Chapter 6
Integration: Mergers, Acquisitions, and Business Alliances
Answers to End of Chapter Discussion Questions
6.1 Why is the integration phase of the acquisition process considered so important?
6.2 Why should acquired companies be integrated quickly? What are the risks to rapid integration?
6.3 Why is candid and continuous communication so important during the integration phase?
6.4 What are the messages that might be communicated to the various stakeholders of the new firm?
6.5 What are examples of difficult decisions that should be made early in the integration process?
6.6 When Daimler Benz acquired Chrysler Corporation in 1998, it announced that it could take 6 to 8
years to fully integrate the combined firm’s global manufacturing operations and certain functions
such as purchasing. Why do you believe it might take that long?
6.7 In your judgment, are acquirers more likely to under–or-overestimate anticipated cost savings?
Explain your answer.
6.8 Cite examples of expenses you believe are commonly incurred in integrating target companies.
6.9 A common justification for mergers of competitors is the potential for cross-selling opportunities
it would provide. Comment on the challenges that might be involved in making such a marketing
strategy work.
6.10 Why did Citibank and Travelers resort to a co-CEO arrangement when they merged in 1998?
What are the advantages and disadvantages of such an arrangement?
Solutions Chapter Case Study Questions
Culture Clash — Walmart Buys Jet.com
Discussion Questions and Answers:
Discussion Questions:
1. Should the success or failure of Walmart’s acquisition of Jet be judged based on Jet as a standalone
business or as part of implementing the firm’s larger online strategy? Explain your answer.
2. What key external and internal factors are likely to impact Walmart’s postmerger integration of
Jet?
3. What is the key premise(s) underlying Walmart’s belief that the two firms can be successfully
integrated? Be specific.
5. Speculate as to whether the Jet acquisition will be successful in moving Walmart from a largely
brick and mortar retailer to one having a much larger online business? Explain your answer.
6. Describe Walmart’s online strategy. Do you think Walmart has a reasonable chance of overtaking
Amazon? Explain your answer
7. What is corporate culture? Why is it important?
8. Why did the earnout focus on the length of time managers stayed and not financial performance
targets for Jet? What might your answer to question tell you about Walmart’s primary motivation
for buying Jet?
Examination Questions and Answers
1. The integration process if done effectively can help to mitigate the potential loss of employees.
True or False
2. Integration is among the most important factors contributing to the success or failure of mergers
and acquisitions. True or False
3. Rapid integration helps to realize the planned synergies and may contribute to a higher present
value for the merger or acquisition. True or False
4. High employee turnover is rarely a problem during the integration of the target firm into the
acquirer. True or False
5. High employee defection during the integration period is an excellent way to realize cost savings?
True or False
6. Employees or so–called “human capital” are often the most valuable asset of the target firm. True
or False
7. Employees of both the target and acquiring firms are likely to resist change following a takeover.
True or False
8. 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. True or False
9. Focus on customers is generally considered a factor critical to the ultimate success or failure of the
merger or acquisition. True or False
10. Revenue growth is often sacrificed in an effort to engage in aggressive cost cutting during the
integration period. True or False
11. 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. True or False
12. Communication plans should be developed for all stakeholder groups except for suppliers, because
they generally have a lower priority in the integration process. True or False
13. Developing staffing plans involves identifying staffing requirements and developing a
compensation strategy, among other things. True or False
14. Co-locating employees from the acquiring and target firms is rarely a good idea early in the
integration period because of the inevitable mistrust that will arise. True or False
15. So-called contract related transition issues often involve how the new employees will be paid and
what benefits they should receive. True or False
16. Employee health care or disability claims tend to escalate just before a transaction closes, thereby
adding to the total cost of the transaction. Who will pay such claims should be determined in the
agreement of purchase and sale. True or False
17. In hostile takeovers, the employees that are on the post-merger integration team should come from
the acquiring firm because of concerns that the target firm’s employees cannot be trusted.
True or False
18. 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.
True or False
19. The management integration team’s primary responsibilities should be to focus on achieving long–
term profit goals, monitoring actual performance to the goals of the integration plan, and on cost
management. True or False
20. An acquiring firm that focuses heavily on integrating a target firm, which represents a sizeable
portion of its total operations, frequently sees deterioration in its own current operating
performance. True or False
21. It is generally more important to respond to current issues as they arise in your communication
plans even if it results in the appearance of a somewhat inconsistent theme throughout
communications made to stakeholders. True or False
22. Key stakeholders in the integration effort generally include employees, customers, suppliers,
communities, and regulators. True or False
23. A newly merged company will often experience at least a 5-10% loss of current customers during
the integration effort. True or False
24. Following an acquisition, long-term contracts with suppliers can generally be broken without
redress. True or False
25. In building a new organization for the combined firms, it is important to start with a clean sheet of
paper and ignore the organizational structures that existed prior to the merger or acquisition.
