban newspapers. To some
Tribune executives, the L.A. Times was arrogant and overstaffed. To L.A. Times executives, Tribune
executives seemed too focused on the "bottom line" to be considered good newspaper people.

The overarching strategy for the new company was to sell packages of newspaper and local TV
advertising in the big urban markets. It soon became apparent that the strategy would be unsuccessful.
Consequently, the Tribune's management turned to aggressive cost cutting to improve profitability. The
Tribune wanted to encourage centralization and cooperation among its newspapers to cut overlapping
coverage and redundant jobs.

Coverage of the same stories by different newspapers owned by the Tribune added substantially to costs.
After months of planning, the Tribune moved five bureaus belonging to Times Mirror papers (including the
L.A. Times) to the same location as its four other bureaus in Washington, D.C. L.A. Times’ staffers objected
strenuously to the move, saying that their stories needed to be tailored to individual markets and they did
not want to share reporters with local newspapers. As a result of the consolidation, the Tribune's
newspapers shared as much as 40 percent of the content from Washington, D.C., among the papers in 2006,
compared to as little as 8 percent in 2000. Such changes allowed for significant staffing reductions.

In trying to achieve cost savings, the firm ran aground in a culture war. Historically, the Times Mirror,
unlike the Tribune, had operated its newspapers more as a loose confederation of separate newspapers.
Moreover, the Tribune wanted more local focus, while the L.A. Times wanted to retain its national and
international presence. The controversy came to a head when the L.A. Times' editor was forced out in late
2006.

Many newspaper stocks, including the Tribune, had lost more than half of their value between 2004 and
2006. The long-term decline in readership within the Tribune appears to have been exacerbated by the
internal culture clash. As a result, the Chandler Trusts, Tribune's largest shareholder, put pressure on the
firm to boost shareholder value. In September, the Tribune announced that it wanted to sell the entire
newspaper; however, by November, after receiving bids that were a fraction of what had been paid to
acquire the newspaper, it was willing to sell parts of the firm. The Tribune was taken private by legendary
investor Sam Zell in 2007 and later went into bankruptcy in 2009, a victim of the recession and its bone-
crushing debt load. See Case Study 13.4 for more details.

Discussion Questions

1. Why do you believe the Tribune thought it could overcome the substantial cultural differences between
itself and the Times Mirror Corporation? Be specific.
2. What would you have done differently following closing to overcome the cultural challenges faced by
the Tribune? Be specific.

Daimler Acquires Chrysler—Anatomy of a Cross-Border Transaction

The combination of Chrysler and Daimler created the third largest auto manufacturer in the world, with
more than 428,000 employees worldwide. Conceptually, the strategic fit seemed obvious. German
engineering in the automotive industry was highly regarded and could be used to help Chrysler upgrade
both its product quality and production process. In contrast, Chrysler had a much better track record than
Daimler in getting products to market rapidly. Daimler’s distribution network in Europe would give
Chrysler products better access to European markets; Chrysler could provide parts and service support for
Mercedes-Benz in the United States. With greater financial strength, the combined companies would be
better able to make inroads into Asian and South American markets.

Daimler’s product markets were viewed as mature, and Chrysler was under pressure from escalating
R&D costs and retooling demands in the wake of rapidly changing technology. Both companies watched
with concern the growing excess capacity of the worldwide automotive manufacturing industry. Daimler
and Chrysler had been in discussions about doing something together for some time. They initiated
discussions about creating a joint venture to expand into Asian and South American markets, where both
companies had a limited presence. Despite the termination of these discussions as a result of disagreement
over responsibilities, talks were renewed in February 1998. Both companies shared the same sense of
urgency about their vulnerability to companies such as Toyota and Volkswagen. The transaction was
completed in April 1998 for $36 billion.

Enjoying a robust auto market, starry-eyed executives were touting how the two firms were going to
save billions by using common parts in future cars and trucks and by sharing research and technology. In a
press conference to announce the merger, Jurgen Schrempp, CEO of DaimlerChrysler, described the merger
as highly complementary in terms of product offerings and the geographic location of many of the firms’
manufacturing operations. It also was described to the press as a merger of equals (Tierney, 2000). On the
surface, it all looked so easy.

The limitations of cultural differences became apparent during efforts to integrate the two companies.
Daimler had been run as a conglomerate, in contrast to Chrysler’s highly centralized operations. Daimler
managers were accustomed to lengthy reports and meetings to review the reports. Under Schrempp’s
direction, many top management positions in Chrysler went to Germans. Only a few former Chrysler
executives reported directly to Schrempp. Made rich by the merger, the potential for a loss of American
managers within Chrysler was high. Chrysler managers were accustomed to a higher degree of
independence than their German counterparts. Mercedes dealers in the United States balked at the thought
of Chrysler’s trucks still sporting the old Mopar logo delivering parts to their dealerships. All the trucks had
to be repainted.

