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

Integrating Supply Chains: Coty Cosmetics Integrates Unilever Cosmetics International In mid-August 2005, Coty, one of the world's largest cosmetics and fragrance manufacturers, acquired Unilever Cosmetics International (UCI), a subsidiary of the Unilever global conglomerate, for $800 million. Coty viewed the transaction as one in which it could become a larger player in the prestigious fragrance market of expensive perfumes. Coty believed it could reap economies of scale from having just one sales force, marketing group, and the like selling and managing the two sets of products. It hoped to retain the best people from both organizations. However, Coty's management understood that if it were not done quickly enough, it might not realize the potential cost savings and would risk losing key personnel. By mid-December, Coty's IT team had just completed moving UCI's employees from Unilever's infrastructure to Coty's. This involved such tedious work as switching employees from Microsoft's Outlook to Lotus Notes. Coty's information technology team was faced with the challenge of combining and standardizing the two firms' supply chains, including order entry, purchasing, processing, financial, warehouse, and shipping systems. At the end of 2006, Coty's management announced that it anticipated that the two firms would be fully integrated by June 30, 2006. From an IT perspective, the challenges were daunting. The new company's supply chain spanned ten countries and employed four different enterprise resource planning (ERP) systems that had three warehouse systems running five major distribution facilities on two continents. ERP is an information system or process that integrates all production and related applications across an entire corporation. On January 11–12, 2006, 25 process or function "owners," including the heads of finance, customer service, distribution, and IT, met to create the integration plan for the firm's disparate supply chains. In addition to the multiple distribution centers and ERP systems, operations in each country had unique processes that had to be included in the integration planning effort. For example, Italy was already using the SAP system on which Coty would eventually standardize. The largest customers there placed orders at the individual store level and expected products to be delivered to these stores. In contrast, the United Kingdom used a legacy (i.e., a highly customized, nonstandard) ERP system, and Coty's largest customer in the United Kingdom, the Boots pharmacy chain, placed orders electronically and had them delivered to central warehouses. Coty's IT team, facing a very demanding schedule, knew it could not accomplish all that needed to be done in the time frame required. Therefore, it started with any system that directly affected the customer, such as sending an order to the warehouse, shipment notification, and billing. The decision to focus on "customer-facing" systems came at the expense of internal systems, such as daily management reports tracking sales and inventory levels. These systems were to be completed after the June 30, 2006, deadline imposed by senior management. To minimize confusion, Coty created small project teams that consisted of project managers, IT directors, and external consultants. Smaller teams did not require costly overhead, like dedicated office space, and eliminated chains of command that might have prevented senior IT management from receiving timely, candid feedback on actual progress against the integration plan. The use of such teams is credited with allowing Coty's IT department to combine sales and marketing forces as planned at the beginning of the 2007 fiscal year in July 2006. While much of the "customer-facing" work was done, many tasks remained. The IT department now had to go back and work out the details it had neglected during the previous integration effort, such as those daily reports its senior managers wanted and the real-time monitoring of transactions. By setting priorities early in the process and employing small, project-focused teams, Coty was able to integrate successfully the complex supply chains of the firms in a timely manner. -Discuss the advantages and disadvantages of using small project teams. Be specific.

Highly decentralized organizational structures generally expedite the integration effort more so than highly centralized structures.

