campus” similar to the P&G Cincinnati headquarters. Under this open layout concept intended to optimize
communication, not even senior executives have doors on their offices. The new office complex in Boston
has copious amounts of open or common space and world-class conferencing facilities to promote more
face-to-face communication as a means of bringing the two corporate cultures together.
While the supply chain integration and its attendant cost reduction appear to have reaped significant
rewards and there appears to be a better melding of the two firms corporate cultures, revenue growth fell
short of expectations. This has been true of most of P&G’s acquisitions historically. However, in time,
revenue growth in line with earlier expectations may be realized. Sales of Olay and Pantene products did
not take off until years after their acquisition as part of P&G’s takeover of Richardson-Vicks in 1985.
Pantene’s revenue did not grow substantially until the early 1990s and Olay’s revenues did not grow until
the early 2000s.
The Gillette acquisition illustrates the difficulty in evaluating the success or failure of mergers and
acquisitions for acquiring company shareholders. Assessing the true impact of the Gillette acquisition
remains elusive. Though the acquisition represented a substantial expansion of P&G’s product offering and
geographic presence, the ability to isolate the specific impact of a single event (i.e., an acquisition)
becomes clouded by the introduction of other major and often-uncontrollable events (e.g., the 2008–2009
recession) and their lingering effects.
While revenue and margin improvement have been below expectations, Gillette has bolstered P&G’s
competitive position in the fast-growing Brazilian and Indian markets, thereby boosting the firm’s longer
term growth potential, and has strengthened its operations in Europe and the United States. Thus, in this
ever-changing world, it will become increasingly difficult with each passing year to identify the portion of
revenue growth and margin improvement attributable to the Gillette acquisition and that due to other
factors.
Case Study Discussion Questions
1. Why is it often considered critical to integrate the target business quickly? Be specific.
2. Given the complexity of these two businesses, do you believe the acquisition of Gillette by P&G
made sense? Explain your answer.
3. Why did P&G rely heavily on personnel in both companies to implement post-closing integration?
4. Why do you believe P&G was unable to retain most of Gillette’s top managers following the
acquisition?
5. Researchers routinely employ abnormal financial returns around the announcement date of a
merger or margin improvement subsequent to closing as ways for determining the success (or
failure) of a takeover. What other factors do you believe should be considered in making this
determination? Be specific.
The Challenges of Airline Integration
Key Points
• Postmerger integration often is a highly complex and lengthy process.
• The deal’s success often is determined by how smoothly postmerger integration occurs.
• Successful integration often is characterized by detailed preintegration planning and cross–
functional integration teams consisting of managers from both the acquirer and target firms.
• Prolonged integration tends to increase the cultural divide between the acquirer and target’s
employee groups.
More than a decade of ongoing airline consolidation in the United States culminated with the merger of
American Airlines and US Airways in late 2013. The new company will be named American Airlines. The
merger enabled American after more than 2 years under the protection of the US bankruptcy court to
emerge from bankruptcy as the largest global carrier on November 12, 2013. The merger might have taken
place sooner had it not been for a lawsuit filed by the US Justice Department alleging that the combination
of these two airlines would result in rising consumer fares. Following a series of concessions, the airlines
were allowed to complete the deal on December 9, 2013.
The new airline will be 2% larger than United–Continental Holdings in terms of traffic (i.e., the number
of miles flown by paying passengers) worldwide and will continue to be based in Dallas-Fort Worth, TX.
The merger is the fourth major deal in the US airline industry since 2008 when Delta bought Northwest
Airlines. United and Continental merged in 2010, and Southwest Airlines bought discount rival AirTran
Holdings in 2011.
The combination of American and US Airways will have more than 100 million frequent fliers, 94,000
employees, 950 planes, 6,500 daily flights, 8 major hubs, and total annual revenue of $39 billion. It will be
the market leader on the East Coast and in the Southwestern United States and in South America. But it
remains a smaller player in Europe, where United and Delta are stronger. The merger does little to bolster
American’s weak presence in Asia.
