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

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. -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.

Decentralized management control usually facilitates the integration of a newly acquired business.

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.

Given the complexity of these two businesses, do you believe the acquisition of Gillette by P&G made sense?

A newly merged company will often experience at least a 5-10% loss of current customers during the integration effort.

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.

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

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 is it often considered critical to integrate the target business quickly? Be specific.

Merging compensation systems can be one of the most challenging activities of the integration process.

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 Allianz attempt to retain key employees? In the short run? In the long run?

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. -How did the interests of the various stakeholders to the merger affect the complexity of the integration process?

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

Certain post integration issues are best addressed prior to the closing. These include all of the following except for

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

Higt employee defection during the integration period is an excellent way to realize cost savings?

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. -Why do you believe the Tribune thought it could overcome the substantial cultural differences between itself and the Times Mirror Corporation? Be specific.

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.

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. -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.

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. -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?

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