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
______________________________________________________________________________
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.
2. What did HP learn by studying other mergers? Give examples.
3. Cite key cultural differences between the two organizations. How were they resolved?
Integrating Supply Chains: Coty Cosmetics Integrates Unilever Cosmetics International
In mid-August 2005, Coty, one of the world’s largest cosmetics and fragrance manufacturers, acquired
Unilever Cosmetics International (UCI), a subsidiary of the Unilever global conglomerate, for $800
million. Coty viewed the transaction as one in which it could become a larger player in the prestigious
fragrance market of expensive perfumes. Coty believed it could reap economies of scale from having just
one sales force, marketing group, and the like selling and managing the two sets of products. It hoped to
retain the best people from both organizations. However, Coty’s management understood that if it were not
done quickly enough, it might not realize the potential cost savings and would risk losing key personnel.
By mid-December, Coty’s IT team had just completed moving UCI’s employees from Unilever‘s
infrastructure to Coty’s. This involved such tedious work as switching employees from Microsoft’s Outlook
to Lotus Notes. Coty‘s information technology team was faced with the challenge of combining and
standardizing the two firms’ supply chains, including order entry, purchasing, processing, financial,
warehouse, and shipping systems. At the end of 2006, Coty’s management announced that it anticipated
that the two firms would be fully integrated by June 30, 2006. From an IT perspective, the challenges were
daunting. The new company’s supply chain spanned ten countries and employed four different enterprise
resource planning (ERP) systems that had three warehouse systems running five major distribution
facilities on two continents. ERP is an information system or process that integrates all production and
related applications across an entire corporation.
On January 11–12, 2006, 25 process or function “owners,” including the heads of finance, customer
service, distribution, and IT, met to create the integration plan for the firm’s disparate supply chains. In
addition to the multiple distribution centers and ERP systems, operations in each country had unique
processes that had to be included in the integration planning effort. For example, Italy was already using
the SAP system on which Coty would eventually standardize. The largest customers there placed orders at
the individual store level and expected products to be delivered to these stores. In contrast, the United
Kingdom used a legacy (i.e., a highly customized, nonstandard) ERP system, and Coty’s largest customer in
the United Kingdom, the Boots pharmacy chain, placed orders electronically and had them delivered to
central warehouses.
Coty’s IT team, facing a very demanding schedule, knew it could not accomplish all that needed to be
done in the time frame required. Therefore, it started with any system that directly affected the customer,
such as sending an order to the warehouse, shipment notification, and billing. The decision to focus on
“customer-facing” systems came at the expense of internal systems, such as daily management reports
tracking sales and inventory levels. These systems were to be completed after the June 30, 2006, deadline
imposed by senior management.
To minimize confusion, Coty created small project teams that consisted of project managers, IT
directors, and external consultants. Smaller teams did not require costly overhead, like dedicated office
space, and eliminated chains of command that might have prevented senior IT management from receiving
timely, candid feedback on actual progress against the integration plan. The use of such teams is credited
with allowing Coty‘s IT department to combine sales and marketing forces as planned at the beginning of
the 2007 fiscal year in July 2006. While much of the “customer–facing” work was done, many tasks
remained. The IT department now had to go back and work out the details it had neglected during the
previous integration effort, such as those daily reports its senior managers wanted and the real-time
monitoring of transactions. By setting priorities early in the process and employing small, project-focused
teams, Coty was able to integrate successfully the complex supply chains of the firms in a timely manner.
Discussion Questions
3. Discuss the advantages and disadvantages of using small project teams. Be specific.
Culture Clash Exacerbates Efforts of the Tribune Corporation
to Integrate the Times Mirror Corporation
The Chicago-based Tribune Corporation owned 11 newspapers, including such flagship publications as the
Chicago Tribune, the Los Angeles Times, and Newsday, as well as 25 television stations. Attempting to
offset the long-term decline in newspaper readership and advertising revenue, Tribune acquired the Times
Mirror (owner of the Los Angeles Times newspaper) for $8 billion in 2000. The merger combined two firms
that historically had been intensely competitive and had dramatically different corporate cultures. The
Tribune was famous for its emphasis on local coverage, with even its international stories having a
connection to Chicago. In contrast, the L.A. Times had always maintained a strong overseas and
Washington, D.C., presence, with local coverage often ceded to local suburban newspapers. To some
Tribune executives, the L.A. Times was arrogant and overstaffed. To L.A. Times executives, Tribune
executives seemed too focused on the “bottom line” to be considered good newspaper people.