True or False
26. Highly decentralized organizational structures generally expedite the integration effort more so
than highly centralized structures. True or False
27. The extent to which compensation plans for the acquiring and acquired firms are integrated
depends on whether the two companies are going to be managed separately or fully integrated.
True or False
28. Benchmarking important functions such as the acquirer’s and the target’s manufacturing and
information technology operations and processes is a useful starting point for determining how to
integrate these activities. True or False
29. When two companies with very different cultures merge, the new firm inevitably adopts one of the
two cultures that existed prior to the merger. True or False
30. Sharing common goals, standards, services, and space can be a highly effective and practical way
to integrate disparate corporate cultures. True or False
31. It is crucial to focus on the highest leverage issues in implementing post-merger integration. True
of False
32. 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.
True or False
33. Pre-closing integration planning is likely to be easier in friendly than in hostile transactions. True
or False
34. Customers of newly acquired firms are usually slow to switch to other suppliers even if product
quality deteriorates due to inertia. True or False
35. Decentralized management control usually facilitates the integration of a newly acquired business.
True or False
36. Merging compensation systems can be one of the most challenging activities of the integration
process. True or False
37. Benchmarking important functions such as the acquirer’s and the target’s manufacturing and IT
operations and processes is a useful starting point for determining how to integrate these activities.
True or False
38. Plant consolidation rarely requires the adoption of a common set of systems and standards for all
manufacturing activities. True or False
39. 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. True or False
40. 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. True or False
41. The speed with which two firms are merged is an important factor determining the long-term
success of the merger. True or False
42. Whenever possible, integration planning should begin before closing. True or False
43. Newly merged firms frequently experience a loss of existing customers as a direct consequence of
the merger. True or False
44. Integration planning involves addressing human resource, customer, and supplier issues that
overlap the change of ownership. True or False
45. Integration of a new business into an existing one rarely affects current operations of either
business. True or False
46. When news about the integration is bad, it is critical never to share it with employees. True or
False
47. The newly integrated firm must be able to communicate a compelling vision to investors. True or
False
48. 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. True or False
49. Staffing plans should be postponed to relatively late in the integration process. True or False
50. The extent to which compensation plans are integrated depends on whether the two companies are
going to be managed separated or integrated. True or False
1. Rapid integration is usually important for all of the following reasons except for
a. Minimizes employee turnover
b. Improves the morale and productivity of current employees of both the acquiring and
acquired firms
c. Builds confidence in current employees in the competence of management
d. Dispenses with the need for pre-integration planning
e. Reduces customer turnover
2. All of the following are often cited as factors critical to the ultimate success of the integration
effort except for
a. Plan carefully, act quickly
b. The use of project management techniques
c. Early communication from the top of the organization
d. Salary and benefit reductions for many employees of the acquired company in order to
realize cost savings
e. Making the tough decisions as early as possible
3. Certain post integration issues are best addressed prior to the closing. These include all of the
following except for
a. Who will pay for employee severance expenses
b. How will employee payroll be managed during ownership transition
c. What will be done with checks from customers that the seller continues to receive after
closing
d. How will the seller be reimbursed for monies owed to suppliers for products sold prior to
closing
e. Who will pay for health care and disability claims that often arise just before a business is
sold?
4. Which of the following is not true about the primary responsibilities of the management
integration team (MIT)?
a. The MIT should direct the daily operations of the individual work teams set up to
implement certain activities.
b. Focus the organization on meeting ongoing business commitments and operational
performance targets
c. The creation of an early warning system to determine when performance targets are
likely to be missed.
d. Establish a rigorous communication program
e. Establishing a master schedule of what should be done by whom and by what date.
5. Which of the following is generally not true about communication during the integration period?
a. Communication should be as frequent as possible
b. Employees should be sheltered from bad news
c. The CEO of the combined firms should lead the effort to communicate to employees at
all levels
d. Regularly scheduled employee meetings are often the best way to communicate progress
to plan
e. The reasons for changing work practices and compensation must be thoroughly explained
to employees
6, Customer attrition following an acquisition is commonly related to uncertainty about
a. On time product delivery
b. Product quality
c. Pricing and payment terms
d. A and B only
e. A, B, and C
7. All of the following are generally considered stakeholders in the integration process except for
a. Suppliers
b. Employees
c. Competitors
d. Regulators
e. Customers
8. All of the following are generally true about creating new organizations except for
a. Learn from prior organizational strengths and weaknesses
b. Business needs should drive structure and not the reverse
c. Centralized organizations facilitate the pace of the integration
d. The structure employed during the integration must be the one used in the long–run
e. Senior managers should be given responsibility for selecting their own subordinates
9. Developing staffing plans requires which of the following?
a. Identifying personnel requirements
b. Determining the availability of skilled employees to fill these requirements
c. Developing compensation plans
d. A and B only
e. A, B, and C
10. All of the following are true about the challenges of integrating firms with different corporate
cultures except for
a. Cultural issues can run the gamut from dress codes to compensation
b. The acquired firm’s overarching culture is generally rapidly accepted by the target firm’s
employees
c. Small companies are usually highly unstructured and informal
d. There are often differences in culture even between firms in the same industry
e. Integration may be inappropriate if acquirer and acquired firm’s cultures are extremely
different.
