meet face to face to reach consensus. Moreover, Gillette managers were inclined to make decisions rapidly,
while P&G decisions often were made only after lengthy deliberations.
While these differences were eventually resolved, it did require substantial time and expense. For
example, in 2009, Gillette completed a $50 million renovation of its headquarters in Boston and forced its
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.
Answer: The acquirer’s ability to earn the premium paid for a target is heavily dependent of the
reliable on-time delivery.
2. Given the complexity of these two businesses, do you believe the acquisition of Gillette by P&G
made sense? Explain your answer.
Answer: Potentially, the acquisition of a competitor is more likely to be successful than of an
3. Why did P&G rely heavily on personnel in both companies to implement post-closing integration?
Answer: The ultimate success of any acquisition ultimately depends on the quality of management
and employees. Both P&G and Gillette had important strengths. P&G was known as a marketing
and product innovator. Gillette had a widely recognized skill in brand management and in
and to develop trust and respect for their respective talents.
4. Why do you believe P&G was unable to retain most of Gillette’s top managers following the
acquisition?
Answer: P&G dwarfed Gillette in terms of revenue. In these situations, it often is difficult for
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.
Answer: Abnormal financial returns reflect investor expectations at a moment in time about a
specific takeover. Generally, investors will not have detailed access to the acquirer’s business
strategy and the likelihood of realizing synergies anticipated at the time of the takeover, as well as
the potential for identifying additional synergy during postclosing integration. By not viewing
takeovers in the context of the acquirer’s business strategy, the size of the announcement date
returns may be understated.
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
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.
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.
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
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
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.
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
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
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,
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
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.
Answer: The acquirer’s ability to earn the premium paid for a target is heavily dependent of the
amount and timing of incremental cash flows due to cost and revenue related synergies since those
2. Given the complexity of these two businesses, do you believe the acquisition of Gillette by P&G
made sense? Explain your answer.
Answer: Potentially, the acquisition of a competitor is more likely to be successful than of an
3. Why did P&G rely heavily on personnel in both companies to implement post–closing integration?
Answer: The ultimate success of any acquisition ultimately depends on the quality of management
and employees. Both P&G and Gillette had important strengths. P&G was known as a marketing
4. Why do you believe P&G was unable to retain most of Gillette’s top managers following the
acquisition?
Answer: P&G dwarfed Gillette in terms of revenue. In these situations, it often is difficult for
employees of a much larger acquirer not to feel more competent than those of the target firm and
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).
ArcelorMittal’s top management set three driving objectives before undertaking the postmerger
integration effort: achieve rapid integration, manage daily operations effectively, and accelerate revenue
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).
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
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
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
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
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
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?
Answer: The “top-down” estimate comes from senior management and is intended to set high
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.
Answer: Clear, consistent, and substantive plans are important to allay fears among those within
4. Comment on ArcelorMittal management’s belief that the cultural diversity within the
combined firms was an advantage. Be specific.
Answer: Different ideas about what constitutes “best practices” forces internal debate which can
result in significant innovation, cost reduction, and productivity improvement. Moreover, cultural
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?
Answer: Rapid integration is important to earn back any premium. The sooner synergies can
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
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
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.
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
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
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
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,
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
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?
Answer: Billed as a merger of equals, Alcatel quickly asserted itself by installing Alcatel
managers in all senior management positions except for the CEO. Such actions may alienate many
former Lucent managers and generate a “brain” drain. Other challenges include language and
3. Most corporate mergers are beset by differences in corporate cultures. How do cross-border
transactions compound these differences?
Answer: Differences in corporate cultures when the firms involved had been competitors can
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?
Answer: The rationale for a merger of equals may be more for public relations than for substantive
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?
Answer: While the board of the new company will consist of six members from each of the former
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.
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.
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
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
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
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
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.