The overarching strategy for the new company was to sell packages of newspaper and local TV
advertising in the big urban markets. It soon became apparent that the strategy would be unsuccessful.
Consequently, the Tribune’s management turned to aggressive cost cutting to improve profitability. The
Tribune wanted to encourage centralization and cooperation among its newspapers to cut overlapping
coverage and redundant jobs.
Coverage of the same stories by different newspapers owned by the Tribune added substantially to costs.
After months of planning, the Tribune moved five bureaus belonging to Times Mirror papers (including the
L.A. Times) to the same location as its four other bureaus in Washington, D.C. L.A. Times’ staffers objected
strenuously to the move, saying that their stories needed to be tailored to individual markets and they did
not want to share reporters with local newspapers. As a result of the consolidation, the Tribune’s
newspapers shared as much as 40 percent of the content from Washington, D.C., among the papers in 2006,
compared to as little as 8 percent in 2000. Such changes allowed for significant staffing reductions.
In trying to achieve cost savings, the firm ran aground in a culture war. Historically, the Times Mirror,
unlike the Tribune, had operated its newspapers more as a loose confederation of separate newspapers.
Moreover, the Tribune wanted more local focus, while the L.A. Times wanted to retain its national and
international presence. The controversy came to a head when the L.A. Times’ editor was forced out in late
2006.
Many newspaper stocks, including the Tribune, had lost more than half of their value between 2004 and
2006. The long-term decline in readership within the Tribune appears to have been exacerbated by the
internal culture clash. As a result, the Chandler Trusts, Tribune’s largest shareholder, put pressure on the
firm to boost shareholder value. In September, the Tribune announced that it wanted to sell the entire
newspaper; however, by November, after receiving bids that were a fraction of what had been paid to
acquire the newspaper, it was willing to sell parts of the firm. The Tribune was taken private by legendary
investor Sam Zell in 2007 and later went into bankruptcy in 2009, a victim of the recession and its bone–
crushing debt load. See Case Study 13.4 for more details.
Discussion Questions
1. Why do you believe the Tribune thought it could overcome the substantial cultural differences between
2. What would you have done differently following closing to overcome the cultural challenges faced by
Daimler Acquires Chrysler—Anatomy of a Cross-Border Transaction
The combination of Chrysler and Daimler created the third largest auto manufacturer in the world, with
more than 428,000 employees worldwide. Conceptually, the strategic fit seemed obvious. German
engineering in the automotive industry was highly regarded and could be used to help Chrysler upgrade
both its product quality and production process. In contrast, Chrysler had a much better track record than
Daimler in getting products to market rapidly. Daimler’s distribution network in Europe would give
Chrysler products better access to European markets; Chrysler could provide parts and service support for
Mercedes-Benz in the United States. With greater financial strength, the combined companies would be
better able to make inroads into Asian and South American markets.
Daimler’s product markets were viewed as mature, and Chrysler was under pressure from escalating
R&D costs and retooling demands in the wake of rapidly changing technology. Both companies watched
with concern the growing excess capacity of the worldwide automotive manufacturing industry. Daimler
and Chrysler had been in discussions about doing something together for some time. They initiated
discussions about creating a joint venture to expand into Asian and South American markets, where both
companies had a limited presence. Despite the termination of these discussions as a result of disagreement
over responsibilities, talks were renewed in February 1998. Both companies shared the same sense of
urgency about their vulnerability to companies such as Toyota and Volkswagen. The transaction was
completed in April 1998 for $36 billion.
Enjoying a robust auto market, starry-eyed executives were touting how the two firms were going to
save billions by using common parts in future cars and trucks and by sharing research and technology. In a
press conference to announce the merger, Jurgen Schrempp, CEO of DaimlerChrysler, described the
merger as highly complementary in terms of product offerings and the geographic location of many of the
firms’ manufacturing operations. It also was described to the press as a merger of equals (Tierney, 2000).
On the surface, it all looked so easy.
The limitations of cultural differences became apparent during efforts to integrate the two companies.
Daimler had been run as a conglomerate, in contrast to Chrysler’s highly centralized operations. Daimler
managers were accustomed to lengthy reports and meetings to review the reports. Under Schrempp’s
direction, many top management positions in Chrysler went to Germans. Only a few former Chrysler
executives reported directly to Schrempp. Made rich by the merger, the potential for a loss of American
managers within Chrysler was high. Chrysler managers were accustomed to a higher degree of
independence than their German counterparts. Mercedes dealers in the United States balked at the thought
of Chrysler’s trucks still sporting the old Mopar logo delivering parts to their dealerships. All the trucks had
to be repainted.