The Challenges of Integrating United and Continental Airlines Among the critical early decisions that must be made before implementing integration is the selection of the manager overseeing the process. Integration teams commonly consist of managers from both the acquirer firm and the target firm. Senior management must remain involved in the postmerger integration process. Realizing anticipated synergies often is elusive. ______________________________________________________________________________________ On June 29, 2011, integration executive Lori Gobillot was selected by United Continental Holdings, the parent of both United and Continental airlines, to stitch together United and Continental airlines into the world’s largest airline. Having completed the merger in October 2010, United and Continental airlines immediately began the gargantuan task of creating the largest airline in the world. In the area of information technology alone, the two firms had to integrate more than 1,400 separate systems, programs, and protocols. Workers from the two airlines were represented by two different unions and were subject to different work rules. Even the airplanes were laid out differently, with United’s fleet having first-class cabins and Continental’s planes having business and coach only. The combined carriers have routes connecting 373 airports in 63 countries. The combined firms have more than 1,300 airplanes. Jeffry Smisek, CEO of United Continental Holdings, had set expectations high, telling Wall Street analysts that the combined firms expected to generate at least $1.2 billion in cost savings annually within three years. This was to be achieved by rationalizing operations and eliminating redundancies. Smisek selected Lori Gobillot as the executive in charge of the integration effort because she had coordinated the carrier’s due diligence with United during the period prior to the two firm’s failed attempt to combine in 2008. Her accumulated knowledge of the two airlines, interpersonal skills, self-discipline, and drive made her a natural choice. She directed 33 interdisciplinary integration teams that collectively made thousands of decisions, ranging from the fastest way to clean 1,260 airplanes and board passengers to which perks to offer in the frequent flyer program. The teams consisted of personnel from both airlines. Members included managers from such functional departments as technology, human resources, fleet management, and network planning and were structured around such activities as operations and a credit card partnership with JPMorgan Chase. In most cases, the teams agreed to retain at least one of the myriad programs already in place for the passengers of one of the airlines so that at least some of the employees would be familiar with the programs. If she was unable to resolve disagreements within teams, Gobillot invited senior managers to join the deliberations. In order to stay on a tight time schedule, Gobillot emphasized to employees at both firms that the integration effort was not “us versus them” but, rather, that they were all in it together. All had to stay focused on the need to achieve integration on a timely basis while minimizing disruption to daily operations if planned synergies were to be realized. Nevertheless, despite the hard work and commitment of those involved in the process, history shows that the challenges associated with any postclosing integration often are daunting. The integration of Continental and United was no exception. United pilots have resisted the training they were offered to learn Continental’s flight procedures. They even unsuccessfully sued their employer due to the slow pace of negotiations to reach new, unified labor contracts. Customers have been confused by the inability of Continental agents to answer questions about United’s flights. Additional confusion was created on March 3, 2012, when the two airlines merged their reservation systems, websites, and frequent flyer programs, a feat that had often been accomplished in stages in prior airline mergers. As a result of alienation of some frequent flyer customers, reservation snafus, and flight delays, revenue has failed thus far to meet expectations. Moreover, by the end of 2012, one-time merger-related expenses totaled almost $1.5 billion. Many airline mergers in the past have hit rough spots that reduced anticipated ongoing savings and revenue increases. Pilots and flight attendants at US Airways Group, a combination of US Airways and America West, were still operating under separate contracts with different pay rates, schedules, and work rules six years after the merger. Delta Airlines remains ensnared in a labor dispute that has kept it from equalizing pay and work rules for flight attendants and ramp workers at Delta and Northwest Airlines, which Delta acquired in 2008. The longer these disputes continue, the greater the cultural divide in integrating these businesses. Alcatel Merges with Lucent, Highlighting Cross-Cultural Issues Alcatel SA and Lucent Technologies signed a merger pact on April 3, 2006, to form a Paris-based telecommunications equipment giant. The combined firms would be led by Lucent's chief executive officer Patricia Russo. Her charge would be to meld two cultures during a period of dynamic industry change. Lucent and Alcatel were considered natural merger partners because they had overlapping product lines and different strengths. More than two-thirds of Alcatel’s business came from Europe, Latin America, the Middle East, and Africa. The French firm was particularly strong in equipment that enabled regular telephone lines to carry high-speed Internet and digital television traffic. Nearly two-thirds of Lucent's business was in the United States. The new company was expected to eliminate 10 percent of its workforce of 88,000 and save $1.7 billion annually within three years by eliminating overlapping functions. While billed as a merger of equals, Alcatel of France, the larger of the two, would take the lead in shaping the future of the new firm, whose shares would be listed in Paris, not in the United States. The board would have six members from the current Alcatel board and six from the current Lucent board, as well as two independent directors that must be European nationals. Alcatel CEO Serge Tehuruk would serve as the chairman of the board. Much of Ms. Russo's senior management team, including the chief operating officer, chief financial officer, the head of the key emerging markets unit, and the director of human resources, would come from Alcatel. To allay U.S. national security concerns, the new company would form an independent U.S. subsidiary to administer American government contracts. This subsidiary would be managed separately by a board composed of three U.S. citizens acceptable to the U.S. government. International combinations involving U.S. companies have had a spotty history in the telecommunications industry. For example, British Telecommunications PLC and AT&T Corp. saw their joint venture, Concert, formed in the late 1990s, collapse after only a few years. Even outside the telecom industry, transatlantic mergers have been fraught with problems. For example, Daimler Benz's 1998 deal with Chrysler, which was also billed as a merger of equals, was heavily weighted toward the German company from the outset. In integrating Lucent and Alcatel, Russo faced a number of practical obstacles, including who would work out of Alcatel's Paris headquarters. Russo, who became Lucent's chief executive in 2000 and does not speak French, had to navigate the challenges of doing business in France. The French government has a big influence on French companies and remains a large shareholder in the telecom and defense sectors. Russo's first big fight would be dealing with the job cuts that were anticipated in the merger plan. French unions tend to be strong, and employees enjoy more legal protections than elsewhere. Hundreds of thousands took to the streets in mid-2006 to protest a new law that would make it easier for firms to hire and fire younger workers. Russo has extensive experience with big layoffs. At Lucent, she helped orchestrate spin-offs, layoffs, and buyouts involving nearly four-fifths of the firm's workforce. Making choices about cuts in a combined company would likely be even more difficult, with Russo facing a level of resistance in France unheard of in the United States, where it is generally accepted that most workers are subject to layoffs and dismissals. Alcatel has been able to make many of its job cuts in recent years outside France, thereby avoiding the greater difficulty of shedding French workers. Lucent workers feared that they would be dismissed first simply because it is easier than dismissing their French counterparts. After the 2006 merger, the company posted six quarterly losses and took more than $4.5 billion in write-offs, while its stock plummeted more than 60 percent. An economic slowdown and tight credit limited spending by phone companies. Moreover, the market was getting more competitive, with China's Huawei aggressively pricing its products. However, other telecommunications equipment manufacturers facing the same conditions have not fared nearly as badly as Alcatel-Lucent. Melding two fundamentally different cultures (Alcatel's entrepreneurial and Lucent's centrally controlled cultures) has proven daunting. Customers who were uncertain about the new firm's products migrated to competitors, forcing Alcatel-Lucent to slash prices even more. Despite the aggressive job cuts, a substantial portion of the projected $3.1 billion in savings from the layoffs were lost to discounts the company made to customers in an effort to rebuild market share. Frustrated by the lack of progress in turning around the business, the Alcatel-Lucent board announced in July 2008 that Patricia Russo, the American chief executive, and Serge Tchuruk, the French chairman, would leave the company by the end of the year. The board also announced that, as part of the shake-up, the size of the board would be reduced, with Henry Schacht, a former chief executive at Lucent, stepping down. Perhaps hamstrung by its dual personality, the French-American company seemed poised to take on a new personality of its own by jettisoning previous leadership. -In what way would you characterize this transaction as a merger of equals? In what ways should it not be considered a merger of equals?

