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.
Discussion Questions
1. Do you agree with Coty management’s decision to focus on integrating “customer-facing” systems first?
Explain your answer.
2. How might this emphasis on integrating “customer-facing” systems have affected the new firm’s ability
to realize anticipated synergies? Be specific.
3. Discuss the advantages and disadvantages of using small project teams. Be specific.
Culture Clash Exacerbates Efforts of the Tribune Corporation to Integrate the Times Mirror
Corporation
The Chicago-based Tribune Corporation owned 11 newspapers, including such flagship publications as the
Chicago Tribune, the Los Angeles Times, and Newsday, as well as 25 television stations. Attempting to
offset the long-term decline in newspaper readership and advertising revenue, Tribune acquired the Times
Mirror (owner of the Los Angeles Times newspaper) for $8 billion in 2000. The merger combined two firms
that historically had been intensely competitive and had dramatically different corporate cultures. The
Tribune was famous for its emphasis on local coverage, with even its international stories having a
connection to Chicago. In contrast, the L.A. Times had always maintained a strong overseas and
Washington, D.C., presence, with local coverage often ceded to local suburban newspapers. To some
Tribune executives, the L.A. Times was arrogant and overstaffed. To L.A. Times executives, Tribune
executives seemed too focused on the “bottom line” to be considered good newspaper people.
The overarching strategy for the new company was to sell packages of newspaper and local TV
advertising in the big urban markets. It soon became apparent that the strategy would be unsuccessful.
Consequently, the Tribune’s management turned to aggressive cost cutting to improve profitability. The
Tribune wanted to encourage centralization and cooperation among its newspapers to cut overlapping
coverage and redundant jobs.
Coverage of the same stories by different newspapers owned by the Tribune added substantially to costs.
After months of planning, the Tribune moved five bureaus belonging to Times Mirror papers (including the
L.A. Times) to the same location as its four other bureaus in Washington, D.C. L.A. Times’ staffers objected
strenuously to the move, saying that their stories needed to be tailored to individual markets and they did
not want to share reporters with local newspapers. As a result of the consolidation, the Tribune’s
newspapers shared as much as 40 percent of the content from Washington, D.C., among the papers in 2006,
compared to as little as 8 percent in 2000. Such changes allowed for significant staffing reductions.
In trying to achieve cost savings, the firm ran aground in a culture war. Historically, the Times Mirror,
unlike the Tribune, had operated its newspapers more as a loose confederation of separate newspapers.
Moreover, the Tribune wanted more local focus, while the L.A. Times wanted to retain its national and
international presence. The controversy came to a head when the L.A. Times’ editor was forced out in late
2006.
Many newspaper stocks, including the Tribune, had lost more than half of their value between 2004 and
2006. The long-term decline in readership within the Tribune appears to have been exacerbated by the
internal culture clash. As a result, the Chandler Trusts, Tribune’s largest shareholder, put pressure on the
firm to boost shareholder value. In September, the Tribune announced that it wanted to sell the entire
newspaper; however, by November, after receiving bids that were a fraction of what had been paid to
acquire the newspaper, it was willing to sell parts of the firm. The Tribune was taken private by legendary
investor Sam Zell in 2007 and later went into bankruptcy in 2009, a victim of the recession and its bone–
crushing debt load. See Case Study 13.4 for more details.
Discussion Questions
1. Why do you believe the Tribune thought it could overcome the substantial cultural differences between
itself and the Times Mirror Corporation? Be specific.
2. What would you have done differently following closing to overcome the cultural challenges faced by
the Tribune? Be specific.
Daimler Acquires Chrysler—Anatomy of a Cross-Border Transaction
The combination of Chrysler and Daimler created the third largest auto manufacturer in the world, with
more than 428,000 employees worldwide. Conceptually, the strategic fit seemed obvious. German
engineering in the automotive industry was highly regarded and could be used to help Chrysler upgrade
both its product quality and production process. In contrast, Chrysler had a much better track record than
Daimler in getting products to market rapidly. Daimler’s distribution network in Europe would give
Chrysler products better access to European markets; Chrysler could provide parts and service support for
Mercedes-Benz in the United States. With greater financial strength, the combined companies would be
better able to make inroads into Asian and South American markets.