Charged with the task of finding cost savings, the integration team identified a list of hundreds of
opportunities, offering billions of dollars in savings. For example, Mercedes dropped its plans to develop a
battery-powered car in favor of Chrysler’s electric minivan. The finance and purchasing departments were
combined worldwide. This would enable the combined company to take advantage of savings on bulk
purchases of commodity products such as steel, aluminum, and glass. In addition, inventories could be
managed more efficiently, because surplus components purchased in one area could be shipped to other
facilities in need of such parts. Long-term supply contracts and the dispersal of much of the purchasing
operations to the plant level meant that it could take as long as 5 years to fully integrate the purchasing
department.
The time required to integrate the manufacturing operations could be significantly longer, because both
Daimler and Chrysler had designed their operations differently and are subject to different union work
rules. Changing manufacturing processes required renegotiating union agreements as the multiyear
contracts expired. All of that had to take place without causing product quality to suffer. To facilitate this
process, Mercedes issued very specific guidelines for each car brand pertaining to R&D, purchasing,
manufacturing, and marketing.
Although certainly not all of DaimlerChrysler’s woes can be blamed on the merger, it clearly
accentuated problems associated with the cyclical economic slowdown during 2001 and the stiffened
competition from Japanese automakers. The firm’s top management has reacted, perhaps somewhat
belatedly to the downturn, by slashing production and eliminating unsuccessful models. Moreover, the firm
has pared its product development budget from $48 billion to $36 billion and eliminated more than 26,000
jobs, or 20% of the firm’s workforce, by early 2002. Six plants in Detroit, Mexico, Argentina, and Brazil
were closed by the end of 2002. The firm also cut sharply the number of Chrysler. car dealerships. Despite
the aggressive cost cutting, Chrysler reported a $2 billion operating loss in 2003 and a $400 million loss in
2004.
While Schrempp had promised a swift integration and a world-spanning company that would dominate
the industry, five years later new products have failed to pull Chrysler out of a tailspin. Moreover,
DaimlerChrysler’s domination has not extended beyond the luxury car market, a market they dominated
before the acquisition. The market capitalization of DaimlerChrysler, at $38 billion at the end of 2004, was
well below the German auto maker’s $47 billion market cap before the transaction.
With the benefit of hindsight, it is possible to note a number of missteps DaimlerChrysler has made that
are likely to haunt the firm for years to come. These include paying too much for some parts, not updating
some vehicle models sooner, falling to offer more high-margin vehicles that could help ease current
financial strains, not developing enough interesting vehicles for future production, and failing to be
completely honest with Chrysler employees. Although Daimler managed to take costs out, it also managed
to alienate the workforce.
Discussion Questions:
1. Identify ways in which the merger combined companies with complementary skills and resources?
2. What are the major cultural differences between Daimler and Chrysler?
3. What were the principal risks to the merger?
4. Why might it take so long to integrate manufacturing operations and certain functions such as
purchasing?
5, How might Daimler have better managed the postmerger integration?
M&A Gets Out of Hand at Cisco
Cisco Systems, the internet infrastructure behemoth, provides the hardware and software to support
efficient traffic flow over the internet. Between 1993 and 2000, Cisco completed 70 acquisitions using its
highflying stock as its acquisition currency. With engineering talent in short supply and a dramatic
compression in product life cycles, Cisco turned to acquisitions to expand existing product lines and to
enter new businesses. The firm’s track record during this period in acquiring and absorbing these
acquisitions was impressive. In fiscal year 1999, Cisco acquired 10 companies. During the same period, its
sales and operating profits soared by 44% and 55%, respectively. In view of its pledge not to layoff any
employees of the target companies, its turnover rate among employees acquired through acquisition was
2.1%, versus an average of 20% for other software and hardware companies.
Cisco’s strategy for acquiring companies was to evaluate its targets’ technologies, financial
performance, and management talent with a focus on ease of integrating the target into Cisco’s operations.
Cisco’s strategy was sometimes referred to as an R&D strategy in that it sought to acquire firms with
leading edge technologies that could be easily adapted to Cisco’s current product lines or used to expand it
product offering. In this manner, its acquisition strategy augmented internal R&D spending. Cisco
attempted to use its operating cash flow to fund development of current technologies and its lofty stock
price to acquire future technologies. Cisco targeted small companies having a viable commercial product or
technology. Cisco believed that larger, more mature companies tended to be difficult to integrate, due to
their entrenched beliefs about technologies, hardware and software solutions.