Integrating Supply Chains: Coty Cosmetics Integrates Unilever Cosmetics International In mid-August 2005, Coty, one of the world's largest cosmetics and fragrance manufacturers, acquired Unilever Cosmetics International (UCI), a subsidiary of the Unilever global conglomerate, for $800 million. Coty viewed the transaction as one in which it could become a larger player in the prestigious fragrance market of expensive perfumes. Coty believed it could reap economies of scale from having just one sales force, marketing group, and the like selling and managing the two sets of products. It hoped to retain the best people from both organizations. However, Coty's management understood that if it were not done quickly enough, it might not realize the potential cost savings and would risk losing key personnel. By mid-December, Coty's IT team had just completed moving UCI's employees from Unilever's infrastructure to Coty's. This involved such tedious work as switching employees from Microsoft's Outlook to Lotus Notes. Coty's information technology team was faced with the challenge of combining and standardizing the two firms' supply chains, including order entry, purchasing, processing, financial, warehouse, and shipping systems. At the end of 2006, Coty's management announced that it anticipated that the two firms would be fully integrated by June 30, 2006. From an IT perspective, the challenges were daunting. The new company's supply chain spanned ten countries and employed four different enterprise resource planning (ERP) systems that had three warehouse systems running five major distribution facilities on two continents. ERP is an information system or process that integrates all production and related applications across an entire corporation. On January 11–12, 2006, 25 process or function "owners," including the heads of finance, customer service, distribution, and IT, met to create the integration plan for the firm's disparate supply chains. In addition to the multiple distribution centers and ERP systems, operations in each country had unique processes that had to be included in the integration planning effort. For example, Italy was already using the SAP system on which Coty would eventually standardize. The largest customers there placed orders at the individual store level and expected products to be delivered to these stores. In contrast, the United Kingdom used a legacy (i.e., a highly customized, nonstandard) ERP system, and Coty's largest customer in the United Kingdom, the Boots pharmacy chain, placed orders electronically and had them delivered to central warehouses. Coty's IT team, facing a very demanding schedule, knew it could not accomplish all that needed to be done in the time frame required. Therefore, it started with any system that directly affected the customer, such as sending an order to the warehouse, shipment notification, and billing. The decision to focus on "customer-facing" systems came at the expense of internal systems, such as daily management reports tracking sales and inventory levels. These systems were to be completed after the June 30, 2006, deadline imposed by senior management. To minimize confusion, Coty created small project teams that consisted of project managers, IT directors, and external consultants. Smaller teams did not require costly overhead, like dedicated office space, and eliminated chains of command that might have prevented senior IT management from receiving timely, candid feedback on actual progress against the integration plan. The use of such teams is credited with allowing Coty's IT department to combine sales and marketing forces as planned at the beginning of the 2007 fiscal year in July 2006. While much of the "customer-facing" work was done, many tasks remained. The IT department now had to go back and work out the details it had neglected during the previous integration effort, such as those daily reports its senior managers wanted and the real-time monitoring of transactions. By setting priorities early in the process and employing small, project-focused teams, Coty was able to integrate successfully the complex supply chains of the firms in a timely manner. -How might this emphasis on integrating "customer-facing" systems have affected the new firm's ability to realize anticipated synergies? Be specific.