The combination is expected to generate more than $1 billion in annual net synergies by 2015. The new
company expects to incur $1.2 billion in one-time transition costs spread over the 3 years following
closing. The annual net synergies are expected to come by 2015 from incremental annual revenue of $900
million, resulting primarily from increased passenger traffic, taking advantage of the combined carrier’s
improved schedule and connectivity, a greater proportion of business travelers, and the redeployment of the
combined fleet to better match capacity to customer demand. Estimated cost synergies of about $150
million annually include the effects of the new labor contracts at American Airlines worked out as part of
the reorganization plan to get the support of American’s three major unions.
Despite the tumultuous events leading up to the closing, daunting challenges remain. The task of creating
the world’s largest airline will require combining two air carriers with vastly different operating cultures
and their own strained labor histories. The two airlines will be run by a single management team but kept
separate until the Federal Aviation Administration provides an aviation operating certificate, a process that
can take 18–24 months. Merging fleets of airplanes, maintaining harmonious labor relations, repainting
plans, planning new routes, and seamlessly combining complex computer systems are activities fraught
with peril.
Of these activities, labor and technology issues are likely to be the most challenging. The outlook for
labor is promising with a lot of trust existing between American’s management and labor union leadership
representing its three major employee groups: pilots, flight attendants, and ground workers. However,
major hurdles remain. Workers from the two airlines are represented by different unions and are subject to
different work rules. The more demanding challenge will be in merging complex reservation and computer
systems without disruption. In the area of information technology (IT) alone, the two firms have to
integrate hundreds of separate systems, programs, and protocols.
The labor terms Doug Parker, CEO of the new firm, needed to garner support from the unions will
eliminate some of the cost concessions won by American’s prior management. To make the merger work,
Parker will need to capture big revenue increases. One area of growth for American may be on Pacific
routes, where capacity could increase as much as 20% in the coming years. Almost all of the capacity
reductions planned for American and US Airways will be on domestic routes where there is more
competition from Southwest and smaller carriers such as JetBlue Airways Corp and Virgin American Inc.
Numerous interdisciplinary integration teams will be required to collectively make thousands of decisions
ranging from the fastest way to clean airplanes and board passengers to which perks to offer in the frequent
flier program. The teams will consist of personnel from both airlines. Members include managers from
such functional departments as technology, human resources, fleet management, and network planning.
The synergies will have to be realized without disruption to daily operations.
Nevertheless, despite the hard work and commitment of those involved and their attention to detail in
planning the integration effort, history shows that mishaps associated with any postclosing integration are
likely to arise. In the integration of Continental and United, United pilots have resisted the training they
were offered to learn the Continental’s flight procedures. They even unsuccessfully sued their employer
due to the slow pace of negotiations to reach new unified labor contracts. Customers have been confused by
the inability of Continental agents to answer questions about United’s flights. Additional confusion was
created on March 3, 2012, when the two airlines merged their reservation systems, websites, and frequent
flyer programs, a feat that was often accomplished in stages in prior airline mergers. As a result of
alienation of some frequent flyer customers, reservation snafus, and flight delays, revenue has failed thus
far to meet expectations. Moreover, by the end of 2012, one-time merger related expenses totaled almost
$1.5 billion.
Anticipated synergies often are not realized on a timely basis. Many airline mergers in the past have hit
rough spots that reduced anticipated ongoing savings and revenue increases. Pilots and flight attendants at
US Airways Group, a combination of US Airways and America West, were still operating under separate
contracts with different pay rates, schedules and work rules, 6 years after the merger. Delta Airlines
remains ensnared in a labor dispute that has kept it from equalizing pay and work rules for flight attendants
and ramp workers at Delta and Northwest Airlines, which Delta acquired in 2008. The longer these
disputes continue the greater the cultural divide in integrating these businesses.
