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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
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
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
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
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
1. Do you agree with Coty management's decision to focus on integrating "customer-facing" systems first?
Explain your answer.
2. How might this emphasis on integrating "customer-facing" systems have affected the new firm's ability
to realize anticipated synergies? Be specific.
3. Discuss the advantages and disadvantages of using small project teams. Be specific.
Culture Clash Exacerbates Efforts of the Tribune Corporation
to Integrate the Times Mirror Corporation
The Chicago-based Tribune Corporation owned 11 newspapers, including such flagship publications as the
Chicago Tribune, the Los Angeles Times, and Newsday, as well as 25 television stations. Attempting to
offset the long-term decline in newspaper readership and advertising revenue, Tribune acquired the Times
Mirror (owner of the Los Angeles Times newspaper) for $8 billion in 2000. The merger combined two firms
that historically had been intensely competitive and had dramatically different corporate cultures. The
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,
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
Discussion Questions
1. Why do you believe the Tribune thought it could overcome the substantial cultural differences between
itself and the Times Mirror Corporation? Be specific.
2. What would you have done differently following closing to overcome the cultural challenges faced by
the Tribune? Be specific.
Daimler Acquires Chrysler—Anatomy of a Cross-Border Transaction
The combination of Chrysler and Daimler created the third largest auto manufacturer in the world, with
more than 428,000 employees worldwide. Conceptually, the strategic fit seemed obvious. German
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
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).
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.
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
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
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?
Germany’s world-renowned reputation in engineering could be employed to raise the overall
2. What are the major cultural differences between Daimler and Chrysler?
Daimler is largely a conglomerate in which management is decentralized. In contrast, Chrysler’s
3. What were the principal risks to the merger?
The risks to the merger included the loss of key Chrysler operating managers, who were enriched
4. Why might it take so long to integrate manufacturing operations and certain functions such as
purchasing?
Changing manufacturing operations require changing union work rules, which are set by contract.
Such rules could only be re-negotiated when current contracts covering the plants expire. Before
any significant changes could be made, Daimler-Chrysler would have to inventory/catalogue
5, How might Daimler have better managed the postmerger integration?
The postmerger integration period could have been better managed if Daimler had better
integrated Chrysler managers into integration teams charged with melding the operations of the
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
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
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
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
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
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?
Answer: Cisco focused on acquisitions that were highly complementary to its existing operations.
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?
Answer: Cisco made many of its acquisition when its stock was trading at lofty multiples, well
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
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
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.
Answer: Businesses should be integrated rapidly and intelligently to minimize customer
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
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
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
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.
Discussion Questions:
1. How did Allianz attempt to retain key employees? In the short run? In the long run?
Answer: In short-run, Allianz used retention bonuses to discourage the defection of key
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.
Answer: Allianz may have benefiting from asking certain Pimco money managers to accept
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.
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
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
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
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.
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?
Answer: Quick integration minimizes employee turnover, customer and supplier attrition, and
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
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
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
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
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
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?
Answer: The Citibank/Travelers transaction was billed as a merger of equals, i.e., one in which
neither party is believed to provide a disproportionate share of anticipated synergy. The co-CEO
2. Describe the management challenges you think may face Citigroup’s management team due to the
increasing global complexity of Citigroup?
Answer: The management teams of the two firms were quite different, as were the overall
3. Identify the key differences between Travelers’ and Citibank’s corporate cultures. Discuss ways
you would resolve such differences.
Answer: Traveler’s 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 tended to be more focused on the strategic vision of the new
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.
Answer: Cross-selling is a conceptually simple strategy, but it is often ferociously difficult to
implement. Marketing and sales people tend to sell that with which they are most comfortable.
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
One day after reaching agreement with the PeopleSoft board, Oracle announced it would release a new
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
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.