Charged with the task of finding cost savings, the integration team identified a list of hundreds of
opportunities, offering billions of dollars in savings. For example, Mercedes dropped its plans to develop a
battery-powered car in favor of Chrysler’s electric minivan. The finance and purchasing departments were
combined worldwide. This would enable the combined company to take advantage of savings on bulk
purchases of commodity products such as steel, aluminum, and glass. In addition, inventories could be
managed more efficiently, because surplus components purchased in one area could be shipped to other
facilities in need of such parts. Long-term supply contracts and the dispersal of much of the purchasing
operations to the plant level meant that it could take as long as 5 years to fully integrate the purchasing
department.

The time required to integrate the manufacturing operations could be significantly longer, because both
Daimler and Chrysler had designed their operations differently and are subject to different union work
rules. Changing manufacturing processes required renegotiating union agreements as the multiyear
contracts expired. All of that had to take place without causing product quality to suffer. To facilitate this
process, Mercedes issued very specific guidelines for each car brand pertaining to R&D, purchasing,
manufacturing, and marketing.

Although certainly not all of DaimlerChrysler’s woes can be blamed on the merger, it clearly
accentuated problems associated with the cyclical economic slowdown during 2001 and the stiffened
competition from Japanese automakers. The firm’s top management has reacted, perhaps somewhat
belatedly to the downturn, by slashing production and eliminating unsuccessful models. Moreover, the firm
has pared its product development budget from $48 billion to $36 billion and eliminated more than 26,000
jobs, or 20% of the firm’s workforce, by early 2002. Six plants in Detroit, Mexico, Argentina, and Brazil
were closed by the end of 2002. The firm also cut sharply the number of Chrysler. car dealerships. Despite
the aggressive cost cutting, Chrysler reported a $2 billion operating loss in 2003 and a $400 million loss in
2004.

While Schrempp had promised a swift integration and a world-spanning company that would dominate
the industry, five years later new products have failed to pull Chrysler out of a tailspin. Moreover,
DaimlerChrysler’s domination has not extended beyond the luxury car market, a market they dominated
before the acquisition. The market capitalization of DaimlerChrysler, at $38 billion at the end of 2004, was
well below the German auto maker’s $47 billion market cap before the transaction.

With the benefit of hindsight, it is possible to note a number of missteps DaimlerChrysler has made that
are likely to haunt the firm for years to come. These include paying too much for some parts, not updating
some vehicle models sooner, falling to offer more high-margin vehicles that could help ease current
financial strains, not developing enough interesting vehicles for future production, and failing to be
completely honest with Chrysler employees. Although Daimler managed to take costs out, it also managed
to alienate the workforce.

Discussion Questions:

1. Identify ways in which the merger combined companies with complementary skills and resources?

Germany’s world-renowned reputation in engineering could be employed to raise the overall

quality of Chrysler products, while Chrysler’s project management skills could be used to shorten
the new product introduction cycle. In addition, Daimler’s distribution network in Europe could
provide access to the European market for Chrysler products. Chrysler dealerships could be used
to service Daimler cars in the United States. Finally, greater access to capital markets and the
combined operating cash flow of the two companies could give Daimler-Chrysler the financial
strength to build assembly plants and develop distribution networks in Asia.

2. What are the major cultural differences between Daimler and Chrysler?

Daimler is largely a conglomerate in which management is decentralized. In contrast, Chrysler’s

management and decision-making process tended to be highly centralized. Daimler, like many
European companies, tended to be very detail-oriented. The replacement of key Chrysler managers
by Daimler managers may have left many Chrysler managers feeling alienated. The small number
of former Chrysler managers reporting directly to the top may have added to a sense of
powerlessness. Differences in customs and habits may also have contributed to poor
communications.

3. What were the principal risks to the merger?

The risks to the merger included the loss of key Chrysler operating managers, who were enriched
by the merger, and a loss of corporate continuity. Moreover, the lengthy time period required to
integrate manufacturing operations and purchasing makes the recovery of the premium paid for
Chrysler that much more difficult.

4. Why might it take so long to integrate manufacturing operations and certain functions such as
purchasing?

Changing manufacturing operations require changing union work rules, which are set by contract.
Such rules could only be re-negotiated when current contracts covering the plants expire. Before
any significant changes could be made, Daimler-Chrysler would have to inventory/catalogue
equipment and procedures by plant, benchmark performance, identify best practices, and convince
workers at the plant level to change their methods. Purchasing represented both a significant
opportunity and major challenge for Daimler-Chrysler. Spending on purchased materials for
automotive companies represents a major portion of their total cost of production. Therefore,
opportunities to buy in bulk offer substantial cost savings. However, integrating purchasing,
 which is often dispersed across various countries or even plants, could only be done as contracts
with existing vendors expire.

5, How might Daimler have better managed the postmerger integration?