The frequency with which Cisco was making acquisitions during the last half of the 1990s caused the
firm to “institutionalize” the way in which it integrated acquired companies. The integration process was
tailored for each acquired company and was implemented by an integration team of 12 professionals.
Newly acquired employees received an information packet including descriptions of Cisco’s business
strategy, organizational structure, benefits, a contact sheet if further information was required, and an
explanation of the strategic importance of the acquired firm to Cisco. On the day the acquisition was
announced, teams of Cisco human resources people would travel to the acquired firm’s headquarters and
meet with small groups of employees to answer questions.
Working with the acquired firm’s management, integration team members would help place new
employees within Cisco’s workforce. Generally, product, engineering, and marketing groups were kept
independent, whereas sales and manufacturing functions were merged into existing Cisco departments.
Cisco payroll and benefits systems were updated to reflect information about the new employees, who were
quickly given access to Cisco’s online employee information systems. Cisco also offered customized
orientation programs intended to educate managers about Cisco’s hiring practices, sales people about
Cisco’s products, and engineers about the firm’s development process. The entire integration process
generally was completed in 4–6 weeks. This lightning-fast pace was largely the result of Cisco’s tendency
to purchase small, highly complementary companies; to leave much of the acquired firm’s infrastructure in
place; and to dedicate a staff of human resource and business development people to facilitate the process
(Cisco Systems, 1999; Goldblatt, 1999).
Cisco was unable to avoid the devastating effects of the explosion of the dot.com bubble and the 2001–
2002 recession in the United States. Corporate technology buyers, who used Cisco’s high-end equipment,
stopped making purchases because of economic uncertainty. Consequently, Cisco was forced to repudiate
its no-layoff pledge and announced a workforce reduction of 8500, about 20% of its total employees, in
early 2001. Despite its concerted effort to retain key employees from previous acquisitions, Cisco’s
turnover began to soar. Companies that had been acquired at highly inflated premiums during the late
1990s lost much of their value as the loss of key talent delayed new product launches.
By mid-2001, the firm had announced inventory and acquisition-related write-downs of more than $2.5
billion. A precipitous drop in its share price made growth through acquisition much less attractive than
during the late 1990s, when its stock traded at lofty price–to-earnings ratios. Thus, Cisco was forced to
abandon its previous strategy of growth through acquisition to one emphasizing improvement in its internal
operations. Acquisitions tumbled from 23 in 2000 to 2 in 2001. Whereas in the past, Cisco’s acquisitions
appeared to have been haphazard, in mid-2003 Cisco set up an investment review board that analyzes
investment proposals, including acquisitions, before they can be implemented. Besides making sure the
proposed deal makes sense for the overall company and determining the ease with which it can be
integrated, the board creates detailed financial projections and the deal’s sponsor must be willing to commit
to sales and earnings targets.
Discussion Questions:
1. Describe how Cisco “institutionalized” the integration process. What are the advantages and
disadvantages to the approach adopted by Cisco?
2. Why did Cisco have a “no layoff” policy? How did this contribute to maintaining or increasing the
value of the companies it acquired?
4. What evidence do you have that the high price–to–earnings ratio associated with Cisco’s stock
during the late 1990s may have caused the firm to overpay for many of its acquisitions? How
might overpayment have complicated the integration process at Cisco?
Case Corporation Loses Sight of Customer Needs
in Integrating New Holland Corporation
Farm implement manufacturer Case Corporation acquired New Holland Corporation in a $4.6 billion
transaction in 1999. Overnight, its CEO, Jean-Pierre Rosso, had engineered a deal that put the combined
firms, with $11 billion in annual revenue, in second place in the agricultural equipment industry just behind
industry leader John Deere. The new firm was named CNH Global (CNH). Although Rosso proved adept at
negotiating and closing a substantial deal for his firm, he was less agile in meeting customer needs during
the protracted integration period. CNH has become a poster child of what can happen when managers
become so preoccupied with the details of combining two big operations that they neglect external issues
such as the economy and competition. Since the merger in November 1999, CNH began losing market
share to John Deere and other rivals across virtually all of its product lines.