11. Which of the following represent commonly used techniques for integrating corporate cultures?
a. Employees are encouraged to share the same overall goals
b. “Best practices” in one department are employed in other departments
c. Multiple businesses share the same service such as the legal department
d. Employees are co-located
e. All of the above
12. Which of the following is not true about integrating business alliances?
a. Teamwork is the underpinning that makes alliances work.
b. Control is best exerted through coordination
c. Decisions are made at the top of the organization
d. Decisions are based on the premise that all participants to the alliance have had an
opportunity to express their opinions.
e. The failure of one party to meet commitments will erode trust
13. Successfully integrated mergers and acquisitions are frequently those which
a. Communicate candidly and continuously
b. Appoint an integration manager and team with clearly defined goals and responsibilities
c. Establish well defined lines of authority
d. Focus on issues that have the greatest near-term impact
e. All of the above
14. Post-closing integration may be viewed in terms of a process consisting of the following activities
a. Integration planning
b. Developing communication plans
c. Creating a new organization
d. Developing staffing plans
e. All of the above
15. The acquirer’s sales force sells very complex software solutions to its customers. The target firm
manufactures commodity hardware products. Customers of the two firms sometimes buy both
products. The benefits of integrating the sales force of both the acquirer and target firms includes
all of the following except for
a. Generates significant cost savings by eliminating duplicate sales representatives
b. Eliminates related sales support expenses
c. Minimizes potential customer confusion by enabling customers to deal with a single sales
representative
d. Facilitates communication of a consistent brand image
e. Makes product cross-selling more effective
16. The post-closing integration process consists of all of the following activities except for
a. Integration planning
b. Developing communication plans
c. Creating a new organization
d. Developing staffing plans
e. Identifying the acquisition vehicle
17. Which of the following activities are likely to extend beyond what is normally considered the
conclusion of the post-closing integration period?
a. Developing communication plans
b. Cultural integration
c. Integration planning
d. Developing staffing plans
e. None of the above
18. Delay in integrating the acquired business contributes to which of the following?
a. Employee anxiety
b. Customer attrition
c. Supplier anxiety
d. Deteriorating employee productivity
e. All of the above
19. Successfully integrated M&As are those that demonstrate leadership by candidly and continuously
communicating which of the following?
a. A clear vision
b. A set of values
c. Unambiguous priorities for each employee
d. A & B only
e. A, B, & C
20. Which of the following represent important decisions that must be made early in the integration
process?
a. Identifying the appropriate organizational structure
b. Defining key reporting relationships
c. Selecting the right managers
d. Identifying and communicating key roles and responsibilities
e. All of the above
21. Poorly executed integration often results in high employee turnover. The costs of such turnover
include which of the following?
a. Declining morale among those that remain
b. Retraining costs
c. Declining productivity
d. Deteriorating customer service
e. All of the above
22. Which of the following factors affect customer attrition that normally accompanies post-merger
integration?
a. Customer uncertainty about on-time delivery
b. More aggressive pricing from competitors
c. Deteriorating customer services
d. Deteriorating product quality
e. All of the above
23. Which of the following is not true about the recommendation that integration should occur
rapidly?
a. All significant operations of the two firms must be integrated immediately.
b. Rapid integration helps to minimize customer attritition.
c. Rapid integration reduces unwanted employee turnover.
d. Rapid integration reduces employee anxiety.
e. None of the above
24. Key management integration team responsibilities include all of the following except for
a. Building a master schedule of activities that need to be accomplished
b. Establishing work teams
c. Tracking the daily operation of the firms
d. Monitoring and expediting key decisions
e. Establishing a rigorous communications program
25. When corporate cultures are substantially different, it may be appropriate to
a. Integrate the businesses as rapidly as possible
b. Leave the businesses separate indefinitely
c. Initially leave the businesses separate but integrate at a later time
d. A or B
e. B or C
Case Study Short Essay Examination Questions
MEN’S WEARHOUSE AND JOS. A. BANK STUMBLE
DURING POSTMERGER INTEGRATION
Case Study Objectives: To illustrate
• The challenges in realizing revenue and cost-related synergies even when firms appear to be
substantially similar,
• The potential long-term debilitating impact on corporate performance of a lengthy or incomplete
integration of a large acquisition,
• How the size of acquisition premiums impact the pace and extent of postmerger integration, and
• Potential conflicts of interest of activist investors promoting a takeover.