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. -When does it make sense to buy a minority interest, a majority interest, or 100 percent of the publicly traded shares of another company?

The acquirer's sales force sells very complex software solutions to its customers. The target firm manufactures commodity hardware products. Customers of the two firms sometimes buy both products. The benefits of integrating the sales force of both the acquirer and target firms includes all of the following except for

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

The Challenges of Integrating United and Continental Airlines Among the critical early decisions that must be made before implementing integration is the selection of the manager overseeing the process. Integration teams commonly consist of managers from both the acquirer firm and the target firm. Senior management must remain involved in the postmerger integration process. Realizing anticipated synergies often is elusive. ______________________________________________________________________________________ On June 29, 2011, integration executive Lori Gobillot was selected by United Continental Holdings, the parent of both United and Continental airlines, to stitch together United and Continental airlines into the world’s largest airline. Having completed the merger in October 2010, United and Continental airlines immediately began the gargantuan task of creating the largest airline in the world. In the area of information technology alone, the two firms had to integrate more than 1,400 separate systems, programs, and protocols. Workers from the two airlines were represented by two different unions and were subject to different work rules. Even the airplanes were laid out differently, with United’s fleet having first-class cabins and Continental’s planes having business and coach only. The combined carriers have routes connecting 373 airports in 63 countries. The combined firms have more than 1,300 airplanes. Jeffry Smisek, CEO of United Continental Holdings, had set expectations high, telling Wall Street analysts that the combined firms expected to generate at least $1.2 billion in cost savings annually within three years. This was to be achieved by rationalizing operations and eliminating redundancies. Smisek selected Lori Gobillot as the executive in charge of the integration effort because she had coordinated the carrier’s due diligence with United during the period prior to the two firm’s failed attempt to combine in 2008. Her accumulated knowledge of the two airlines, interpersonal skills, self-discipline, and drive made her a natural choice. She directed 33 interdisciplinary integration teams that collectively made thousands of decisions, ranging from the fastest way to clean 1,260 airplanes and board passengers to which perks to offer in the frequent flyer program. The teams consisted of personnel from both airlines. Members included managers from such functional departments as technology, human resources, fleet management, and network planning and were structured around such activities as operations and a credit card partnership with JPMorgan Chase. In most cases, the teams agreed to retain at least one of the myriad programs already in place for the passengers of one of the airlines so that at least some of the employees would be familiar with the programs. If she was unable to resolve disagreements within teams, Gobillot invited senior managers to join the deliberations. In order to stay on a tight time schedule, Gobillot emphasized to employees at both firms that the integration effort was not “us versus them” but, rather, that they were all in it together. All had to stay focused on the need to achieve integration on a timely basis while minimizing disruption to daily operations if planned synergies were to be realized. Nevertheless, despite the hard work and commitment of those involved in the process, history shows that the challenges associated with any postclosing integration often are daunting. The integration of Continental and United was no exception. United pilots have resisted the training they were offered to learn Continental’s flight procedures. They even unsuccessfully sued their employer due to the slow pace of negotiations to reach new, unified labor contracts. Customers have been confused by the inability of Continental agents to answer questions about United’s flights. Additional confusion was created on March 3, 2012, when the two airlines merged their reservation systems, websites, and frequent flyer programs, a feat that had often been accomplished in stages in prior airline mergers. As a result of alienation of some frequent flyer customers, reservation snafus, and flight delays, revenue has failed thus far to meet expectations. Moreover, by the end of 2012, one-time merger-related expenses totaled almost $1.5 billion. Many airline mergers in the past have hit rough spots that reduced anticipated ongoing savings and revenue increases. Pilots and flight attendants at US Airways Group, a combination of US Airways and America West, were still operating under separate contracts with different pay rates, schedules, and work rules six years after the merger. Delta Airlines remains ensnared in a labor dispute that has kept it from equalizing pay and work rules for flight attendants and ramp workers at Delta and Northwest Airlines, which Delta acquired in 2008. The longer these disputes continue, the greater the cultural divide in integrating these businesses. Alcatel