Rosso remained focused on negotiating with antitrust officials about what it would take to get regulatory
approval. Once achieved, CNH was slow to complete the last of its asset sales as required under the consent
decree with the FTC. The last divestiture was not completed until late January 2001, more than 20 months
after the deal had been announced. This delay forced Rosso to postpone cost cutting and to slow their new
product entries. This spooked farmers and dealers who could not get the firm to commit to telling them
which products would be discontinued and which the firm would continue to support with parts and
service. Fearful that CNH would discontinue duplicate Case and New Holland products, farmers and
equipment dealers switched brands. The result was that John Deere became more dominant than ever. CNH
was slow to reassure customers with tangible actions and to introduce new products competitive with
Deere. This gave Deere the opportunity to fill the vacuum in the marketplace.
The integration was deemed to have been completed a full four years after closing. As a sign of how
painful the integration had been, CNH was laying workers off as Deere was hiring to keep up with the
strong demand for its products. Deere also appeared to be ahead in moving toward common global
platforms and parts to take fuller advantage of economies of scale.
Discussion Questions:
1. Why is rapid integration important? Illustrate with examples from the case study.
2. What could CNH have done differently to slow or reverse its loss of market share?
Exxon-Mobil: A Study in Cost Cutting
Having obtained access to more detailed information following consummation of the merger, Exxon-Mobil
announced dramatic revisions in its estimates of cost savings. The world’s largest publicly owned oil
company would cut almost 16,000 jobs by the end of 2002. This was an increase from the 9000 cuts
estimated when the merger was first announced in December 1998. Of the total, 6000 would come from
early retirement. Estimated annual savings reached $3.8 billion by 2003, up by more than $1 billion from
when the merger originally was announced. As time passed, the companies seemed to have become a
highly focused, smooth-running machine remarkably efficient at discovering, refining, and marketing oil
and gas. An indication of this is the fact that the firm spent less per barrel to find oil and gas in 2003 than at
almost any time in history. With revenues of $210 billion, Exxon-Mobil surged to the top of the Fortune
500 in 2004.
Discussion Question:
1. In your judgment, are acquirers more likely to under– or overestimate anticipated cost savings?
Explain your answer.
Albertson’s Acquires American Stores—
Underestimating the Costs of Integration
In 1999, Albertson’s acquired American Stores for $12.5 billion, making it the nation’s second largest
supermarket chain, with more than 1000 stores. The corporate marriage stumbled almost immediately.
Escalating integration costs resulted in a sharp downward revision of its fiscal year 2000 profits. In the
quarter ended October 28, 1999, operating profits fell 15% to $185 million, despite an increase in sales of
1.6% to $8.98 billion. Albertson’s proceeded to update the Lucky supermarket stores that it had acquired in
California and to combine the distribution operations of the two supermarket chains. It appears that
Albertson’s substantially underestimated the complexity of integrating an acquisition of this magnitude.
Albertson’s spent about $90 million before taxes to convert more than 400 stores to its information and
distribution systems as well as to change the name to Albertson’s. By the end of 1999, Albertson’s stock
had lost more than one-half of its value (Bloomberg.com, November 1, 1999).
Discussion Questions:
1. In your judgment, do you think acquirers’ commonly (albeit not deliberately) understate
integration costs? Why or why not?
2. Cite examples of expenses you believe are commonly incurred in integrating target companies.
Overcoming Culture Clash:
Allianz AG Buys Pimco Advisors LP
On November 7, 1999, Allianz AG, the leading German insurance conglomerate, acquired Pimco Advisors
LP for $3.3 billion. The Pimco acquisition boosts assets under management at Allianz from $400 billion to
$650 billion, making it the sixth largest money manager in the world.
The cultural divide separating the two firms represented a potentially daunting challenge. Allianz’s
management was well aware that firms distracted by culture clashes and the morale problems and mistrust
they breed are less likely to realize the synergies and savings that caused them to acquire the company in
the first place. Allianz was acutely aware of the potential problems as a result of difficulties they had
experienced following the acquisition of Firemen’s Fund, a large U.S.-based property–casualty company.
A major motivation for the acquisition was to obtain the well-known skills of the elite Pimco money
managers to broaden Allianz’s financial services product offering. Although retention bonuses can buy
loyalty in the short run, employees of the acquired firm generally need much more than money in the long
term. Pimco’s money managers stated publicly that they wanted Allianz to let them operate independently,
the way Pimco existed under their former parent, Pacific Mutual Life Insurance Company. Allianz had
decided not only to run Pimco as an independent subsidiary but also to move $100 billion of Allianz’s
assets to Pimco. Bill Gross, Pimco’s legendary bond trader, and other top Pimco money managers, now
collect about one-fourth of their compensation in the form of Allianz stock. Moreover, most of the top
managers have been asked to sign long-term employment contracts and have received retention bonuses.