The postmerger integration period could have been better managed if Daimler had better
integrated Chrysler managers into integration teams charged with melding the operations of the
two firms together. Moreover, while Daimler appeared on the surface to recognize that the
cultures of the firms were quite different, it seemed to be unwilling to be sensitive to retaining key
managers and employees. Finally, Daimler fed a sense of mistrust between the Daimler and
Chrysler employees that militated against cooperation by not being forthright in their
communication with Chrysler employees. The merger was initially billed as a merger of equals.
Within a short period, it was clear that this had never been the intention of Daimler management

M&A Gets Out of Hand at Cisco

Cisco Systems, the internet infrastructure behemoth, provides the hardware and software to support
efficient traffic flow over the internet. Between 1993 and 2000, Cisco completed 70 acquisitions using its
highflying stock as its acquisition currency. With engineering talent in short supply and a dramatic
compression in product life cycles, Cisco turned to acquisitions to expand existing product lines and to
enter new businesses. The firm’s track record during this period in acquiring and absorbing these
acquisitions was impressive. In fiscal year 1999, Cisco acquired 10 companies. During the same period, its
sales and operating profits soared by 44% and 55%, respectively. In view of its pledge not to layoff any
employees of the target companies, its turnover rate among employees acquired through acquisition was
2.1%, versus an average of 20% for other software and hardware companies.

Cisco’s strategy for acquiring companies was to evaluate its targets’ technologies, financial
performance, and management talent with a focus on ease of integrating the target into Cisco’s operations.
Cisco’s strategy was sometimes referred to as an R&D strategy in that it sought to acquire firms with
leading edge technologies that could be easily adapted to Cisco’s current product lines or used to expand it
product offering. In this manner, its acquisition strategy augmented internal R&D spending. Cisco
attempted to use its operating cash flow to fund development of current technologies and its lofty stock
price to acquire future technologies. Cisco targeted small companies having a viable commercial product or
technology. Cisco believed that larger, more mature companies tended to be difficult to integrate, due to
their entrenched beliefs about technologies, hardware and software solutions.

The frequency with which Cisco was making acquisitions during the last half of the 1990s caused the
firm to “institutionalize” the way in which it integrated acquired companies. The integration process was
tailored for each acquired company and was implemented by an integration team of 12 professionals.
Newly acquired employees received an information packet including descriptions of Cisco’s business
strategy, organizational structure, benefits, a contact sheet if further information was required, and an
explanation of the strategic importance of the acquired firm to Cisco. On the day the acquisition was
announced, teams of Cisco human resources people would travel to the acquired firm’s headquarters and
meet with small groups of employees to answer questions.

Working with the acquired firm’s management, integration team members would help place new
employees within Cisco’s workforce. Generally, product, engineering, and marketing groups were kept
independent, whereas sales and manufacturing functions were merged into existing Cisco departments.
Cisco payroll and benefits systems were updated to reflect information about the new employees, who were
quickly given access to Cisco’s online employee information systems. Cisco also offered customized
orientation programs intended to educate managers about Cisco’s hiring practices, sales people about
Cisco’s products, and engineers about the firm’s development process. The entire integration process
generally was completed in 4–6 weeks. This lightning-fast pace was largely the result of Cisco’s tendency
to purchase small, highly complementary companies; to leave much of the acquired firm’s infrastructure in
place; and to dedicate a staff of human resource and business development people to facilitate the process
(Cisco Systems, 1999; Goldblatt, 1999).
 Cisco was unable to avoid the devastating effects of the explosion of the dot.com bubble and the 2001–
2002 recession in the United States. Corporate technology buyers, who used Cisco’s high-end equipment,
stopped making purchases because of economic uncertainty. Consequently, Cisco was forced to repudiate
its no-layoff pledge and announced a workforce reduction of 8500, about 20% of its total employees, in
early 2001. Despite its concerted effort to retain key employees from previous acquisitions, Cisco’s
turnover began to soar. Companies that had been acquired at highly inflated premiums during the late 1990s
lost much of their value as the loss of key talent delayed new product launches.

By mid-2001, the firm had announced inventory and acquisition-related write-downs of more than $2.5
billion. A precipitous drop in its share price made growth through acquisition much less attractive than
during the late 1990s, when its stock traded at lofty price-to-earnings ratios. Thus, Cisco was forced to
abandon its previous strategy of growth through acquisition to one emphasizing improvement in its internal
operations. Acquisitions tumbled from 23 in 2000 to 2 in 2001. Whereas in the past, Cisco’s acquisitions
appeared to have been haphazard, in mid-2003 Cisco set up an investment review board that analyzes
investment proposals, including acquisitions, before they can be implemented. Besides making sure the
proposed deal makes sense for the overall company and determining the ease with which it can be
integrated, the board creates detailed financial projections and the deal’s sponsor must be willing to commit
to sales and earnings targets.

Discussion Questions:

1. Describe how Cisco “institutionalized” the integration process. What are the advantages and
disadvantages to the approach adopted by Cisco?

Answer: Cisco focused on acquisitions that were highly complementary to its existing operations.
As such, the processes and procedures for integrating each acquisition could be standardized.
Cisco created a group at the corporate level whose primary responsibility was to acquire and
integrate the businesses following a standardized format. Presumably, the group’s ability to
integrate effectively new acquisitions improved with experience.

2. Why did Cisco have a “no layoff” policy? How did this contribute to maintaining or increasing the
value of the companies it acquired?