Assessing Procter & Gamble’s Acquisition of Gillette:
What Worked and What Didn’t
____________________________________________________________________________________
Key Points
Realizing synergies depends on how quickly and seamlessly integration is implemented.
Cost-related synergies often are more readily realized since the firms involved in the integration tend to
have more direct control over cost-reduction activities.
Realizing revenue-related synergies is more elusive due to the difficulty in assessing customer response to
new brands as well as marketing and pricing strategies.
____________________________________________________________________________________
The potential seemed limitless as Procter & Gamble Company (P&G) announced that it had completed its
purchase of Gillette Company (Gillette) in late 2005. 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.
Six 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 2011 stood about 20% above its level on the acquisition announcement date, less than
one-half the share price appreciation of such competitors as Unilever and Colgate-Palmolive Company
during the same period.
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 and cost reduction; 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. .
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. 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 co-leaders of the project. The world was divided into seven regions, and co-leaders 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 six 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 information technology (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 data set
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.
While the supply chain integration appears to have reaped significant rewards, revenue growth fell short
of expectations. This has been true of most of P&G’s acquisitions historically. However, in time, revenue
growth in line with earlier expectations may be realized. Sales of Olay and Pantene products did not take
off until years after their acquisition as part of P&G’s takeover of Richardson–Vicks in 1985. Pantene’s
revenue did not grow substantially until the early 1990s and Pantene’s revenues did not grow until the early
2000s.
The Gillette acquisition illustrates the difficulty in evaluating the success or failure of mergers and
acquisitions for acquiring company shareholders. Assessing the true impact of the Gillette acquisition
remains elusive. Though the acquisition represented a substantial expansion of P&G’s product offering and
geographic presence, the ability to isolate the specific impact of a single event (i.e., an acquisition)
becomes clouded by the introduction of other major and often-uncontrollable events (e.g., the 2008–2009
recession) and their lingering effects. While revenue and margin improvement have been below
expectations, Gillette has bolstered P&G’s competitive position in the fast–growing Brazilian and Indian
markets, thereby boosting the firm’s longer-term growth potential, and has strengthened its operations in
Europe and the United States. Thus, in this ever-changing world, it will become increasingly difficult with
each passing year to identify the portion of revenue growth and margin improvement attributable to the
Gillette acquisition and that due to other factors.
Case Study Discussion Questions:
1. Why is it often considered critical to integrate the target business quickly? Be specific.
2. Given the complexity of these two businesses, do you believe the acquisition of Gillette by P&G
made sense? Explain your answer.
3. Why did P&G rely heavily on personnel in both companies to implement post-closing integration?
4. Why do you believe P&G was unable to retain most of Gillette’s top managers following the
acquisition?
Steel Giants Mittal and Arcelor Adopt a Highly Disciplined Approach to Postclosing Integration
Key Points
Successful integration requires clearly defined objectives, a clear implementation schedule, ongoing and
candid communication, and involvement by senior management.
Cultural integration often is an ongoing activity.
_____________________________________________________________________________________
The merger of Arcelor and Mittal into ArcelorMittal in June 2006 resulted in the creation of the world’s
largest steel company.1 With 2007 revenues of $105 billion and its steel production accounting for about
10% of global output, the behemoth has 320,000 employees in 60 countries, and it is a global leader in all
its target markets. Arcelor was a product of three European steel companies (Arbed, Aceralia, and Usinor).
Similarly, Mittal resulted from a series of international acquisitions. The two firms’ downstream (raw
material) and upstream (distribution) operations proved to be highly complementary, with Mittal owning
much of its iron ore and coal reserves and Arcelor having extensive distribution and service center
operations. Like most mergers, ArcelorMittal faced the challenge of integrating management teams; sales,
marketing, and product functions; production facilities; and purchasing operations. Unlike many mergers
involving direct competitors, a relatively small portion of cost savings would come from eliminating
duplicate functions and operations.