Daimler’s product markets were viewed as mature, and Chrysler was under pressure from escalating
R&D costs and retooling demands in the wake of rapidly changing technology. Both companies watched
with concern the growing excess capacity of the worldwide automotive manufacturing industry. Daimler
and Chrysler had been in discussions about doing something together for some time. They initiated
discussions about creating a joint venture to expand into Asian and South American markets, where both
companies had a limited presence. Despite the termination of these discussions as a result of disagreement
over responsibilities, talks were renewed in February 1998. Both companies shared the same sense of
urgency about their vulnerability to companies such as Toyota and Volkswagen. The transaction was
completed in April 1998 for $36 billion.
Enjoying a robust auto market, starry-eyed executives were touting how the two firms were going to
save billions by using common parts in future cars and trucks and by sharing research and technology. In a
press conference to announce the merger, Jurgen Schrempp, CEO of DaimlerChrysler, described the
merger as highly complementary in terms of product offerings and the geographic location of many of the
firms’ manufacturing operations. It also was described to the press as a merger of equals (Tierney, 2000).
On the surface, it all looked so easy.
The limitations of cultural differences became apparent during efforts to integrate the two companies.
Daimler had been run as a conglomerate, in contrast to Chrysler’s highly centralized operations. Daimler
managers were accustomed to lengthy reports and meetings to review the reports. Under Schrempp’s
direction, many top management positions in Chrysler went to Germans. Only a few former Chrysler
executives reported directly to Schrempp. Made rich by the merger, the potential for a loss of American
managers within Chrysler was high. Chrysler managers were accustomed to a higher degree of
independence than their German counterparts. Mercedes dealers in the United States balked at the thought
of Chrysler’s trucks still sporting the old Mopar logo delivering parts to their dealerships. All the trucks had
to be repainted.
Charged with the task of finding cost savings, the integration team identified a list of hundreds of
opportunities, offering billions of dollars in savings. For example, Mercedes dropped its plans to develop a
battery-powered car in favor of Chrysler’s electric minivan. The finance and purchasing departments were
combined worldwide. This would enable the combined company to take advantage of savings on bulk
purchases of commodity products such as steel, aluminum, and glass. In addition, inventories could be
managed more efficiently, because surplus components purchased in one area could be shipped to other
facilities in need of such parts. Long-term supply contracts and the dispersal of much of the purchasing
operations to the plant level meant that it could take as long as 5 years to fully integrate the purchasing
department.
The time required to integrate the manufacturing operations could be significantly longer, because both
Daimler and Chrysler had designed their operations differently and are subject to different union work
rules. Changing manufacturing processes required renegotiating union agreements as the multiyear
contracts expired. All of that had to take place without causing product quality to suffer. To facilitate this
process, Mercedes issued very specific guidelines for each car brand pertaining to R&D, purchasing,
manufacturing, and marketing.
Although certainly not all of DaimlerChrysler’s woes can be blamed on the merger, it clearly
accentuated problems associated with the cyclical economic slowdown during 2001 and the stiffened
competition from Japanese automakers. The firm’s top management has reacted, perhaps somewhat
belatedly to the downturn, by slashing production and eliminating unsuccessful models. Moreover, the firm
has pared its product development budget from $48 billion to $36 billion and eliminated more than 26,000
jobs, or 20% of the firm’s workforce, by early 2002. Six plants in Detroit, Mexico, Argentina, and Brazil
were closed by the end of 2002. The firm also cut sharply the number of Chrysler. car dealerships. Despite
the aggressive cost cutting, Chrysler reported a $2 billion operating loss in 2003 and a $400 million loss in
2004.