Pressured by activist investors to pursue growth, Men’s Wearhouse is the story of a clothing retailer which
undertook an expensive and ultimately value destroying acquisition. The firm had a history of growth and
of making intelligent (value enhancing) acquisitions, such as tuxedo rental business After Hours Formal
Wear (later renamed Tux). Completed in 2006, the acquisition allowed Men’s Wearhouse to tap additional
customers in an era of declining brick and mortar retail sales. From 2009 through 2013, revenue and
profitability at Men’s Wearhouse showed continuous improvement. However, in 2013, the firm’s financial
performance foundered.
To restore growth in revenue and profitability, the firm acquired competitor Jos. A. Bank in late 2014
for $1.8 billion after a heated bidding war. The final bid of $65 in cash for each Jos. A. Bank’s share
represented a 56% premium to the closing price in early October 2013.The combined company had annual
revenue of $3.5 billion and projected annual savings of $100 to $150 million consisting of lower overhead,
more efficient marketing, and improved customer service. The combination of Jos. A. Bank’s, a seller of
men’s tailored and casual clothing, U.S. retail operations seemed to line up geographically with the larger
Men’s Wearhouse, which operated in the U.S., Canada, and Puerto Rico. The potential for substantial cost
savings through elimination of overhead, redundant stores, and economies of scale and purchasing
appeared substantial. But actually realizing these potential savings would be challenging.
The animosity that had been created between the management groups of both firms made collaborative
premerger integration planning for the culturally disparate organizations difficult. Instead, closing occurred
in an atmosphere of mistrust and insecurity among employees, as well as confusion and uncertainty among
suppliers and customers. During the following 24 months, Men’s Wearhouse stock fell 70% from its level
at closing reflecting investor concern about the long-term viability of the merger.
A specialty retailer of men’s suits and a provider of tuxedo rental in the United States and Canada, the
new Men’s Wearhouse Inc. operates in two segments: retail and corporate apparel. The retail operation
offers its products and services through its four retail merchandising brands and Internet Websites. The
firm’s corporate segment provides corporate clothing uniforms and related work apparel. As of December
2016, the firm operated a total of 1,758 retail stores.
Private equity firm, Eminence Capital, which owned a 4.9% stake in Jos. A. Bank and a 10% position in
Men’s Wearhouse prior to the takeover, had been pushing Jos. A. Bank to make a deal for months. In fact,
both Men’s Wearhouse and Jos. A. Bank’s management teams had clung stubbornly to their desire to
remain independent. Expressing growing impatience, Eminence Capital unsuccessfully took Jos. A. Bank
to court to try to force the retailer to negotiate exclusively with Men’s Wearhouse.
Eminence Capital, which had at first backed Jos. A. Bank’s bid to acquire Men’s Wearhouse switched
sides and encouraged Men’s Wearhouse to adopt a so-called Pac Man defense in which the hunted becomes
the hunter. Eminence Capital was hedging its bets with investments in both firms, and the combination of
the two firms offered to be a winner for the private equity firm. As evidenced by the firm’s increased
ownership stake after the merger, Eminence fervently believed that substantial synergy between the two
clothiers would unlock substantial value for shareholders.
Another private equity firm that also stood to benefit from a deal between Jos. A. Bank and Men’s
Wearhouse was Golden Gate Capital, which owned outdoor gear retailer Eddie Bauer. Jos. A. Bank had
agreed to buy Eddie Bauer for $825 million in a bid to discourage Men’s Wearhouse’s takeover bid. The
merger agreement with Eddie Bauer stipulated that any alternative bidder such as Men’s Wearhouse that
came along with a higher bid would pay Golden Gate $48 million as a breakup fee. Golden Gate also had
been a financing source in Jos. A. Bank’s original bid for Men’s Wearhouse. The Golden Gate break-up fee
forced Men’s Wearhouse to up its initial bid putting an additional $210 million into Jos. A. Bank’s
shareholders’ pockets. At closing it appeared that both Eminence and Golden Gate came out winners as
well as Jos. A. Bank shareholders. However, the longer run outlook for Men’s Wearhouse shareholders
appeared uncertain due to its problematic ability to digest Jos. A. Bank.
Once the merger was completed, Men’s Wearhouse was faced with the task of figuring out how to make
good on its publicly stated commitment to eliminate $100 to $150 million in costs over three years. These
anticipated synergies were a major part of the justification for paying the substantial premium for Jos. A.
Bank, and Men’s Wearhouse was under considerable pressure to realize these savings as quickly as
possible. To assist in the integration, the firm hired advisory firm AlixPartners, a well-known retailer
turnaround firm, to support the integration process.