Merges with Lucent, Highlighting Cross-Cultural Issues Alcatel SA and Lucent Technologies signed a merger pact on April 3, 2006, to form a Paris-based telecommunications equipment giant. The combined firms would be led by Lucent's chief executive officer Patricia Russo. Her charge would be to meld two cultures during a period of dynamic industry change. Lucent and Alcatel were considered natural merger partners because they had overlapping product lines and different strengths. More than two-thirds of Alcatel’s business came from Europe, Latin America, the Middle East, and Africa. The French firm was particularly strong in equipment that enabled regular telephone lines to carry high-speed Internet and digital television traffic. Nearly two-thirds of Lucent's business was in the United States. The new company was expected to eliminate 10 percent of its workforce of 88,000 and save $1.7 billion annually within three years by eliminating overlapping functions. While billed as a merger of equals, Alcatel of France, the larger of the two, would take the lead in shaping the future of the new firm, whose shares would be listed in Paris, not in the United States. The board would have six members from the current Alcatel board and six from the current Lucent board, as well as two independent directors that must be European nationals. Alcatel CEO Serge Tehuruk would serve as the chairman of the board. Much of Ms. Russo's senior management team, including the chief operating officer, chief financial officer, the head of the key emerging markets unit, and the director of human resources, would come from Alcatel. To allay U.S. national security concerns, the new company would form an independent U.S. subsidiary to administer American government contracts. This subsidiary would be managed separately by a board composed of three U.S. citizens acceptable to the U.S. government. International combinations involving U.S. companies have had a spotty history in the telecommunications industry. For example, British Telecommunications PLC and AT&T Corp. saw their joint venture, Concert, formed in the late 1990s, collapse after only a few years. Even outside the telecom industry, transatlantic mergers have been fraught with problems. For example, Daimler Benz's 1998 deal with Chrysler, which was also billed as a merger of equals, was heavily weighted toward the German company from the outset. In integrating Lucent and Alcatel, Russo faced a number of practical obstacles, including who would work out of Alcatel's Paris headquarters. Russo, who became Lucent's chief executive in 2000 and does not speak French, had to navigate the challenges of doing business in France. The French government has a big influence on French companies and remains a large shareholder in the telecom and defense sectors. Russo's first big fight would be dealing with the job cuts that were anticipated in the merger plan. French unions tend to be strong, and employees enjoy more legal protections than elsewhere. Hundreds of thousands took to the streets in mid-2006 to protest a new law that would make it easier for firms to hire and fire younger workers. Russo has extensive experience with big layoffs. At Lucent, she helped orchestrate spin-offs, layoffs, and buyouts involving nearly four-fifths of the firm's workforce. Making choices about cuts in a combined company would likely be even more difficult, with Russo facing a level of resistance in France unheard of in the United States, where it is generally accepted that most workers are subject to layoffs and dismissals. Alcatel has been able to make many of its job cuts in recent years outside France, thereby avoiding the greater difficulty of shedding French workers. Lucent workers feared that they would be dismissed first simply because it is easier than dismissing their French counterparts. After the 2006 merger, the company posted six quarterly losses and took more than $4.5 billion in write-offs, while its stock plummeted more than 60 percent. An economic slowdown and tight credit limited spending by phone companies. Moreover, the market was getting more competitive, with China's Huawei aggressively pricing its products. However, other telecommunications equipment manufacturers facing the same conditions have not fared nearly as badly as Alcatel-Lucent. Melding two fundamentally different cultures (Alcatel's entrepreneurial and Lucent's centrally controlled cultures) has proven daunting. Customers who were uncertain about the new firm's products migrated to competitors, forcing Alcatel-Lucent to slash prices even more. Despite the aggressive job cuts, a substantial portion of the projected $3.1 billion in savings from the layoffs were lost to discounts the company made to customers in an effort to rebuild market share. Frustrated by the lack of progress in turning around the business, the Alcatel-Lucent board announced in July 2008 that Patricia Russo, the American chief executive, and Serge Tchuruk, the French chairman, would leave the company by the end of the year. The board also announced that, as part of the shake-up, the size of the board would be reduced, with Henry Schacht, a former chief executive at Lucent, stepping down. Perhaps hamstrung by its dual personality, the French-American company seemed poised to take on a new personality of its own by jettisoning previous leadership. -Why do you think mergers, both domestic and cross-border, are often communicated by the acquirer and target firms' management as mergers of equals?