ArcelorMittal’s top management set three driving objectives before undertaking the postmerger
integration effort: achieve rapid integration, manage daily operations effectively, and accelerate revenue
and profit growth. The third objective was viewed as the primary motivation for the merger. The goal was
to combine what were viewed as entities having highly complementary assets and skills. This goal was
quite different from the way Mittal had grown historically, which was a result of acquisitions of turnaround
targets focused on cost and productivity improvements.
The formal phase of the integration effort was to be completed in six months. It was crucial to agree on
the role of the management integration team (MIT); the key aspects of the integration process, such as how
1 This case relies on information provided in an interview with Jerome Ganboulan (formerly of Arcelor)
and William A. Scotting (formerly of Mittal), the two executives charged with directing the postmerger
integration effort and is adapted from De Mdedt and Van Hoey (2008).
decisions would be made; and the roles and responsibilities of team members. Activities were undertaken
in parallel rather than sequentially. Teams consisted of employees from the two firms. People leading task
forces came from the business units.
The teams were then asked to propose a draft organization to the MIT, including the profiles of the
people who were to become senior managers. Once the senior managers were selected, they were to build
their own teams to identify the synergies and create action plans for realizing the synergies. Teams were
formed before the organization was announced, and implementation of certain actions began before
detailed plans had been developed fully. Progress to plan was monitored on a weekly basis, enabling the
MIT to identify obstacles facing the 25 decentralized task forces and, when necessary, resolve issues.
Considerable effort was spent on getting line managers involved in the planning process and selling the
merger to their respective operating teams. Initial communication efforts included the launch of a top–
management “road show.” The new company also established a website and introduced Web TV. Senior
executives reported two- to three-minute interviews on various topics, giving everyone with access to a
personal computer the ability to watch the interviews onscreen.
Owing to the employee duress resulting from the merger, uncertainty was high, as employees with both
firms wondered how the merger would affect them. To address employee concerns, managers were given a
well-structured message about the significance of the merger and the direction of the new company.
Furthermore, the new brand, ArcelorMittal, was launched in a meeting attended by 500 of the firm’s top
managers during the spring of 2007.
External communication was conducted in several ways. Immediately following the closing, senior
managers traveled to all the major cities and sites of operations, talking to local management and
employees in these sites. Typically, media interviews were also conducted around these visits, providing an
opportunity to convey the ArcelorMittal message to the communities through the press. In March 2007, the
new firm held a media day in Brussels. Journalists were invited to go to the different businesses and review
the progress themselves.
Within the first three months following the closing, customers were informed about the advantages of
the merger for them, such as enhanced R&D capabilities and wider global coverage. The sales forces of the
two organizations were charged with the task of creating a single “face” to the market.
ArcelorMittal’s management viewed the merger as an opportunity to conduct interviews and surveys
with employees to gain an understanding of their views about the two companies. Employees were asked
about the combined firm’s strengths and weaknesses and how the new firm should present itself to its
various stakeholder groups. This process resulted in a complete rebranding of the combined firms.
ArcelorMittal management set a target for annual cost savings of $1.6 billion, based on experience with
earlier acquisitions. The role of the task forces was first to validate this number from the bottom up and
then to tell the MIT how the synergies would be achieved. As the merger progressed, it was necessary to
get the business units to assume ownership of the process to formulate the initiatives, timetables, and key
performance indicators that could be used to track performance against objectives. In some cases, the
synergy potential was larger than anticipated while smaller in other situations. The expectation was that the
synergy could be realized by mid-2009. The integration objectives were included in the 2007 annual budget
plan. As of the end of 2008, the combined firms had realized their goal of annualized cost savings of $1.6
billion, six months earlier than expected.
The integration was deemed complete when the new organization, the brand, the “one face to the
customer” requirement, and the synergies were finalized. This occurred within eight months of the closing.