In addition to implementing cost savings programs, Men’s Wearhouse pursued an aggressive strategy to
rationalize Jos. A. Bank’s marketing strategy. The latter competed almost exclusively on the basis of price
and frequent promotional campaigns. Men’s Wearhouse sought to change Jos. A. Bank’s customer base by
weaning them away from what had attracted them in the first place: highly aggressive pricing and
promotion campaigns. Jos. A. Bank’s promotions such as “buy one get three free” have proven toxic to
Men’s Wearhouse. Sensing a chance to turn around the brand, the new owners saw an opportunity to gain
market share.
Men’s Wearhouse tried to move away from the Jos A. Bank strategy of being “always on sale” by
cutting the number of promotional events in favor of a single, bigger buy–one-get-three-free sale at the end
of a quarter. This approach was not well received by Jos. A. Bank customers who had historically been
accustomed to regular sales promotions. The strategy change not only cut into Jos. A. Bank’s revenue but
discouraged the number of potential customers from visiting the retailer’s outlets. In hindsight, it is
apparent that these overly generous promotions are what drove large numbers of customers to shop at Jos.
A. Bank and that these customers became addicted to them. Despite the negative customer reaction, Men’s
Wearhouse CEO Doug Ewert remained resolute about the need to transition away from the unsustainable
promotional strategy inherited from Jos. A. Bank. The objective was to have fewer sales such that the firm
could charge higher average prices throughout the year.
While overly aggressive promotional campaigns can hurt profitability, it can be far more damaging to
revenue by eroding store traffic. History has not been kind to retailers who have tried to alter customer
expectations. Men’s Wearhouse founder and former CEO George Zimmer expressed concern that the
aggressive cost cutting to make the integration work was going too quickly and that it would undermine the
firm’s ability to grow sales. Zimmer, who had been fired by Men’s Wearhouse over governance and
compensation issues, reasoned that, given the similarity of the two firms’ offerings, former Jos A. Bank
customers were simply shopping at nearby Men’s Wearhouse stores.
From the outset, management at Men’s Wearhouse said publicly they would not rebrand Bank’s stores
believing the two firms had separate customer bases and different corporate cultures. Where Jos. A. Bank
retains the more classic lines, Men’s Wearhouse revels in its trendier image. Because of that, the ability to
cut costs by closing stores was slow to materialize. Moreover, realizing supply chain efficiencies along
with cuts in advertising costs and duplicative corporate functions created friction between the two firms’
workforces, impairing communication and the implementation of new programs.
In addition to changing its promotional strategy, Men’s Wearhouse sought to update Jos. A. Bank’s
merchandise by adding more tailored fits and accessories, such as shoes. The chain also rolled out a new ad
campaign and worked to retrain employees to sell products under the new promotional strategy. Postmerger
integration efforts also included integrating the brands and upgrading the e–commerce system. The buy-
one-get-three free promotions have ended and were replaced with a buy-one-and get-two free promotion at
Jos. A. Bank. In addition to promotional changes, the firm has launched a new loyalty program.
Furthermore, Men’s Wearhouse signed an agreement with Macy’s to open licensed tuxedo rental shops
aiming to attract new customers.
The challenge to date of integrating Jos. A. Bank has proven to be bruising for Men’s Wearhouse. The
firm was forced to take in 2015 a $90.1 million non-cash write down in the value of the Jos. A. Bank brand
due to its declining revenue. Men’s Wearhouse also has been burdened by the need to make principal and
interest payments on its staggering debt load which has limited reinvestment in stores that needed updating.
To finance the deal Men’s Wearhouse borrowed $1.6 billion. In addition to its long-term debt, Men’s
Wearhouse also carried off balance sheet debt from operating leases for its stores totaling $700 million
bringing total debt at the time of closing to $2.3 billion.
Two years after buying rival Jos. A. Bank, Men’s Wearhouse has seen the market value of its equity and
debt plunge as investors and bondholders question the firm’s ability to reverse the decline in sales at Jos. A.
Bank. When the deal closed in September 2014, the firm’s equity value exceeded $2.6 billion eventually
topping out at $3.2 billion in October 2015. Since then the firm’s equity value has fallen to less than $700
million by the end of 2016. The firm’s 7% bonds due in 2022 also plunged to $.65 cents per dollar of face
value from $104 during the same period. Standard & Poor’s lowered the firm’s credit rating to well below
investment grade.
Throughout the turmoil, Eminence Capital, the activist investor that had pushed so hard for the merger,
has remained the firm’s largest investor. The private equity firm has expressed confidence in the clothier’s
long-term strategy pointing out that Men’s Wearhouse brand remains strong and that Jos. A. Bank accounts
for only 24% of consolidated sales. While management remains adamant that there are no plans to divest or
spinoff Jos. A. Bank, only time will tell if the unit can be turned around.
Discussion Questions and Answers:
1. How does the size of the premium paid for Jos. A. Bank affect the pace and extent of postmerger
integration?
2. How did private equity investments in both firms affect the size of the premium paid for Jos. A.
Bank? Were the Private equity firms simply interested in getting a deal since it boosted the value
of their investment? Explain your answer.