Newly merged firms frequently experience a loss of existing customers as a direct consequence of the merger.

Revenue growth is often sacrificed in an effort to engage in aggressive cost cutting during the integration period.

Integrating Supply Chains: Coty Cosmetics Integrates Unilever Cosmetics International In mid-August 2005, Coty, one of the world's largest cosmetics and fragrance manufacturers, acquired Unilever Cosmetics International (UCI), a subsidiary of the Unilever global conglomerate, for $800 million. Coty viewed the transaction as one in which it could become a larger player in the prestigious fragrance market of expensive perfumes. Coty believed it could reap economies of scale from having just one sales force, marketing group, and the like selling and managing the two sets of products. It hoped to retain the best people from both organizations. However, Coty's management understood that if it were not done quickly enough, it might not realize the potential cost savings and would risk losing key personnel. By mid-December, Coty's IT team had just completed moving UCI's employees from Unilever's infrastructure to Coty's. This involved such tedious work as switching employees from Microsoft's Outlook to Lotus Notes. Coty's information technology team was faced with the challenge of combining and standardizing the two firms' supply chains, including order entry, purchasing, processing, financial, warehouse, and shipping systems. At the end of 2006, Coty's management announced that it anticipated that the two firms would be fully integrated by June 30, 2006. From an IT perspective, the challenges were daunting. The new company's supply chain spanned ten countries and employed four different enterprise resource planning (ERP) systems that had three warehouse systems running five major distribution facilities on two continents. ERP is an information system or process that integrates all production and related applications across an entire corporation. On January 11–12, 2006, 25 process or function "owners," including the heads of finance, customer service, distribution, and IT, met to create the integration plan for the firm's disparate supply chains. In addition to the multiple distribution centers and ERP systems, operations in each country had unique processes that had to be included in the integration planning effort. For example, Italy was already using the SAP system on which Coty would eventually standardize. The largest customers there placed orders at the individual store level and expected products to be delivered to these stores. In contrast, the United Kingdom used a legacy (i.e., a highly customized, nonstandard) ERP system, and Coty's largest customer in the United Kingdom, the Boots pharmacy chain, placed orders electronically and had them delivered to central warehouses. Coty's IT team, facing a very demanding schedule, knew it could not accomplish all that needed to be done in the time frame required. Therefore, it started with any system that directly affected the customer, such as sending an order to the warehouse, shipment notification, and billing. The decision to focus on "customer-facing" systems came at the expense of internal systems, such as daily management reports tracking sales and inventory levels. These systems were to be completed after the June 30, 2006, deadline imposed by senior management. To minimize confusion, Coty created small project teams that consisted of project managers, IT directors, and external consultants. Smaller teams did not require costly overhead, like dedicated office space, and eliminated chains of command that might have prevented senior IT management from receiving timely, candid feedback on actual progress against the integration plan. The use of such teams is credited with allowing Coty's IT department to combine sales and marketing forces as planned at the beginning of the 2007 fiscal year in July 2006. While much of the "customer-facing" work was done, many tasks remained. The IT department now had to go back and work out the details it had neglected during the previous integration effort, such as those daily reports its senior managers wanted and the real-time monitoring of transactions. By setting priorities early in the process and employing small, project-focused teams, Coty was able to integrate successfully the complex supply chains of the firms in a timely manner. -Do you agree with Coty management's decision to focus on integrating "customer-facing" systems first? Explain your answer.

