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

Key stakeholders in the integration effort generally include employees, customers, suppliers, communities, and regulators.

Which of the following is not true about the primary responsibilities of the management integration team (MIT)?

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

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

Panasonic Moves to Consolidate Past Acquisitions • 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. -Describe the advantages and disadvantages of owning less than 100 percent of another company.

Staffing plans should be postponed to relatively late in the integration process.

Why is candid and continuous communication so important during the integration phase?

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.

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

When news about the integration is bad, it is critical never to share it with employees.

Which of the following is not true about integrating business alliances?

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 were the principal risks to the merger?

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?

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

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. -What would you have done differently following closing to overcome the cultural challenges faced by the Tribune? Be specific.

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

Integration is among the most important factors contributing to the success or failure of mergers and acquisitions.

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.

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

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.