Joachim Faber, chief of money management at Allianz, played an essential role in smoothing over
cultural differences. Led by Faber, top Allianz executives had been visiting Pimco for months and having
quiet dinners with top Pimco fixed income investment officials and their families. The intent of these
intimate meetings was to reassure these officials that their operation would remain independent under
Allianz’s ownership.
Discussion Questions:
1. How did Allianz attempt to retain key employees? In the short run? In the long run?
2. How did the potential for culture clash affect the way Alliance acquired Pimco?
3. What else could Allianz have done to minimize potential culture clash? Be specific.
Avoiding the Merger Blues: American Airlines Integrates TWA
Trans World Airlines (TWA) had been tottering on the brink of bankruptcy for several years, jeopardizing a
number of jobs and the communities in which they are located. Despite concerns about increased
concentration, regulators approved American’s proposed buyout of TWA in 2000 largely on the basis of
the “failing company doctrine.” This doctrine suggested that two companies should be allowed to merge
despite an increase in market concentration if one of the firms can be saved from liquidation.
American, now the world’s largest airline, has struggled to assimilate such smaller acquisitions as
AirCal in 1987 and Reno Air in 1998. Now, in trying to meld together two major carriers with very
different and deeply ingrained cultures, a combined workforce of 113,000 and 900 jets serving 300 cities,
American faced even bigger challenges. For example, because switches and circuit breakers are in different
locations in TWA’s cockpits than in American’s, the combined airlines must spend millions of dollars to
rearrange cockpit gear and to train pilots how to adjust to the differences. TWA’s planes also are on
different maintenance schedules than American’s jets. For American to see any savings from combining
maintenance operations, it gradually had to synchronize those schedules. Moreover, TWA’s workers had to
be educated in American’s business methods, and the carrier’s reservations had to be transferred to
American’s computer systems. Planes had to be repainted, and seats had to be rearranged (McCartney,
2001).
Combining airline operations always has proved to be a huge task. American has studied the problems
that plagued other airline mergers, such as Northwest, which moved too quickly to integrate Republic
Airlines in 1986. This integration proved to be one of the most turbulent in history. The computers failed
on the first day of merged operations. Angry workers vandalized ground equipment. For 6 months, flights
were delayed and crews did not know where to find their planes. Passenger suitcases were misrouted.
Former Republic pilots complained that they were being demoted in favor of Northwest pilots. Friction
between the two groups of pilots continued for years. In contrast, American adopted a more moderately
paced approach as a result of the enormity and complexity of the tasks involved in putting the two airlines
together. The model they followed was Delta Airline’s acquisition of Western Airlines in 1986. Delta
succeeded by methodically addressing every issue, although the mergers were far less complex because
they involved merging far fewer computerized systems.
Even Delta had its problems, however. In 1991, Delta purchased Pan American World Airways’
European operations. Pan Am’s international staff had little in common with Delta’s largely domestic–
minded workforce, creating a tremendous cultural divide in terms of how the combined operations should
be managed. In response to the 1991–1992 recession, Delta scaled back some routes, cut thousands of jobs,
and reduced pay and benefits for workers who remained..
Before closing, American had set up an integration management team of 12 managers, six each from
American and TWA. An operations czar, who was to become the vice chair of the board of the new
company, directed the team. The group met daily by phone for as long as 2 hours, coordinating all merger-
related initiatives. American set aside a special server to log the team’s decisions. The team concluded that
the two lynchpins to a successful integration process were successfully resolving labor problems and
meshing the different computer systems. To ease the transition, William Compton, TWA’s CEO, agreed to
stay on with the new company through the transition period as president of the TWA operations.
The day after closing the team empowered 40 department managers at each airline to get involved. Their
tasks included replacing TWA’s long–term airport leases with short-term ones, combining some cargo
operations, changing over the automatic deposits of TWA employees’ paychecks, and implementing
American’s environmental response program at TWA in case of fuel spills. Work teams, consisting of both
American and TWA managers, identified more than 10,000 projects that must be undertaken before the two
airlines can be fully integrated.
Some immediate cost savings were realized as American was able to negotiate new lease rates on TWA
jets that are $200 million a year less than what TWA was paying. These savings were a result of the
increased credit rating of the combined companies. However, other cost savings were expected to be
modest during the 12 months following closing as the two airlines were operated separately. TWA’s union
workers, who would have lost their jobs had TWA shut down, have been largely supportive of the merger.
