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

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

Plant consolidation rarely requires the adoption of a common set of systems and standards for all manufacturing activities.

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

Which of the following represent important decisions that must be made early in the integration process?

Differences in the way the management of the acquiring and target firms make decisions,the pace of decision-making,and perceived values are common examples of cultural differences between the two firms.

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. : -In your opinion,what are the advantages and disadvantages of moving to integrate operations quickly? What are the advantages and disadvantages of moving more slowly and deliberately?

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

When corporate cultures are substantially different,it may be appropriate to

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

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

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

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

Case Study Short Essay Examination Questions Overcoming Culture Clash: Allianz AG Buys Pimco Advisors LP On November 7, 1999, Allianz AG, the leading German insurance conglomerate, acquired Pimco Advisors LP for $3.3 billion. The Pimco acquisition boosts assets under management at Allianz from $400 billion to $650 billion, making it the sixth largest money manager in the world. The cultural divide separating the two firms represented a potentially daunting challenge. Allianz's management was well aware that firms distracted by culture clashes and the morale problems and mistrust they breed are less likely to realize the synergies and savings that caused them to acquire the company in the first place. Allianz was acutely aware of the potential problems as a result of difficulties they had experienced following the acquisition of Firemen's Fund, a large U.S.-based property-casualty company. A major motivation for the acquisition was to obtain the well-known skills of the elite Pimco money managers to broaden Allianz's financial services product offering. Although retention bonuses can buy loyalty in the short run, employees of the acquired firm generally need much more than money in the long term. Pimco's money managers stated publicly that they wanted Allianz to let them operate independently, the way Pimco existed under their former parent, Pacific Mutual Life Insurance Company. Allianz had decided not only to run Pimco as an independent subsidiary but also to move $100 billion of Allianz's assets to Pimco. Bill Gross, Pimco's legendary bond trader, and other top Pimco money managers, now collect about one-fourth of their compensation in the form of Allianz stock. Moreover, most of the top managers have been asked to sign long-term employment contracts and have received retention bonuses. Joachim Faber, chief of money management at Allianz, played an essential role in smoothing over cultural differences. Led by Faber, top Allianz executives had been visiting Pimco for months and having quiet dinners with top Pimco fixed income investment officials and their families. The intent of these intimate meetings was to reassure these officials that their operation would remain independent under Allianz's ownership. : -How did Allianz attempt to retain key employees? In the short run? In the long run?

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

A merger agreement should specify how the seller should be reimbursed for products shipped or services provided by the seller before closing but not paid for by the customer until after closing.

Employees or so-called "human capital" are often the most valuable asset of the target firm.

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

Case Study Short Essay Examination Questions M&A Gets Out of Hand at Cisco Cisco Systems, the internet infrastructure behemoth, provides the hardware and software to support efficient traffic flow over the internet. Between 1993 and 2000, Cisco completed 70 acquisitions using its highflying stock as its acquisition currency. With engineering talent in short supply and a dramatic compression in product life cycles, Cisco turned to acquisitions to expand existing product lines and to enter new businesses. The firm's track record during this period in acquiring and absorbing these acquisitions was impressive. In fiscal year 1999, Cisco acquired 10 companies. During the same period, its sales and operating profits soared by 44% and 55%, respectively. In view of its pledge not to layoff any employees of the target companies, its turnover rate among employees acquired through acquisition was 2.1%, versus an average of 20% for other software and hardware companies. Cisco's strategy for acquiring companies was to evaluate its targets' technologies, financial performance, and management talent with a focus on ease of integrating the target into Cisco's operations. Cisco's strategy was sometimes referred to as an R&D strategy in that it sought to acquire firms with leading edge technologies that could be easily adapted to Cisco's current product lines or used to expand it product offering. In this manner, its acquisition strategy augmented internal R&D spending. Cisco attempted to use its operating cash flow to fund development of current technologies and its lofty stock price to acquire future technologies. Cisco targeted small companies having a viable commercial product or technology. Cisco believed that larger, more mature companies tended to be difficult to integrate, due to their entrenched beliefs about technologies, hardware and software solutions. The frequency with which Cisco was making acquisitions during the last half of the 1990s caused the firm to "institutionalize" the way in which it integrated acquired companies. The integration process was tailored for each acquired company and was implemented by an integration team of 12 professionals. Newly acquired employees received an information packet including descriptions of Cisco's business strategy, organizational structure, benefits, a contact sheet if further information was required, and an explanation of the strategic importance of the acquired firm to Cisco. On the day the acquisition was announced, teams of Cisco human resources people would travel to the acquired firm's headquarters and meet with small groups of employees to answer questions. Working with the acquired firm's management, integration team members would help place new employees within Cisco's workforce. Generally, product, engineering, and marketing groups were kept independent, whereas sales and manufacturing functions were merged into existing Cisco departments. Cisco payroll and benefits systems were updated to reflect information about the new employees, who were quickly given access to Cisco's online employee information systems. Cisco also offered customized orientation programs intended to educate managers about Cisco's hiring practices, sales people about Cisco's products, and engineers about the firm's development process. The entire integration process generally was completed in 4-6 weeks. This lightning-fast pace was largely the result of Cisco's tendency to purchase small, highly complementary companies; to leave much of the acquired firm's infrastructure in place; and to dedicate a staff of human resource and business development people to facilitate the process (Cisco Systems, 1999; Goldblatt, 1999). Cisco was unable to avoid the devastating effects of the explosion of the dot.com bubble and the 2001-2002 recession in the United States. Corporate technology buyers, who used Cisco's high-end equipment, stopped making purchases because of economic uncertainty. Consequently, Cisco was forced to repudiate its no-layoff pledge and announced a workforce reduction of 8500, about 20% of its total employees, in early 2001. Despite its concerted effort to retain key employees from previous acquisitions, Cisco's turnover began to soar. Companies that had been acquired at highly inflated premiums during the late 1990s lost much of their value as the loss of key talent delayed new product launches. By mid-2001, the firm had announced inventory and acquisition-related write-downs of more than $2.5 billion. A precipitous drop in its share price made growth through acquisition much less attractive than during the late 1990s, when its stock traded at lofty price-to-earnings ratios. Thus, Cisco was forced to abandon its previous strategy of growth through acquisition to one emphasizing improvement in its internal operations. Acquisitions tumbled from 23 in 2000 to 2 in 2001. Whereas in the past, Cisco's acquisitions appeared to have been haphazard, in mid-2003 Cisco set up an investment review board that analyzes investment proposals, including acquisitions, before they can be implemented. Besides making sure the proposed deal makes sense for the overall company and determining the ease with which it can be integrated, the board creates detailed financial projections and the deal's sponsor must be willing to commit to sales and earnings targets. : -Why did Cisco have a "no layoff" policy? How did this contribute to maintaining or increasing the value of the companies it acquired?

Integration of a new business into an existing one rarely affects current operations of either business.

The management integration team's primary responsibilities should be monitoring the daily operations of the work-teams assigned to complete specific tasks during the integration.