Exam 6: Postclosing Integration: Mergers, Acquisitions, and Business Alliances

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. -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?

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

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

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

Assessing Procter & Gamble’s Acquisition of Gillette: What Worked and What Didn’t 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. -Why did P&G rely heavily on personnel in both companies to implement post-closing integration?

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

All of the following are often cited as factors critical to the ultimate success of the integration effort except for

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

Which of the following is generally not true about communication during the integration period?

Employees of both the target and acquiring firms are likely to resist change following a takeover.

Rapid integration is usually important for all of the following reasons except for

All of the following are generally true about creating new organizations except for

Steel Giants Mittal and Arcelor Adopt a Highly Disciplined Approach to Postclosing Integration 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. 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. 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. -Why is it important to establish both" top-down" and "bottoms-up" estimates of synergy?

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

Why is the integration phase of the acquisition process considered so important?

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.

It is crucial to focus on the highest leverage issues in implementing post-merger integration.

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. -Identify the key differences between Travelers' and Citibank's corporate cultures. Discuss ways you would resolve such differences.

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

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. -Cite key cultural differences between the two organizations. How were they resolved?