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

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

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

Researchers routinely employ abnormal financial returns around the announcement date of a merger or margin improvement subsequent to closing as ways for determining the success (or failure) of a takeover. What other factors do you believe should be considered in making this determination? Be specific.

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. -Describe the management challenges you think may face Citigroup's management team due to the increasing global complexity of Citigroup?

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

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

Sharing common goals, standards, services, and space can be a highly effective and practical way to integrate disparate corporate cultures.

All of the following are true about the challenges of integrating firms with different corporate cultures except for

Why do you believe P&G was unable to retain most of Gillette's top managers following the acquisition?

When two companies with very different cultures merge, the new firm inevitably adopts one of the two cultures that existed prior to the merger.

Successfully integrated mergers and acquisitions are frequently those which

Benchmarking important functions such as the acquirer's and the target's manufacturing and IT operations and processes is a useful starting point for determining how to integrate these activities.

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

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

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

Whenever possible, integration planning should begin before closing.

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

Integration planning involves addressing human resource, customer, and supplier issues that overlap the change of ownership.