3. What key external and internal factors affected postmerger integration?
4. How does a hostile takeover impact the likelihood of a successful integration?
5. What is the key premise(s) underlying Men’s Wearhouse’s belief that the two firms can be
successfully integrated? Was each premise correct? Be specific.
6. What is the fatal flaw in the integration effort?
7. George Zimmer, the founder of Men’s Wearhouse, argued that the integration was too fast. Why
would his argument to slow the integration make sense only if the premium paid had been
smaller?
HOW A CHINESE OIL GIANT STUMBLED IN ITS LARGEST CROSS BORDER
POSTMERGER INTEGRATION EFFORT
KEY POINTS
• Postmerger integration often is a highly complex and lengthy process
• How smoothly postmerger integration goes often depends on actions taken prior to closing the
deal and developments beyond the control of the merger partners
• Protracted integration often reduces the ability of the acquirer to recover the premium paid for the
target firm.
Three years after having acquired Canadian oil and gas company Nexen Inc., China’s largest oil company,
CNOOC, was beset with problems managing its investment. Publicly traded CNOOC is 64% owned by
state-owned China National Offshore Oil Corporation. In its largest foreign takeover ever, CNOOC paid
$15.1 billion for Nexen in 2013, giving it new offshore production in the North Sea, the Gulf of Mexico,
offshore of West Africa, and oil and gas properties in the Middle East and Canada. It also gave CNOOC a
bet on the future development of nonconventional oil and gas reserves such as the Canadian oil sands.
What appeared at the time of closing to have fulfilled CNOOC’s three decades old vision of becoming a
global oil company was soon to become a management nightmare.
Oil sands require high cost forms of extraction and produce heavy oil, not easily extracted during
production, that sells at a discount on the world market. Despite these limitations, technological innovation
and high crude prices triggered an oil sands production boom over the last decade. The process by which
oil sands are converted to usable crude oil releases more carbon into the atmosphere than conventional
crude extraction. This has created substantial opposition among environmental groups seeking to limit or
eliminate further development of oil sands. Environmental groups in North America immediately urged
regulators not to approve the takeover. Concerns in the US about national security issues made it clear from
the outset that getting regulatory approval in the U.S. was going to be an uphill battle.
When oil prices were in excess of $100 per barrel, the Nexen deal looked like a good bet. CNOOC
believed that they could make concessions necessary to get regulatory approval and that global energy
prices would continue to rise enabling the firm to earn back any premium paid for Nexen. In their rush to
get the deal done, CNOOC’s management seems to have downplayed the implications of such concessions
and the fact that historically oil prices have shown both sharp increases and decreases. CNOOC’s troubles
with Nexen really began before it actually took control.
To convince shareholders to sell and to appease those concerned about the impact on the environment,
the firm paid a 61% premium to Nexen shareholders and made certain public commitments to
environmental groups in Canada. As a result, Nexen shareholders readily accepted the offer in October
2012 and the deal received Canadian regulatory approval in December 2012. However, to close, CNOOC
still had to overcome opposition among U.S. lawmakers who publicly expressed concerned about Chinese
government control of Nexen’s Gulf of Mexico assets and other national security issues. To get U.S.
regulatory approval, CNOOC ceded operating control over several Gulf of Mexico oil drilling platforms to
U.S. or European firms with whom it had partnered to develop these offshore properties paving the way for
the deal to close in February 2013.
Since closing, the Nexen acquisition has sopped up huge amounts of management time and corporate
capital to fix a unit contributing only 2% of the firm’s consolidated profits. CNOOC seriously
underestimated the challenges with its Canadian purchase including cost overruns in Canada, U.S.
investment controls that forced CNOOC to relinquish operating control over its Gulf of Mexico assets, and
a withdrawal from Nexen’s Yemen business amid a civil war.
CNOOC’s problems have been compounded by the collapse in global oil prices and a pipeline oil spill
creating a public furor in Canada. Nexen’s oil sands project called Long Lake is typical of CNOOC’s woes
associated with this deal. Long Lake is one of the least productive oil sands operations in northern Alberta
province. Initially expected to cost $3.4 billion Canadian dollars, the project’s costs have more than
doubled putting pressure on Nexen’s profit margins. The oil spill came at a time when Canadian oil
producers were anxious to ease growing public concerns about pipeline safety and raised questions about
Nexen’s quality control and fail-safe protocols.
In response to these developments, CNOOC has cut capital spending by 30% from earlier estimates and
reported a reduction in the value of the Nexen acquisition by $700 million in recognition that the unit’s fair
market value having dropped below its book value. The firm also reneged on a pre-closing pledge it had
made to retain existing management and minimize any layoffs related to the deal. Frustrated by CNOOC’s
refusal to share its long term strategy with Nexen senior management in Canada, Canadian managers ran
Nexen as if it were a totally autonomous unit. CNOOC forced out existing management in April 2014. As
world oil prices continued to slide throughout 2015, the Long Lake project became increasingly
uncompetitive. The Chinese owners have moved aggressively to cut costs through layoffs and the
integration of some business operations in North America. This confluence of events created a public
relations nightmare for CNOOC in Canada.
