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

Case Study Short Essay Examination Questions 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?

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

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

Case Study Short Essay Examination Questions 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?

Case Study Short Essay Examination Questions 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.

Divulging the true intentions of the acquiring firm to the target firm's employees should be deferred until it can be determined that such employees can be trusted.

Case Study Short Essay Examination Questions 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.

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

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

Case Study Short Essay Examination Questions 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?

Developing staffing plans requires which of the following?

Case Study Short Essay Examination Questions 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. : -Most corporate mergers are beset by differences in corporate cultures.How do cross-border transactions compound these differences?

Customers of newly acquired firms are usually slow to switch to other suppliers even if product quality deteriorates due to inertia.

An effective starting point in setting up a structure is to learn from the past and to recognize that the needs of the business drive structure and not the other way around.

Delay in integrating the acquired business contributes to which of the following?

Enabling the customer to see a consistent image in advertising and promotional campaigns is often the greatest challenge facing the integration of the marketing function.

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

The speed with which two firms are merged is an important factor determining the long-term success of the merger.

Successfully integrated mergers and acquisitions are frequently those which

The extent to which the sales forces of the two firms are combined depends on their relative size,the nature of their products and markets,and their geographic location.