While Schrempp had promised a swift integration and a world-spanning company that would dominate
the industry, five years later new products have failed to pull Chrysler out of a tailspin. Moreover,
DaimlerChrysler’s domination has not extended beyond the luxury car market, a market they dominated
before the acquisition. The market capitalization of DaimlerChrysler, at $38 billion at the end of 2004, was
well below the German auto maker’s $47 billion market cap before the transaction.
With the benefit of hindsight, it is possible to note a number of missteps DaimlerChrysler has made that
are likely to haunt the firm for years to come. These include paying too much for some parts, not updating
some vehicle models sooner, falling to offer more high-margin vehicles that could help ease current
financial strains, not developing enough interesting vehicles for future production, and failing to be
completely honest with Chrysler employees. Although Daimler managed to take costs out, it also managed
to alienate the workforce.
Discussion Questions:
1. Identify ways in which the merger combined companies with complementary skills and resources?
2. What are the major cultural differences between Daimler and Chrysler?
3. What were the principal risks to the merger?
4. Why might it take so long to integrate manufacturing operations and certain functions such as
purchasing?
5, How might Daimler have better managed the postmerger integration?
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.
Discussion Questions:
1. Describe how Cisco “institutionalized” the integration process. What are the advantages and
disadvantages to the approach adopted by Cisco?
2. Why did Cisco have a “no layoff” policy? How did this contribute to maintaining or increasing the
value of the companies it acquired?
4. What evidence do you have that the high price–to–earnings ratio associated with Cisco’s stock
during the late 1990s may have caused the firm to overpay for many of its acquisitions? How
might overpayment have complicated the integration process at Cisco?
Case Corporation Loses Sight of Customer Needs
in Integrating New Holland Corporation
Farm implement manufacturer Case Corporation acquired New Holland Corporation in a $4.6 billion
transaction in 1999. Overnight, its CEO, Jean-Pierre Rosso, had engineered a deal that put the combined
firms, with $11 billion in annual revenue, in second place in the agricultural equipment industry just behind
industry leader John Deere. The new firm was named CNH Global (CNH). Although Rosso proved adept at
negotiating and closing a substantial deal for his firm, he was less agile in meeting customer needs during
the protracted integration period. CNH has become a poster child of what can happen when managers
become so preoccupied with the details of combining two big operations that they neglect external issues
such as the economy and competition. Since the merger in November 1999, CNH began losing market
share to John Deere and other rivals across virtually all of its product lines.
Rosso remained focused on negotiating with antitrust officials about what it would take to get regulatory
approval. Once achieved, CNH was slow to complete the last of its asset sales as required under the consent
decree with the FTC. The last divestiture was not completed until late January 2001, more than 20 months
after the deal had been announced. This delay forced Rosso to postpone cost cutting and to slow their new
product entries. This spooked farmers and dealers who could not get the firm to commit to telling them
which products would be discontinued and which the firm would continue to support with parts and
service. Fearful that CNH would discontinue duplicate Case and New Holland products, farmers and
equipment dealers switched brands. The result was that John Deere became more dominant than ever. CNH
was slow to reassure customers with tangible actions and to introduce new products competitive with
Deere. This gave Deere the opportunity to fill the vacuum in the marketplace.
The integration was deemed to have been completed a full four years after closing. As a sign of how
painful the integration had been, CNH was laying workers off as Deere was hiring to keep up with the
strong demand for its products. Deere also appeared to be ahead in moving toward common global
platforms and parts to take fuller advantage of economies of scale.
Discussion Questions:
1. Why is rapid integration important? Illustrate with examples from the case study.
2. What could CNH have done differently to slow or reverse its loss of market share?
Exxon-Mobil: A Study in Cost Cutting
Having obtained access to more detailed information following consummation of the merger, Exxon-Mobil
announced dramatic revisions in its estimates of cost savings. The world’s largest publicly owned oil
company would cut almost 16,000 jobs by the end of 2002. This was an increase from the 9000 cuts
estimated when the merger was first announced in December 1998. Of the total, 6000 would come from
early retirement. Estimated annual savings reached $3.8 billion by 2003, up by more than $1 billion from
when the merger originally was announced. As time passed, the companies seemed to have become a
highly focused, smooth-running machine remarkably efficient at discovering, refining, and marketing oil
and gas. An indication of this is the fact that the firm spent less per barrel to find oil and gas in 2003 than at
almost any time in history. With revenues of $210 billion, Exxon-Mobil surged to the top of the Fortune
500 in 2004.