However, integration would continue for some time to achieve cultural integration. Cultural differences
within the two firms are significant. In effect, neither company was homogeneous from a cultural
perspective. ArcelorMittal management viewed this diversity as an advantage in that it provided an
opportunity to learn new ideas.
Case Study Discussion Questions:
1. Why is it important to establish both” top-down” and “bottoms-up” estimates of synergy?
2. How did ArcelorMittal attempt to bridge cultural differences during the integration? Be specific.
3. Why are communication plans so important? What methods did ArcelorMittal employ to achieve
these objectives? Be specific.
4. Comment on ArcelorMittal management’s belief that the cultural diversity within the
combined firms was an advantage. Be specific.
5. The formal phase of the post-merger integration period was to be completed within 6
months. Why do you believe that ArcelorMittal’s management was eager to integrate rapidly
the two businesses? Be specific. What integration activities were to extend beyond the
proposed 6 month integration period?
The Challenges of Integrating United and Continental Airlines
______________________________________________________________________________
Key Points
Among the critical early decisions that must be made before implementing integration is the selection of
the manager overseeing the process.
Integration teams commonly consist of managers from both the acquirer firm and the target firm.
Senior management must remain involved in the postmerger integration process.
Realizing anticipated synergies often is elusive.
______________________________________________________________________________________
On June 29, 2011, integration executive Lori Gobillot was selected by United Continental Holdings, the
parent of both United and Continental airlines, to stitch together United and Continental airlines into the
world’s largest airline. Having completed the merger in October 2010, United and Continental airlines
immediately began the gargantuan task of creating the largest airline in the world. In the area of
information technology alone, the two firms had to integrate more than 1,400 separate systems, programs,
and protocols. Workers from the two airlines were represented by two different unions and were subject to
different work rules. Even the airplanes were laid out differently, with United’s fleet having first-class
cabins and Continental’s planes having business and coach only. The combined carriers have routes
connecting 373 airports in 63 countries. The combined firms have more than 1,300 airplanes.
Jeffry Smisek, CEO of United Continental Holdings, had set expectations high, telling Wall Street
analysts that the combined firms expected to generate at least $1.2 billion in cost savings annually within
three years. This was to be achieved by rationalizing operations and eliminating redundancies.
Smisek selected Lori Gobillot as the executive in charge of the integration effort because she had
coordinated the carrier’s due diligence with United during the period prior to the two firm’s failed attempt
to combine in 2008. Her accumulated knowledge of the two airlines, interpersonal skills, self-discipline,
and drive made her a natural choice.
She directed 33 interdisciplinary integration teams that collectively made thousands of decisions,
ranging from the fastest way to clean 1,260 airplanes and board passengers to which perks to offer in the
frequent flyer program. The teams consisted of personnel from both airlines. Members included managers
from such functional departments as technology, human resources, fleet management, and network
planning and were structured around such activities as operations and a credit card partnership with
JPMorgan Chase. In most cases, the teams agreed to retain at least one of the myriad programs already in
place for the passengers of one of the airlines so that at least some of the employees would be familiar with
the programs.
If she was unable to resolve disagreements within teams, Gobillot invited senior managers to join the
deliberations. In order to stay on a tight time schedule, Gobillot emphasized to employees at both firms that
the integration effort was not “us versus them” but, rather, that they were all in it together. All had to stay
focused on the need to achieve integration on a timely basis while minimizing disruption to daily
operations if planned synergies were to be realized.
Nevertheless, despite the hard work and commitment of those involved in the process, history shows
that the challenges associated with any postclosing integration often are daunting. The integration of
Continental and United was no exception. United pilots have resisted the training they were offered to learn
Continental’s flight procedures. They even unsuccessfully sued their employer due to the slow pace of
negotiations to reach new, unified labor contracts. Customers have been confused by the inability of
Continental agents to answer questions about United’s flights. Additional confusion was created on March
3, 2012, when the two airlines merged their reservation systems, websites, and frequent flyer programs, a
feat that had often been accomplished in stages in prior airline mergers. As a result of alienation of some
frequent flyer customers, reservation snafus, and flight delays, revenue has failed thus far to meet
expectations. Moreover, by the end of 2012, one–time merger-related expenses totaled almost $1.5 billion.