American has won an agreement from its own pilots’ union on a plan to integrate the carriers’ cockpit
crews. Seniority issues proved to be a major hurdle. Getting the mechanics’ and flight attendants’ unions on
board required substantial effort. All of TWA’s licenses had to be switched to American. These ranged
from the Federal Aviation Administration operating certificate to TWA’s liquor license in all the states.
Discussion Questions:
1. In your opinion, what are the advantages and disadvantages of moving to integrate operations
quickly? What are the advantages and disadvantages of moving more slowly and deliberately?
2. Why did American choose to use managers from both airlines to direct the integration of the
two companies? What are the specific benefits in doing so?
3. How did the interests of the various stakeholders to the merger affect the complexity of the
integration process?
The Travelers and Citicorp Integration Experience
Promoted as a merger of equals, the merger of Travelers and Citicorp to form Citigroup illustrates many of
the problems encountered during postmerger integration. At $73 billion, the merger between Travelers and
Citicorp was the second largest merger in 1998 and is an excellent example of how integrating two
businesses can be far more daunting than consummating the transaction. Their experience demonstrates
how everything can be going smoothly in most of the businesses being integrated, except for one, and how
this single business can sop up all of management’s time and attention to correct its problems. In some
respects, it highlights the ultimate challenge of every major integration effort: getting people to work
together. It also spotlights the complexity of managing large, intricate businesses when authority at the top
is divided among several managers.
The strategic rationale for the merger relied heavily on cross-selling the financial services products of
both corporations to the other’s customers. The combination would create a financial services giant capable
of making loans, accepting deposits, selling mutual funds, underwriting securities, selling insurance, and
dispensing financial planning advice. Citicorp had relationships with thousands of companies around the
world. In contrast, Travelers’ Salomon Smith Barney unit dealt with relatively few companies. It was
believed that Salomon could expand its underwriting and investment banking business dramatically by
having access to the much larger Citicorp commercial customer base. Moreover, Citicorp lending officers,
who frequently had access only to midlevel corporate executives at companies within their customer base,
would have access to more senior executives as a result of Salomon’s investment banking relationships.
Although the characteristics of the two businesses seemed to be complementary, motivating all parties
to cooperate proved a major challenge. Because of the combined firm’s co-CEO arrangement, the lack of
clearly delineated authority exhausted management time and attention without resolving major integration
issues. Some decisions proved to be relatively easy. Others were not. Citicorp, in stark contrast to
Travelers, was known for being highly bureaucratic with marketing, credit, and finance departments at the
global, North American, and business unit levels. North American departments were eliminated quickly.
Salomon was highly regarded in the fixed income security area, so Citicorp’s fixed income operations were
folded into Salomon. Citicorp received Salomon’s foreign exchange trading operations because of their
pre-merger reputation in this business. However, both the Salomon and Citicorp derivatives business
tended to overlap and compete for the same customers. Each business unit within Travelers and Citicorp
had a tendency to believe they “owned” the relationship with their customers and were hesitant to introduce
others that might assume control over this relationship. Pay was also an issue, as investment banker salaries
in Salomon Smith Barney tended to dwarf those of Citicorp middle-level managers. When it came time to
cut costs, issues arose around who would be terminated.
Citicorp was organized along three major product areas: global corporate business, global consumer
business, and asset management. The merged companies’ management structure consisted of three
executives in the global corporate business area and two in each of the other major product areas. Each area
contained senior managers from both companies. Moreover, each area reported to the co-chairs and CEOs
John Reed and Sanford Weill, former CEOs of Citicorp and Travelers, respectively. Of the three major
product areas, the integration of two was progressing well, reflecting the collegial atmosphere of the top
managers in both areas. However, the global business area was well behind schedule, beset by major riffs
among the three top managers. Travelers’ corporate culture was characterized as strongly focused on the
bottom line, with a lean corporate overhead structure and a strong predisposition to impose its style on the
Citicorp culture. In contrast, Citicorp, under John Reed, tended to be more focused on the strategic vision
of the new company rather than on day–to-day operations.
The organizational structure coupled with personal differences among certain key managers ultimately
resulted in the termination of James Dimon, who had been a star as president of Travelers before the
merger. On July 28, 1999, the co-chair arrangement was dissolved. Sanford Weill assumed responsibility
for the firm’s operating businesses and financial function, and John Reed became the focal point for the
company’s internet, advanced development, technology, human resources, and legal functions. This change
in organizational structure was intended to help clarify lines of authority and to overcome some of the
obstacles in managing a large and complex set of businesses that result from split decision-making
authority. On February 28, 2000, John Reed formally retired.