Answer: Cisco’s no layoff policy made sense during the Internet boom when it was very difficult
to acquire and retain technical people. However, when the market for their products softened the
no layoff policy limited the firm’s ability to adjust its cost. Moreover, when they finally had to lay
employees off it created serious mistrust of the firm among employees.

4. What evidence do you have that the high price-to-earnings ratio associated with Cisco’s stock
during the late 1990s may have caused the firm to overpay for many of its acquisitions? How
might overpayment have complicated the integration process at Cisco?

Answer: Cisco made many of its acquisition when its stock was trading at lofty multiples, well
above other firms in its industry. It is probable that the stock was overvalued causing the firm to
offer highly attractive prices to potential targets to ensure a takeover. In doing so, the firm issued
more shares than might have been necessary had they been more prudent. The overhang of shares
outstanding exacerbated the decline in EPS in subsequent years.

Case Corporation Loses Sight of Customer Needs

in Integrating New Holland Corporation

Farm implement manufacturer Case Corporation acquired New Holland Corporation in a $4.6 billion
transaction in 1999. Overnight, its CEO, Jean-Pierre Rosso, had engineered a deal that put the combined
firms, with $11 billion in annual revenue, in second place in the agricultural equipment industry just behind
industry leader John Deere. The new firm was named CNH Global (CNH). Although Rosso proved adept at
negotiating and closing a substantial deal for his firm, he was less agile in meeting customer needs during
the protracted integration period. CNH has become a poster child of what can happen when managers
become so preoccupied with the details of combining two big operations that they neglect external issues
such as the economy and competition. Since the merger in November 1999, CNH began losing market
share to John Deere and other rivals across virtually all of its product lines.

Rosso remained focused on negotiating with antitrust officials about what it would take to get regulatory
approval. Once achieved, CNH was slow to complete the last of its asset sales as required under the consent
decree with the FTC. The last divestiture was not completed until late January 2001, more than 20 months
after the deal had been announced. This delay forced Rosso to postpone cost cutting and to slow their new
product entries. This spooked farmers and dealers who could not get the firm to commit to telling them
which products would be discontinued and which the firm would continue to support with parts and
service. Fearful that CNH would discontinue duplicate Case and New Holland products, farmers and
equipment dealers switched brands. The result was that John Deere became more dominant than ever. CNH
was slow to reassure customers with tangible actions and to introduce new products competitive with
Deere. This gave Deere the opportunity to fill the vacuum in the marketplace.

The integration was deemed to have been completed a full four years after closing. As a sign of how
painful the integration had been, CNH was laying workers off as Deere was hiring to keep up with the
strong demand for its products. Deere also appeared to be ahead in moving toward common global
platforms and parts to take fuller advantage of economies of scale.

Discussion Questions:

1. Why is rapid integration important? Illustrate with examples from the case study.

Answer: Businesses should be integrated rapidly and intelligently to minimize customer

attrition, loss of key employees to competitors, reduced product/service quality, deteriorating
customer service and to maximize the acquirer’s ability to earn back any premium paid for the
target. By being slow to alert New Holland’s former customers about planned new product
entries, Case encouraged customer defection to Deere.

2. What could CNH have done differently to slow or reverse its loss of market share?

Answer: Case should have made decisions more rapidly and exhibited the ability to multitask.
By focusing on negotiating with the regulators, they were slow to make critical decisions and
to communicate effectively with all the firm’s stakeholders.

Exxon-Mobil: A Study in Cost Cutting

Having obtained access to more detailed information following consummation of the merger, Exxon-Mobil
announced dramatic revisions in its estimates of cost savings. The world’s largest publicly owned oil
company would cut almost 16,000 jobs by the end of 2002. This was an increase from the 9000 cuts
estimated when the merger was first announced in December 1998. Of the total, 6000 would come from
early retirement. Estimated annual savings reached $3.8 billion by 2003, up by more than $1 billion from
when the merger originally was announced. As time passed, the companies seemed to have become a
highly focused, smooth-running machine remarkably efficient at discovering, refining, and marketing oil
and gas. An indication of this is the fact that the firm spent less per barrel to find oil and gas in 2003 than at
almost any time in history. With revenues of $210 billion, Exxon-Mobil surged to the top of the Fortune
500 in 2004.

Discussion Question:

1. In your judgment, are acquirers more likely to under- or overestimate anticipated cost savings?
Explain your answer.
 Answer: Acquirers are more prone to overestimate both the amount of synergies and under-
estimate the time and money required to realize synergies. This conclusion is suggested by the
studies that show that buyers often tend to overpay for acquisitions. This overpayment is often
justified by overstating synergies.