Many airline mergers in the past have hit rough spots that reduced anticipated ongoing savings and
revenue increases. Pilots and flight attendants at US Airways Group, a combination of US Airways and
America West, were still operating under separate contracts with different pay rates, schedules, and work
rules six years after the merger. Delta Airlines remains ensnared in a labor dispute that has kept it from
equalizing pay and work rules for flight attendants and ramp workers at Delta and Northwest Airlines,
which Delta acquired in 2008. The longer these disputes continue, the greater the cultural divide in
integrating these businesses.
Alcatel Merges with Lucent, Highlighting Cross-Cultural Issues
Alcatel SA and Lucent Technologies signed a merger pact on April 3, 2006, to form a Paris–based
telecommunications equipment giant. The combined firms would be led by Lucent’s chief executive officer
Patricia Russo. Her charge would be to meld two cultures during a period of dynamic industry change.
Lucent and Alcatel were considered natural merger partners because they had overlapping product lines
and different strengths. More than two–thirds of Alcatel’s business came from Europe, Latin America, the
Middle East, and Africa. The French firm was particularly strong in equipment that enabled regular
telephone lines to carry high-speed Internet and digital television traffic. Nearly two-thirds of Lucent’s
business was in the United States. The new company was expected to eliminate 10 percent of its workforce
of 88,000 and save $1.7 billion annually within three years by eliminating overlapping functions.
While billed as a merger of equals, Alcatel of France, the larger of the two, would take the lead in
shaping the future of the new firm, whose shares would be listed in Paris, not in the United States. The
board would have six members from the current Alcatel board and six from the current Lucent board, as
well as two independent directors that must be European nationals. Alcatel CEO Serge Tehuruk would
serve as the chairman of the board. Much of Ms. Russo’s senior management team, including the chief
operating officer, chief financial officer, the head of the key emerging markets unit, and the director of
human resources, would come from Alcatel. To allay U.S. national security concerns, the new company
would form an independent U.S. subsidiary to administer American government contracts. This subsidiary
would be managed separately by a board composed of three U.S. citizens acceptable to the U.S.
government.
International combinations involving U.S. companies have had a spotty history in the
telecommunications industry. For example, British Telecommunications PLC and AT&T Corp. saw their
joint venture, Concert, formed in the late 1990s, collapse after only a few years. Even outside the telecom
industry, transatlantic mergers have been fraught with problems. For example, Daimler Benz’s 1998 deal
with Chrysler, which was also billed as a merger of equals, was heavily weighted toward the German
company from the outset.
In integrating Lucent and Alcatel, Russo faced a number of practical obstacles, including who would
work out of Alcatel’s Paris headquarters. Russo, who became Lucent’s chief executive in 2000 and does not
speak French, had to navigate the challenges of doing business in France. The French government has a big
influence on French companies and remains a large shareholder in the telecom and defense sectors. Russo‘s
first big fight would be dealing with the job cuts that were anticipated in the merger plan. French unions
tend to be strong, and employees enjoy more legal protections than elsewhere. Hundreds of thousands took
to the streets in mid-2006 to protest a new law that would make it easier for firms to hire and fire younger
workers. Russo has extensive experience with big layoffs. At Lucent, she helped orchestrate spin-offs,
layoffs, and buyouts involving nearly four-fifths of the firm’s workforce.
Making choices about cuts in a combined company would likely be even more difficult, with Russo
facing a level of resistance in France unheard of in the United States, where it is generally accepted that
most workers are subject to layoffs and dismissals. Alcatel has been able to make many of its job cuts in
recent years outside France, thereby avoiding the greater difficulty of shedding French workers. Lucent
workers feared that they would be dismissed first simply because it is easier than dismissing their French
counterparts.