Although the power sharing arrangement may have been necessary to get the deal done, Reed’s leaving
made it easier for Weill to manage the business. The co-CEO arrangement had contributed to an extended
period of indecision, resulting in part to their widely divergent views. Reed wanted to support Citibank’s
Internet efforts with substantial and sustained investment, whereas the more bottom–line-oriented Weill
wanted to contain costs.
With its $112 billion in annual revenue in 2000, Citigroup ranked sixth on the Fortune 500 list. Its $13.5
billion in profit was second only to Exxon–Mobil’s $17.7 billion. The combination of Salomon Smith
Barney’s investment bankers and Citibank’s commercial bankers is working very effectively. In a year–end
2000 poll by Fortune magazine of the Most Admired U.S. companies, Citigroup was the clear winner.
Among the 600 companies judged by a poll of executives, directors, and securities analysts, it ranked first
for using its assets wisely and for long-term investment value (Loomis, 2001). However, this early success
has taken its toll on management. Of the 15 people initially on the management committee, only five
remain in addition to Weill. Among those that have left are all those that were with Citibank when the
merger was consummated. Ironically, in 2004, James Dimon emerged as the head of the JP Morgan Chase
powerhouse in direct competition with his former boss Sandy Weill of Citigroup.
Discussion Questions:
1. Why did Citibank and Travelers resort to a co-CEO arrangement? What are the advantages and
disadvantages of such an arrangement?
2. Describe the management challenges you think may face Citigroup’s management team due to the
increasing global complexity of Citigroup?
3. Identify the key differences between Travelers’ and Citibank’s corporate cultures. Discuss ways
you would resolve such differences.
4. In what sense is the initial divergence in Travelers’ operational orientation and Citigroup’s
marketing and planning orientation an excellent justification for the merger? Explain your answer.
5. One justification for the merger was the cross-selling opportunities it would provide. Comment on
the challenges that might be involved in making such a marketing strategy work.
Promises to PeopleSoft’s Customers Complicate Oracle’s Integration Efforts
When Oracle first announced its bid for PeopleSoft in mid–2003, the firm indicated that it planned to stop
selling PeopleSoft’s existing software programs and halt any additions to its product lines. This would
result in the termination of much of PeopleSoft’s engineering, sales, and support staff. Oracle indicated that
it was more interested in PeopleSoft’s customer list than its technology. PeopleSoft earned sizeable profit
margins on its software maintenance contracts, under which customers pay for product updates, fixing
software errors, and other forms of product support. Maintenance fees represented an annuity stream that
could improve profitability even when new product sales are listless. However, PeopleSoft’s customers
worried that they would have to go through the costly and time-consuming process of switching software.
To win customer support for the merger and to avoid triggering $2 billion in guarantees PeopleSoft had
offered its customers in the event Oracle failed to support its products, Oracle had to change dramatically
its position over the next 18 months.
One day after reaching agreement with the PeopleSoft board, Oracle announced it would release a new
version of PeopleSoft’s products and would develop another version of J.D. Edwards’s software, which
PeopleSoft had acquired in 2003. Oracle committed itself to support the acquired products even longer than
PeopleSoft’s guarantees would have required. Consequently, Oracle had to maintain programs that run with
database software sold by rivals such as IBM. Oracle also had to retain the bulk of PeopleSoft’s engineering
staff and sales and customer support teams.
Among the biggest beneficiaries of the protracted takeover battle was German software giant SAP. SAP
was successful in winning customers uncomfortable about dealing with either Oracle or PeopleSoft. SAP
claimed that its worldwide market share had grown from 51 percent in mid-2003 to 56 percent by late
2004. SAP took advantage of the highly public hostile takeover by using sales representatives, email, and
an international print advertising campaign to target PeopleSoft customers. The firm touted its reputation
for maintaining the highest quality of support and service for its products.
Discussion Questions
1. How did the commitments Oracle made to PeopleSoft’s customers have affected its ability to realize
anticipated synergies? Be specific.
2. Explain why Oracle’s willingness to pay such a high premium for PeopleSoft and its willingness to
change its position on supporting PeopleSoft products and retaining the firm’s employees may have had
a negative impact on Oracle shareholders. Be specific.