Albertson’s Acquires American Stores—

Underestimating the Costs of Integration

In 1999, Albertson’s acquired American Stores for $12.5 billion, making it the nation’s second largest
supermarket chain, with more than 1000 stores. The corporate marriage stumbled almost immediately.
Escalating integration costs resulted in a sharp downward revision of its fiscal year 2000 profits. In the
quarter ended October 28, 1999, operating profits fell 15% to $185 million, despite an increase in sales of
1.6% to $8.98 billion. Albertson’s proceeded to update the Lucky supermarket stores that it had acquired in
California and to combine the distribution operations of the two supermarket chains. It appears that
Albertson’s substantially underestimated the complexity of integrating an acquisition of this magnitude.
Albertson’s spent about $90 million before taxes to convert more than 400 stores to its information and
distribution systems as well as to change the name to Albertson’s. By the end of 1999, Albertson’s stock
had lost more than one-half of its value (Bloomberg.com, November 1, 1999).

Discussion Questions:

1. In your judgment, do you think acquirers’ commonly (albeit not deliberately) understate
integration costs? Why or why not?

Answer: Such expenses are commonly understating when the acquirer is buying an unrelated
business. In such circumstances, the dollar outlay and the amount of time required to complete
integration often is understated.

2. Cite examples of expenses you believe are commonly incurred in integrating target companies.

Answer: Common integration-related expenses include the following: severance, retraining,

buying out leases, closure costs, merging IT centers, inventory and receivables write-downs,
maintenance expenses deferred by the seller, employee relocation expenses, advertising and
signage expenses, and public relations expenditures.

Overcoming Culture Clash:

Allianz AG Buys Pimco Advisors LP

On November 7, 1999, Allianz AG, the leading German insurance conglomerate, acquired Pimco Advisors
LP for $3.3 billion. The Pimco acquisition boosts assets under management at Allianz from $400 billion to
$650 billion, making it the sixth largest money manager in the world.

The cultural divide separating the two firms represented a potentially daunting challenge. Allianz’s
management was well aware that firms distracted by culture clashes and the morale problems and mistrust
they breed are less likely to realize the synergies and savings that caused them to acquire the company in
the first place. Allianz was acutely aware of the potential problems as a result of difficulties they had
experienced following the acquisition of Firemen’s Fund, a large U.S.-based property–casualty company.

A major motivation for the acquisition was to obtain the well-known skills of the elite Pimco money
managers to broaden Allianz’s financial services product offering. Although retention bonuses can buy
loyalty in the short run, employees of the acquired firm generally need much more than money in the long
term. Pimco’s money managers stated publicly that they wanted Allianz to let them operate independently,
the way Pimco existed under their former parent, Pacific Mutual Life Insurance Company. Allianz had
decided not only to run Pimco as an independent subsidiary but also to move $100 billion of Allianz’s
assets to Pimco. Bill Gross, Pimco’s legendary bond trader, and other top Pimco money managers, now
collect about one-fourth of their compensation in the form of Allianz stock. Moreover, most of the top
managers have been asked to sign long-term employment contracts and have received retention bonuses.

Joachim Faber, chief of money management at Allianz, played an essential role in smoothing over
cultural differences. Led by Faber, top Allianz executives had been visiting Pimco for months and having
quiet dinners with top Pimco fixed income investment officials and their families. The intent of these
intimate meetings was to reassure these officials that their operation would remain independent under
Allianz’s ownership.

Discussion Questions:

1. How did Allianz attempt to retain key employees? In the short run? In the long run?

Answer: In short-run, Allianz used retention bonuses to discourage the defection of key
employees. In the long-run, Allianz encouraged loyalty on the part of the Pimco employees by
keeping the business separate and letting them operate as they had prior to the acquisition. In
addition, key employees were asked to sign long-term employment agreements. Pimco money
managers also receive a large portion of their total compensation in Allianz stock. In a vote of
confidence in Pimco, Allianz transferred the investment portfolio they had been managing to
Pimco.

2. How did the potential for culture clash affect the way Alliance acquired Pimco?

Answer: Top Allianz managers spent months prior to the acquisition trying to build personal
relationships with key Pimco employees. Allianz recognized the importance of building trust.

3. What else could Allianz have done to minimize potential culture clash? Be specific.

Answer: Allianz may have benefiting from asking certain Pimco money managers to accept
temporary assignments with the parent. Likewise, Allianz employees could have taken
temporary positions with Pimco. This relationship building could accelerate the integration of
the disparate corporate cultures.

Avoiding the Merger Blues: American Airlines Integrates TWA

Trans World Airlines (TWA) had been tottering on the brink of bankruptcy for several years, jeopardizing a
number of jobs and the communities in which they are located. Despite concerns about increased
concentration, regulators approved American’s proposed buyout of TWA in 2000 largely on the basis of the
“failing company doctrine.” This doctrine suggested that two companies should be allowed to merge
despite an increase in market concentration if one of the firms can be saved from liquidation.