Discussion Question:
1. In your judgment, are acquirers more likely to under– or overestimate anticipated cost savings?
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).
Discussion Questions:
1. In your judgment, do you think acquirers’ commonly (albeit not deliberately) understate
integration costs? Why or why not?
2. Cite examples of expenses you believe are commonly incurred in integrating target companies.
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.
Discussion Questions:
1. How did Allianz attempt to retain key employees? In the short run? In the long run?
2. How did the potential for culture clash affect the way Alliance acquired Pimco?
3. What else could Allianz have done to minimize potential culture clash? Be specific.
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.
Discussion Questions:
1. 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?
2. 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?
3. How did the interests of the various stakeholders to the merger affect the complexity of the
integration process?
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.
Discussion Questions:
1. Why did Citibank and Travelers resort to a co-CEO arrangement? What are the advantages and
disadvantages of such an arrangement?
2. Describe the management challenges you think may face Citigroup’s management team due to the
increasing global complexity of Citigroup?
3. Identify the key differences between Travelers’ and Citibank’s corporate cultures. Discuss ways
you would resolve such differences.
4. In what sense is the initial divergence in Travelers’ operational orientation and Citigroup’s
marketing and planning orientation an excellent justification for the merger? Explain your answer.
5. 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.
Promises to PeopleSoft’s Customers Complicate Oracle’s Integration Efforts
When Oracle first announced its bid for PeopleSoft in mid-2003, the firm indicated that it planned to stop
selling PeopleSoft’s existing software programs and halt any additions to its product lines. This would
result in the termination of much of PeopleSoft’s engineering, sales, and support staff. Oracle indicated that
it was more interested in PeopleSoft’s customer list than its technology. PeopleSoft earned sizeable profit
margins on its software maintenance contracts, under which customers pay for product updates, fixing
software errors, and other forms of product support. Maintenance fees represented an annuity stream that
could improve profitability even when new product sales are listless. However, PeopleSoft’s customers
worried that they would have to go through the costly and time-consuming process of switching software.
To win customer support for the merger and to avoid triggering $2 billion in guarantees PeopleSoft had
offered its customers in the event Oracle failed to support its products, Oracle had to change dramatically
its position over the next 18 months.
One day after reaching agreement with the PeopleSoft board, Oracle announced it would release a new
version of PeopleSoft’s products and would develop another version of J.D. Edwards’s software, which
PeopleSoft had acquired in 2003. Oracle committed itself to support the acquired products even longer than
PeopleSoft’s guarantees would have required. Consequently, Oracle had to maintain programs that run with
database software sold by rivals such as IBM. Oracle also had to retain the bulk of PeopleSoft’s engineering
staff and sales and customer support teams.
Among the biggest beneficiaries of the protracted takeover battle was German software giant SAP. SAP
was successful in winning customers uncomfortable about dealing with either Oracle or PeopleSoft. SAP
claimed that its worldwide market share had grown from 51 percent in mid-2003 to 56 percent by late
2004. SAP took advantage of the highly public hostile takeover by using sales representatives, email, and
an international print advertising campaign to target PeopleSoft customers. The firm touted its reputation
for maintaining the highest quality of support and service for its products.
Discussion Questions
1. How did the commitments Oracle made to PeopleSoft’s customers have affected its ability to realize
anticipated synergies? Be specific.
2. Explain why Oracle’s willingness to pay such a high premium for PeopleSoft and its willingness to
change its position on supporting PeopleSoft products and retaining the firm’s employees may have had
a negative impact on Oracle shareholders. Be specific.