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

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

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

The management integration team's primary responsibilities should be to focus on achieving long-term profit goals, monitoring actual performance to the goals of the integration plan, and on cost management.

Pre-closing integration planning is likely to be easier in friendly than in hostile transactions.

The Challenges of Integrating United and Continental Airlines Among the critical early decisions that must be made before implementing integration is the selection of the manager overseeing the process. Integration teams commonly consist of managers from both the acquirer firm and the target firm. Senior management must remain involved in the postmerger integration process. Realizing anticipated synergies often is elusive. ______________________________________________________________________________________ On June 29, 2011, integration executive Lori Gobillot was selected by United Continental Holdings, the parent of both United and Continental airlines, to stitch together United and Continental airlines into the world’s largest airline. Having completed the merger in October 2010, United and Continental airlines immediately began the gargantuan task of creating the largest airline in the world. In the area of information technology alone, the two firms had to integrate more than 1,400 separate systems, programs, and protocols. Workers from the two airlines were represented by two different unions and were subject to different work rules. Even the airplanes were laid out differently, with United’s fleet having first-class cabins and Continental’s planes having business and coach only. The combined carriers have routes connecting 373 airports in 63 countries. The combined firms have more than 1,300 airplanes. Jeffry Smisek, CEO of United Continental Holdings, had set expectations high, telling Wall Street analysts that the combined firms expected to generate at least $1.2 billion in cost savings annually within three years. This was to be achieved by rationalizing operations and eliminating redundancies. Smisek selected Lori Gobillot as the executive in charge of the integration effort because she had coordinated the carrier’s due diligence with United during the period prior to the two firm’s failed attempt to combine in 2008. Her accumulated knowledge of the two airlines, interpersonal skills, self-discipline, and drive made her a natural choice. She directed 33 interdisciplinary integration teams that collectively made thousands of decisions, ranging from the fastest way to clean 1,260 airplanes and board passengers to which perks to offer in the frequent flyer program. The teams consisted of personnel from both airlines. Members included managers from such functional departments as technology, human resources, fleet management, and network planning and were structured around such activities as operations and a credit card partnership with JPMorgan Chase. In most cases, the teams agreed to retain at least one of the myriad programs already in place for the passengers of one of the airlines so that at least some of the employees would be familiar with the programs. If she was unable to resolve disagreements within teams, Gobillot invited senior managers to join the deliberations. In order to stay on a tight time schedule, Gobillot emphasized to employees at both firms that the integration effort was not “us versus them” but, rather, that they were all in it together. All had to stay focused on the need to achieve integration on a timely basis while minimizing disruption to daily operations if planned synergies were to be realized. Nevertheless, despite the hard work and commitment of those involved in the process, history shows that the challenges associated with any postclosing integration often are daunting. The integration of Continental and United was no exception. United pilots have resisted the training they were offered to learn Continental’s flight procedures. They even unsuccessfully sued their employer due to the slow pace of negotiations to reach new, unified labor contracts. Customers have been confused by the inability of Continental agents to answer questions about United’s flights. Additional confusion was created on March 3, 2012, when the two airlines merged their reservation systems, websites, and frequent flyer programs, a feat that had often been accomplished in stages in prior airline mergers. As a result of alienation of some frequent flyer customers, reservation snafus, and flight delays, revenue has failed thus far to meet expectations. Moreover, by the end of 2012, one-time merger-related expenses totaled almost $1.5 billion. Many airline mergers in the past have hit rough spots that reduced anticipated ongoing savings and revenue increases. Pilots and flight attendants at US Airways Group, a combination of US Airways and America West, were still operating under separate contracts with different pay rates, schedules, and work rules six years after the merger. Delta Airlines remains ensnared in a labor dispute that has kept it from equalizing pay and work rules for flight attendants and ramp workers at Delta and Northwest Airlines, which Delta acquired in 2008. The longer these disputes continue, the greater the cultural divide in integrating these businesses. Alcatel Merges with Lucent, Highlighting Cross-Cultural Issues Alcatel SA and Lucent Technologies signed a merger pact on April 3, 2006, to form a Paris-based telecommunications equipment