American, now the world’s largest airline, has struggled to assimilate such smaller acquisitions as AirCal
in 1987 and Reno Air in 1998. Now, in trying to meld together two major carriers with very different and
deeply ingrained cultures, a combined workforce of 113,000 and 900 jets serving 300 cities, American
faced even bigger challenges. For example, because switches and circuit breakers are in different locations
in TWA’s cockpits than in American’s, the combined airlines must spend millions of dollars to rearrange
cockpit gear and to train pilots how to adjust to the differences. TWA’s planes also are on different
maintenance schedules than American’s jets. For American to see any savings from combining maintenance
operations, it gradually had to synchronize those schedules. Moreover, TWA’s workers had to be educated
in American’s business methods, and the carrier’s reservations had to be transferred to American’s
computer systems. Planes had to be repainted, and seats had to be rearranged (McCartney, 2001).

Combining airline operations always has proved to be a huge task. American has studied the problems
that plagued other airline mergers, such as Northwest, which moved too quickly to integrate Republic
Airlines in 1986. This integration proved to be one of the most turbulent in history. The computers failed on
the first day of merged operations. Angry workers vandalized ground equipment. For 6 months, flights were
delayed and crews did not know where to find their planes. Passenger suitcases were misrouted. Former
Republic pilots complained that they were being demoted in favor of Northwest pilots. Friction between the
two groups of pilots continued for years. In contrast, American adopted a more moderately paced approach
as a result of the enormity and complexity of the tasks involved in putting the two airlines together. The
model they followed was Delta Airline’s acquisition of Western Airlines in 1986. Delta succeeded by
methodically addressing every issue, although the mergers were far less complex because they involved
merging far fewer computerized systems.

Even Delta had its problems, however. In 1991, Delta purchased Pan American World Airways’
European operations. Pan Am’s international staff had little in common with Delta’s largely domestic-
minded workforce, creating a tremendous cultural divide in terms of how the combined operations should
be managed. In response to the 1991–1992 recession, Delta scaled back some routes, cut thousands of jobs,
and reduced pay and benefits for workers who remained..

Before closing, American had set up an integration management team of 12 managers, six each from
American and TWA. An operations czar, who was to become the vice chair of the board of the new
company, directed the team. The group met daily by phone for as long as 2 hours, coordinating all merger-
related initiatives. American set aside a special server to log the team’s decisions. The team concluded that
the two lynchpins to a successful integration process were successfully resolving labor problems and
meshing the different computer systems. To ease the transition, William Compton, TWA’s CEO, agreed to
stay on with the new company through the transition period as president of the TWA operations.

The day after closing the team empowered 40 department managers at each airline to get involved. Their
tasks included replacing TWA’s long-term airport leases with short-term ones, combining some cargo
operations, changing over the automatic deposits of TWA employees’ paychecks, and implementing
American’s environmental response program at TWA in case of fuel spills. Work teams, consisting of both
American and TWA managers, identified more than 10,000 projects that must be undertaken before the two
airlines can be fully integrated.

Some immediate cost savings were realized as American was able to negotiate new lease rates on TWA
jets that are $200 million a year less than what TWA was paying. These savings were a result of the
increased credit rating of the combined companies. However, other cost savings were expected to be
modest during the 12 months following closing as the two airlines were operated separately. TWA’s union
workers, who would have lost their jobs had TWA shut down, have been largely supportive of the merger.
American has won an agreement from its own pilots’ union on a plan to integrate the carriers’ cockpit
crews. Seniority issues proved to be a major hurdle. Getting the mechanics’ and flight attendants’ unions on
board required substantial effort. All of TWA’s licenses had to be switched to American. These ranged from
the Federal Aviation Administration operating certificate to TWA’s liquor license in all the states.

Discussion Questions:

1. In your opinion, what are the advantages and disadvantages of moving to integrate operations
quickly? What are the advantages and disadvantages of moving more slowly and deliberately?

Answer: Quick integration minimizes employee turnover, customer and supplier attrition, and adds
to the acquirer’s ability to earn back any premium paid for the target. However, some functions
which directly touch the customer should be done more slowly since failure to smoothly integrate
these functions can be very disruptive to the customer. Such functions include customer service
call and data centers.

2. Why did American choose to use managers from both airlines to direct the integration of the
two companies? What are the specific benefits in doing so?

Answer: Choosing managers from both firms enables the use of the most competent managers. It
also helps to integrate disparate cultures by building trust and familiarity among managers from
both firms.
3. How did the interests of the various stakeholders to the merger affect the complexity of the
integration process?

Answer: The integration was made more challenging by the need to get acceptance by powerful
employee unions.

The Travelers and Citicorp Integration Experience

Promoted as a merger of equals, the merger of Travelers and Citicorp to form Citigroup illustrates many of
the problems encountered during postmerger integration. At $73 billion, the merger between Travelers and
Citicorp was the second largest merger in 1998 and is an excellent example of how integrating two
businesses can be far more daunting than consummating the transaction. Their experience demonstrates
how everything can be going smoothly in most of the businesses being integrated, except for one, and how
this single business can sop up all of management’s time and attention to correct its problems. In some
respects, it highlights the ultimate challenge of every major integration effort: getting people to work
together. It also spotlights the complexity of managing large, intricate businesses when authority at the top
is divided among several managers.