After the 2006 merger, the company posted six quarterly losses and took more than $4.5 billion in write–
offs, while its stock plummeted more than 60 percent. An economic slowdown and tight credit limited
spending by phone companies. Moreover, the market was getting more competitive, with China’s Huawei
aggressively pricing its products. However, other telecommunications equipment manufacturers facing the
same conditions have not fared nearly as badly as Alcatel-Lucent. Melding two fundamentally different
cultures (Alcatel’s entrepreneurial and Lucent’s centrally controlled cultures) has proven daunting.
Customers who were uncertain about the new firm’s products migrated to competitors, forcing Alcatel–
Lucent to slash prices even more. Despite the aggressive job cuts, a substantial portion of the projected $3.1
billion in savings from the layoffs were lost to discounts the company made to customers in an effort to
rebuild market share.
Frustrated by the lack of progress in turning around the business, the Alcatel-Lucent board announced in
July 2008 that Patricia Russo, the American chief executive, and Serge Tchuruk, the French chairman,
would leave the company by the end of the year. The board also announced that, as part of the shake-up,
the size of the board would be reduced, with Henry Schacht, a former chief executive at Lucent, stepping
down. Perhaps hamstrung by its dual personality, the French-American company seemed poised to take on
a new personality of its own by jettisoning previous leadership.
Discussion Questions:
1. Explain the logic behind combining the two companies. Be specific.
2. What are the major challenges the management of the combined companies are likely to face?
How would you recommend resolving these issues?
3. Most corporate mergers are beset by differences in corporate cultures. How do cross–border
transactions compound these differences?
4. Why do you think mergers, both domestic and cross-border, are often communicated by the
acquirer and target firms’ management as mergers of equals?
5. In what way would you characterize this transaction as a merger of equals? In what ways
should it not be considered a merger of equals?
Panasonic Moves to Consolidate Past Acquisitions
Key Points:
• Minority investors may impede a firm’s ability to implement its business strategy by slowing the
decision making process.
• A common solution is for the parent firm to buy out or “squeeze–out” minority shareholders
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Increased competition in the manufacture of rechargeable batteries and other renewable energy products
threatened to thwart Panasonic Corporation’s move to achieve a dominant global position in renewable
energy products. South Korean rivals Samsung Electronics Company and LG Electronics Inc. were
increasing investment to overtake Panasonic in this marketplace. These firms have already been successful
in surpassing Panasonic’s leadership position in flat–panel televisions.
Despite having a majority ownership in several subsidiaries, Sanyo Electric Company and Panasonic
Electric Works Company that are critical to its long–term success in the manufacture and sale of renewable
energy products, Panasonic has been frustrated by the slow pace of decision making and strategy
implementation. In particular, Sanyo Electric has been reluctant to surrender decision making to Panasonic.
Despite appeals by Panasonic president Fumio Ohtsubo ’s for collaboration, Panasonic and Sanyo
continued to compete for customers. Sanyo Electric maintains a brand that is distinctly different from the
Panasonic brand, thereby creating confusion among customers.
Sanyo Electric, the global market share leader in rechargeable lithium ion batteries, also has a growing
presence in solar panels. Panasonic Electric Works makes lighting equipment, sensors, and other key
components for making homes and offices more energy efficient.
To gain greater decision-making power, Panasonic acquired the remaining publicly traded shares in
both Sanyo Electric and Panasonic Electric Works in March 2011 and plans to merge these two operations
into the parent. Plans call for combining certain overseas sales operations and production facilities of Sanyo
Electric and Panasonic Electric Works, as well as using Panasonic factories to make Sanyo products.
The two businesses were consolidated in 2012. The challenge to Panasonic now is gaining full control
without alienating key employees who may be inclined to leave and destroying those attributes of the
Sanyo culture that are needed to expand Panasonic’s global position in renewable energy products.