CNOOC’s senior managers assumed that they could overcome technical problems at the Long Lake
project and that Nexen’s management at the time of closing was up to the job of developing the oil sands
reserves. CNOOC also confidently believed global oil prices over which they had no control would
continue to rise making the oil sands reserves highly profitable in the future, despite operating problems at
the Long Lake project which were known at the time of closing. Even the risk associated with the oil
reserves in the turbulent country of Yemen often on the brink of civil war was ignored. In the end, a
combination of managerial over-confidence and too great a fixation on a corporate vision helped create an
ongoing corporate management nightmare.
Has Proctor & Gamble Fully Recovered from Its 2005 Acquisition of Gillette?
Case Study Objectives: To illustrate
• The challenges in realizing revenue and cost-related synergies even when firms appear to be
substantially similar
• The potential long-term debilitating impact on corporate performance of a lengthy or incomplete
integration of a large acquisition.
Billed by pundits as a dream deal, the potential seemed limitless as Procter & Gamble Company (P&G)
announced that it had completed its purchase of Gillette Company (Gillette) in late 2005. The synergies
seemed obvious. The merger appeared poised to create the greatest consumer products company in history.
P&G’s chairman and CEO, A.G. Lafley, predicted that the acquisition of Gillette would add one percentage
point to the firm’s annual revenue growth rate and cost savings would exceed $1 billion annually, while
Gillette’s chairman and CEO, Jim Kilts, opined that the successful integration of the two best companies in
consumer products would be studied in business schools for years to come. Given the belief that the two
firms appeared culturally compatible and that both revenue and cost synergies could be realized in a
reasonable time period, P&G’s board of directors and management anticipated that the financial
performance of the combined firms would accelerate following postclosing integration.
Nine years later, things have not turned out as expected. While cost savings targets were achieved,
operating margins faltered. Gillette’s businesses, such as its pricey razors, were buffeted by the 2008–2009
recession and have been a drag on P&G’s top line. Most of Gillette’s top managers have left. P&G’s stock
price at the end of 2014 stood about 30% above its level on the acquisition announcement date, about one–
half the share price appreciation of such competitors as Unilever and Colgate-Palmolive Company during
the same period.
After retiring in 2009, Lafley was brought out of retirement in to replace Robert McDonald when he
retired in mid-2013 as Chairman and CEO, some say to restore investor confidence in the business. Under
McDonald’s direction, P&G was focused on cutting expenses and attempting to reinvigorate its product
development efforts.
But the firm’s lagging financial performance during this period annoyed investors. Bill Ackman, CEO
of Pershing Square Capital Management, with a $2.2 billion stake in the firm, railed against the firm’s poor
financial showing asking publicly if the firm had ever “fully integrated its 2005 purchase of Gillette.”
Moreover, despite a history of new product innovation such as Pampers, Febreze, and Swifter cleaners, the
years since the acquisition have been largely bereft of blockbuster new products, the firm’s hallmark.
Ackman openly criticized the firm’s inadequate financial returns and bloated organizational overhead.
While much has happened in the years since 2005, looking back at the past can be instructive. The great
fanfare that surrounded the announcement that the two firms would be combined may have been an
indication of the excessive confidence of those closest to the merger.
The euphoria was palpable on January 28, 2005, when P&G enthusiastically announced that it had
reached an agreement to buy Gillette in a share-for-share exchange valued at $55.6 billion. The combined
firms would retain the P&G name and have annual 2005 revenue of more than $60 billion. Half of the new
firm’s product portfolio would consist of personal care, healthcare, and beauty products, with the remainder
consisting of razors and blades and batteries.
P&G had long been viewed as a premier marketing and product innovator of products targeted largely to
women. Consequently, P&G assumed that its R&D and marketing skills in developing and promoting
women’s personal care products could be used to enhance and promote Gillette’s women’s razors. In
contrast, Gillette’s marketing strengths centered on developing and promoting products targeted at men.
Gillette was best known for its ability to sell an inexpensive product (e.g., razors) and hook customers to a
lifetime of refills (e.g., razor blades). Although Gillette was the number 1 and number 2 supplier in the
lucrative toothbrush and men’s deodorant markets, respectively, it was less successful in improving the
profitability of its Duracell battery brand. It had been beset by intense price competition from Energizer and
Rayovac Corp., which generally sell for less than Duracell batteries.