The strategic rationale for the merger relied heavily on cross-selling the financial services products of
both corporations to the other’s customers. The combination would create a financial services giant capable
of making loans, accepting deposits, selling mutual funds, underwriting securities, selling insurance, and
dispensing financial planning advice. Citicorp had relationships with thousands of companies around the
world. In contrast, Travelers’ Salomon Smith Barney unit dealt with relatively few companies. It was
believed that Salomon could expand its underwriting and investment banking business dramatically by
having access to the much larger Citicorp commercial customer base. Moreover, Citicorp lending officers,
who frequently had access only to midlevel corporate executives at companies within their customer base,
would have access to more senior executives as a result of Salomon’s investment banking relationships.

Although the characteristics of the two businesses seemed to be complementary, motivating all parties to
cooperate proved a major challenge. Because of the combined firm’s co-CEO arrangement, the lack of
clearly delineated authority exhausted management time and attention without resolving major integration
issues. Some decisions proved to be relatively easy. Others were not. Citicorp, in stark contrast to Travelers,
was known for being highly bureaucratic with marketing, credit, and finance departments at the global,
North American, and business unit levels. North American departments were eliminated quickly. Salomon
was highly regarded in the fixed income security area, so Citicorp’s fixed income operations were folded
into Salomon. Citicorp received Salomon’s foreign exchange trading operations because of their pre-merger
reputation in this business. However, both the Salomon and Citicorp derivatives business tended to overlap
and compete for the same customers. Each business unit within Travelers and Citicorp had a tendency to
believe they “owned” the relationship with their customers and were hesitant to introduce others that might
assume control over this relationship. Pay was also an issue, as investment banker salaries in Salomon
Smith Barney tended to dwarf those of Citicorp middle-level managers. When it came time to cut costs,
issues arose around who would be terminated.

Citicorp was organized along three major product areas: global corporate business, global consumer
business, and asset management. The merged companies’ management structure consisted of three
executives in the global corporate business area and two in each of the other major product areas. Each area
contained senior managers from both companies. Moreover, each area reported to the co-chairs and CEOs
John Reed and Sanford Weill, former CEOs of Citicorp and Travelers, respectively. Of the three major
product areas, the integration of two was progressing well, reflecting the collegial atmosphere of the top
managers in both areas. However, the global business area was well behind schedule, beset by major riffs
among the three top managers. Travelers’ corporate culture was characterized as strongly focused on the
bottom line, with a lean corporate overhead structure and a strong predisposition to impose its style on the
Citicorp culture. In contrast, Citicorp, under John Reed, tended to be more focused on the strategic vision
of the new company rather than on day-to-day operations.
 The organizational structure coupled with personal differences among certain key managers ultimately
resulted in the termination of James Dimon, who had been a star as president of Travelers before the
merger. On July 28, 1999, the co-chair arrangement was dissolved. Sanford Weill assumed responsibility
for the firm’s operating businesses and financial function, and John Reed became the focal point for the
company’s internet, advanced development, technology, human resources, and legal functions. This change
in organizational structure was intended to help clarify lines of authority and to overcome some of the
obstacles in managing a large and complex set of businesses that result from split decision-making
authority. On February 28, 2000, John Reed formally retired.

Although the power sharing arrangement may have been necessary to get the deal done, Reed’s leaving
made it easier for Weill to manage the business. The co-CEO arrangement had contributed to an extended
period of indecision, resulting in part to their widely divergent views. Reed wanted to support Citibank’s
Internet efforts with substantial and sustained investment, whereas the more bottom-line-oriented Weill
wanted to contain costs.

With its $112 billion in annual revenue in 2000, Citigroup ranked sixth on the Fortune 500 list. Its $13.5
billion in profit was second only to Exxon-Mobil’s $17.7 billion. The combination of Salomon Smith
Barney’s investment bankers and Citibank’s commercial bankers is working very effectively. In a year-end
2000 poll by Fortune magazine of the Most Admired U.S. companies, Citigroup was the clear winner.
Among the 600 companies judged by a poll of executives, directors, and securities analysts, it ranked first
for using its assets wisely and for long-term investment value (Loomis, 2001). However, this early success
has taken its toll on management. Of the 15 people initially on the management committee, only five
remain in addition to Weill. Among those that have left are all those that were with Citibank when the
merger was consummated. Ironically, in 2004, James Dimon emerged as the head of the JP Morgan Chase
powerhouse in direct competition with his former boss Sandy Weill of Citigroup.

Discussion Questions:

1. Why did Citibank and Travelers resort to a co-CEO arrangement? What are the
advantages and disadvantages of such an arrangement?

Answer: The Citibank/Travelers transaction was billed as a merger of equals,

i.e., one in which neither party is believed to provide a disproportionate share
of anticipated synergy. The co-CEO arrangement was necessary to get
support from the Citibank management team. The advantages are that they
encourage cooperation from top management of the target firm in completing
the transaction. However, during the post-closing period, the disadvantages
become evident due to the need to generate consensus within the office of
the CEO for important decisions. Moreover, the lack of clearly delineated
authority exhausted management time and attention without resolving major
integration issues.