This problem is not unique to Panasonic. Many Japanese companies consist of large interlocking
networks of majority-owned subsidiaries that are proving less nimble than firms with more centralized
authority. After four straight years of operating losses, Hitachi Ltd. spent 256 billion yen ($2.97 billion) to
buy out minority shareholders in five of its majority-owned subsidiaries in order to achieve more
centralized control.
Discussion Questions
1. Describe the advantages and disadvantages of owning less than 100 percent of another company.
2. When does it make sense to buy a minority interest, a majority interest, or 100 percent of the
publicly traded shares of another company?
HP Acquires Compaq—The Importance of Preplanning Integration
The proposed marriage between Hewlett-Packard (HP) and Compaq Computer got off to a rocky start when
the sons of the founders came out against the transaction. The resulting long, drawn-out proxy battle
threatened to divert management’s attention from planning for the postclosing integration effort. The
complexity of the pending integration effort appeared daunting. The two companies would need to meld
employees in 160 countries and assimilate a large array of products ranging from personal computers to
consulting services. When the transaction closed on May 7, 2002, critics predicted that the combined
businesses, like so many tech mergers over the years, would become stalled in a mess of technical and
personal entanglements.
Instead, HP’s then CEO Carly Fiorina methodically began to plan for integration prior to the deal
closing. She formed an elite team that studied past tech mergers, mapped out the merger’s most important
tasks, and checked regularly whether key projects were on schedule. A month before the deal was even
announced on September 4, 2001, Carly Fiorina and Compaq CEO Michael Capellas each tapped a top
manager to tackle the integration effort. The integration managers immediately moved to form a 30-person
integration team. The team learned, for example, that during Compaq’s merger with Digital some server
computers slated for elimination were never eliminated. In contrast, HP executives quickly decided what to
jettison. Every week they pored over progress charts to review how each product exit was proceeding. By
early 2003, HP had eliminated 33 product lines it had inherited from the two companies, thereby reducing
the remaining number to 27. Another 6 were phased out in 2004.
After reviewing other recent transactions, the team recommended offering retention bonuses to
employees the firms wanted to keep, as Citigroup had done when combining with Travelers. The team also
recommended that moves be taken to create a unified culture to avoid the kind of divisions that plagued
AOL Time Warner. HP executives learned to move quickly, making tough decisions early with respect to
departments, products, and executives. By studying the 1984 merger between Chevron and Gulf Oil, where
it had taken months to name new managers, integration was delayed and employee morale suffered. In
contrast, after Chevron merged with Texaco in 2001, new managers were appointed in days, contributing to
a smooth merger.
Disputes between HP and former Compaq staff sometimes emerged over issues such as the different
approaches to compensating sales people. These issues were resolved by setting up a panel of up to six
sales managers enlisted from both firms to referee the disagreements. HP also created a team to deal with
combining the corporate cultures and hired consultants to document the differences. A series of workshops
involving employees from both organizations were established to find ways to bridge actual or perceived
differences. Teams of sales personnel from both firms were set up to standardize ways to market to
common customers. Schedules were set up to ensure that agreed-upon tactics were actually implemented in
a timely manner. The integration managers met with Ms. Fiorina weekly.
The results of this intense preplanning effort were evident by the end of the first year following closing.
HP eliminated duplicate product lines and closed dozens of facilities. The firm cut 12,000 jobs, 2,000 more
than had been planned at that point in time, from its combined 150,000 employees. HP achieved $3 billion
in savings from layoffs, office closures, and consolidating its supply chain. Its original target was for
savings of $2.4 billion after the first 18 months.
Despite realizing greater than anticipated cost savings, operating margins by 2004 in the PC business
fell far short of expectations. This shortfall was due largely to declining selling prices and a slower than
predicted recovery in PC unit sales. The failure to achieve the level of profitability forecast at this time of
the acquisition contributed to the termination of Ms. Fiorina in early 2005.
Discussion Questions
1. Explain how premerger planning aided in the integration of HP and Compaq.