Suppliers such as P&G and Gillette had been under considerable pressure from the continuing
consolidation in the retail industry due to the ongoing growth of Wal-Mart and industry mergers at that
time, such as Sears with Kmart. About 17% of P&G’s $51 billion in 2005 revenues and 13% of Gillette’s
$9 billion annual revenue came from sales to Wal-Mart. The new company, P&G believed, would have
more negotiating leverage with retailers for shelf space and in determining selling prices as well as with its
own suppliers such as advertisers and media companies.
The broad geographic presence of P&G was expected to facilitate the marketing of such products as
razors and batteries in huge developing markets, such as China and India. Cumulative cost cutting was
expected to reach $16 billion, including layoffs of about 4% of the new company’s workforce of 140,000.
Such cost reductions were to be realized by integrating Gillette’s deodorant products into P&G’s structure
as quickly as possible. Other Gillette product lines, such as the razor and battery businesses, were to remain
intact.
P&G’s corporate culture was often described as conservative, with a “promote-from–within”
philosophy. P&G also had a reputation for being resistant to ideas that were not generated within the
company. While Gillette’s CEO was to become vice chairman of the new company, the role of other senior
Gillette managers was less clear in view of the perception that P&G is laden with highly talented top
management. Gillette managers were perceived as more disciplined and aggressive cost cutters than their
P&G counterparts.
With this as a backdrop, what worked and what didn’t? The biggest successes appear to have been the
integration of the two firms’ enormously complex supply chains, cost reduction, and achieving general
acceptance of a uniform corporate culture; the biggest failures may be the inability to retain most senior
Gillette managers and to realize revenue growth projections made at the time the deal was announced. The
failure to achieve more aggressive revenue growth may explain the lackluster performance of P&G’s share
price.
Supply chains describe the activities required to get the manufactured product to the store shelf from the
time the orders are placed until the firm collects payment. Together the firms had supply chains stretching
across 180 countries. Merging the two supply chains was a high priority from the outset because senior
management believed that it could contribute, if done properly, $1 billion in cost savings annually and an
additional $750 million in annual revenue. Each firm had been analyzing the strengths and weaknesses of
each other’s supply chain operations for years in an attempt to benchmark industry “best practices.” The
monumental challenge was to determine how to handle the addition to P&G’s supply chain of 100,000
Gillette customers, 50,000 stock-keeping units (SKUs), and $9 billion in revenue. The two firms also
needed to develop a single order entry system for both firms’ SKUs as well as an integrated distribution
system to eliminate redundancies to achieve substantial efficiencies. P&G wanted to complete this process
quickly and seamlessly to avoid disrupting its customers’ businesses.
The integration process began with the assembly of teams of experienced senior managers from both
P&G and Gillette. Reporting directly to the P&G CEO, one senior manager from each firm was appointed
as coleaders of the project. The world was divided into seven regions, and coleaders from both firms were
selected to manage the regional integration. Throughout the process, more than 1,000 full-time employees
from the existing staffs of both firms worked from late 2005 to completion in late 2007.
Implementation was done in phases. Latin America was selected first because the integration challenges
there were similar to those in other regions and the countries were small. This presented a relatively low–
risk learning opportunity. In just 6 months after receiving government approval to complete the transaction,
the integration of supply chains in five countries in Latin America was completed. In 2006, P&G merged
the two supply chains in North America, China, half of Western Europe, and several smaller countries in
Eastern Europe. The remaining Western and Eastern European countries were converted in early 2007.
Supply chain integration in Japan and the rest of Asia were completed by the end of 2007.
Creating a common IT platform for data communication also was critical to integrating the supply
chains. As part of the regional projects, Gillette’s production and distribution data were transferred to
P&G’s SAP software system, thereby creating a single IT platform worldwide for all order shipping,
billing, and distribution center operations.
While some of the activities were broad in scope, others were very narrow. The addition of 50,000
Gillette SKUs to P&G’s IT system required the creation of a common, consistent, and accurate dataset such
that products made in the United States could be exported successfully to another country. An example of a
more specific task involved changing the identification codes printed on the cartons of all Gillette products
to reflect the new ownership.
Manufacturing was less of a concern, since the two firms’ product lines did not overlap; however, their
distribution and warehousing centers did. As a result of the acquisition, P&G owned more than 500
distribution centers and warehouses worldwide. P&G sought to reduce that number by 50% while retaining
the best in the right locations to meet local customer requirements.
Integrating corporate cultures, once considered highly compatible, turned out to be a challenge. It was
not that the two firms had deeply rooted differences in terms of mission and values. Rather, it was the more
mundane things. Each firm had a significantly different way of communicating and decision making.
Gillette managers were inclined to communicate by sending memos, while P&G executives preferred to
meet face to face to reach consensus. Moreover, Gillette managers were inclined to make decisions rapidly,
while P&G decisions often were made only after lengthy deliberations.
While these differences were eventually resolved, it did require substantial time and expense. For
example, in 2009, Gillette completed a $50 million renovation of its headquarters in Boston and forced its
senior executives to move from their well-appointed offices at another location into the new “open layout