2. Describe the management challenges you think may face Citigroup’s

management team due to the increasing global complexity of Citigroup?

Answer: The management teams of the two firms were quite different, as
were the overall corporate cultures. Citibank was widely viewed as a strong
marketing and planning organization, while Travelers focused on operational
efficiency and the effective implementation of business plans. Differing
priorities inevitably lead to inaction as both parties promote the efficacy of
their own philosophies. Action is often replaced by analysis of options.

3. Identify the key differences between Travelers’ and Citibank’s corporate

cultures. Discuss ways you would resolve such differences.
 Answer: Traveler’s corporate culture was characterized as strongly focused on
the bottom line, with a lean corporate overhead structure and a strong
predisposition to impose its style on the Citicorp culture. In contrast, Citicorp
tended to be more focused on the strategic vision of the new company rather
than on day-to-day operations. While these cultural differences were
formidable, some progress at infusing the new combined firm’s culture with
the best of both firms could be made by co-locating Traveler’s and Citibank
employees were possible. Moreover, managers from each firm could be
transferred laterally into similar positions to introduce new concepts,
discipline, and a sense of urgency. Finally, incentive systems could be
introduced to induce the desired changes in the new culture. For example,
while cost cutting seemed out of place within the Citibank environment,
bonuses for former Citibank managers could be made increasingly dependent
on their ability to achieve certain cost savings targets.

4. In what sense is the initial divergence in Travelers’ operational orientation and

Citigroup’s marketing and planning orientation an excellent justification for
the merger? Explain your answer.

Answer: The core competencies of the two businesses, e.g., Citibank’s

marketing and planning skills and Traveler’s operational excellence, filled
voids found in each business. The different talents of each firm presented an
opportunity for the new firm to develop a culture that would exploit the best
of both firms in order to strengthen its overall competitiveness.

5. One justification for the merger was the cross-selling opportunities it would
provide. Comment on the challenges that might be involved in making such a
marketing strategy work.

Answer: Cross-selling is a conceptually simple strategy, but it is often

ferociously difficult to implement. Marketing and sales people tend to sell that
with which they are most comfortable. Consequently, even if they are
provided with a new array of product to offer their customers, they may be
very slow in doing so because it is simply easier to continue to sell what they
have been selling. Furthermore, sales people must be trained in how to sell
the new products. This takes both time and money. Finally, new incentive
systems may be required to induce the sales forces of each firm to sell the
other firm’s products aggressively.

Promises to PeopleSoft's Customers Complicate Oracle's Integration Efforts

When Oracle first announced its bid for PeopleSoft in mid-2003, the firm indicated that it planned to stop
selling PeopleSoft's existing software programs and halt any additions to its product lines. This would
result in the termination of much of PeopleSoft's engineering, sales, and support staff. Oracle indicated that
it was more interested in PeopleSoft's customer list than its technology. PeopleSoft earned sizeable profit
margins on its software maintenance contracts, under which customers pay for product updates, fixing
software errors, and other forms of product support. Maintenance fees represented an annuity stream that
could improve profitability even when new product sales are listless. However, PeopleSoft's customers
worried that they would have to go through the costly and time-consuming process of switching software.
To win customer support for the merger and to avoid triggering $2 billion in guarantees PeopleSoft had
offered its customers in the event Oracle failed to support its products, Oracle had to change dramatically
its position over the next 18 months.
One day after reaching agreement with the PeopleSoft board, Oracle announced it would release a new
version of PeopleSoft's products and would develop another version of J.D. Edwards's software, which
PeopleSoft had acquired in 2003. Oracle committed itself to support the acquired products even longer than
PeopleSoft's guarantees would have required. Consequently, Oracle had to maintain programs that run with
database software sold by rivals such as IBM. Oracle also had to retain the bulk of PeopleSoft's engineering
staff and sales and customer support teams.
Among the biggest beneficiaries of the protracted takeover battle was German software giant SAP. SAP
was successful in winning customers uncomfortable about dealing with either Oracle or PeopleSoft. SAP
claimed that its worldwide market share had grown from 51 percent in mid-2003 to 56 percent by late
2004. SAP took advantage of the highly public hostile takeover by using sales representatives, email, and
an international print advertising campaign to target PeopleSoft customers. The firm touted its reputation
for maintaining the highest quality of support and service for its products.

Discussion Questions

1. How did the commitments Oracle made to PeopleSoft's customers have affected its ability to realize
anticipated synergies? Be specific.
Answer: Such commitments prevented Oracle from cutting duplicate positions at PeopleSoft in order to
realize cost savings in a timely fashion. Moreover, Oracle had to maintain investment levels to ensure
maintain appropriate customer support and maintenance operations.
2. Explain why Oracle’s willingness to pay such a high premium for PeopleSoft and its willingness to
change its position on supporting PeopleSoft products and retaining the firm's employees may have had
a negative impact on Oracle shareholders. Be specific.
Answer: The inability to realize savings immediately limited Oracle’s ability to earn back the large
premium paid for the firm, potentially resulting in an inability to earn the firm’s cost of capital.