giant. The combined firms would be led by Lucent's chief executive officer Patricia Russo. Her charge would be to meld two cultures during a period of dynamic industry change. Lucent and Alcatel were considered natural merger partners because they had overlapping product lines and different strengths. More than two-thirds of Alcatel’s business came from Europe, Latin America, the Middle East, and Africa. The French firm was particularly strong in equipment that enabled regular telephone lines to carry high-speed Internet and digital television traffic. Nearly two-thirds of Lucent's business was in the United States. The new company was expected to eliminate 10 percent of its workforce of 88,000 and save $1.7 billion annually within three years by eliminating overlapping functions. While billed as a merger of equals, Alcatel of France, the larger of the two, would take the lead in shaping the future of the new firm, whose shares would be listed in Paris, not in the United States. The board would have six members from the current Alcatel board and six from the current Lucent board, as well as two independent directors that must be European nationals. Alcatel CEO Serge Tehuruk would serve as the chairman of the board. Much of Ms. Russo's senior management team, including the chief operating officer, chief financial officer, the head of the key emerging markets unit, and the director of human resources, would come from Alcatel. To allay U.S. national security concerns, the new company would form an independent U.S. subsidiary to administer American government contracts. This subsidiary would be managed separately by a board composed of three U.S. citizens acceptable to the U.S. government. International combinations involving U.S. companies have had a spotty history in the telecommunications industry. For example, British Telecommunications PLC and AT&T Corp. saw their joint venture, Concert, formed in the late 1990s, collapse after only a few years. Even outside the telecom industry, transatlantic mergers have been fraught with problems. For example, Daimler Benz's 1998 deal with Chrysler, which was also billed as a merger of equals, was heavily weighted toward the German company from the outset. In integrating Lucent and Alcatel, Russo faced a number of practical obstacles, including who would work out of Alcatel's Paris headquarters. Russo, who became Lucent's chief executive in 2000 and does not speak French, had to navigate the challenges of doing business in France. The French government has a big influence on French companies and remains a large shareholder in the telecom and defense sectors. Russo's first big fight would be dealing with the job cuts that were anticipated in the merger plan. French unions tend to be strong, and employees enjoy more legal protections than elsewhere. Hundreds of thousands took to the streets in mid-2006 to protest a new law that would make it easier for firms to hire and fire younger workers. Russo has extensive experience with big layoffs. At Lucent, she helped orchestrate spin-offs, layoffs, and buyouts involving nearly four-fifths of the firm's workforce. Making choices about cuts in a combined company would likely be even more difficult, with Russo facing a level of resistance in France unheard of in the United States, where it is generally accepted that most workers are subject to layoffs and dismissals. Alcatel has been able to make many of its job cuts in recent years outside France, thereby avoiding the greater difficulty of shedding French workers. Lucent workers feared that they would be dismissed first simply because it is easier than dismissing their French counterparts. After the 2006 merger, the company posted six quarterly losses and took more than $4.5 billion in write-offs, while its stock plummeted more than 60 percent. An economic slowdown and tight credit limited spending by phone companies. Moreover, the market was getting more competitive, with China's Huawei aggressively pricing its products. However, other telecommunications equipment manufacturers facing the same conditions have not fared nearly as badly as Alcatel-Lucent. Melding two fundamentally different cultures (Alcatel's entrepreneurial and Lucent's centrally controlled cultures) has proven daunting. Customers who were uncertain about the new firm's products migrated to competitors, forcing Alcatel-Lucent to slash prices even more. Despite the aggressive job cuts, a substantial portion of the projected $3.1 billion in savings from the layoffs were lost to discounts the company made to customers in an effort to rebuild market share. Frustrated by the lack of progress in turning around the business, the Alcatel-Lucent board announced in July 2008 that Patricia Russo, the American chief executive, and Serge Tchuruk, the French chairman, would leave the company by the end of the year. The board also announced that, as part of the shake-up, the size of the board would be reduced, with Henry Schacht, a former chief executive at Lucent, stepping down. Perhaps hamstrung by its dual personality, the French-American company seemed poised to take on a new personality of its own by jettisoning previous leadership. -Explain the logic behind combining the two companies. Be specific.

Developing staffing plans involves identifying staffing requirements and developing a compensation strategy, among other things.

Why did P&G rely heavily on personnel in both companies to implement post-closing integration?

Focus on customers is generally considered a factor critical to the ultimate success or failure of the merger or acquisition.