2. How did private equity investments in both firms affect the size of the premium paid for Jos. A.
Bank? Were the Private equity firms simply interested in getting a deal since it boosted the value
of their investment? Explain your answer.
Answer: Private equity investors Eminence Capital and Golden Gate Capital stood to gain only if
a Jos. A. Bank were sold to Men’s Wearhouse. Consequently, they pressured aggressively Men’s
3. What key external and internal factors affected postmerger integration?
Answer: External factors impacting the integration process include the long-term decline in
purchases of men’s suits and the failure of consumer spending to fully recover from the 2008-2009
4. How does a hostile takeover impact the likelihood of a successful integration?
Answer: Generally, friendly takeovers in which the target’s management and board agree to the
proposed takeover terms provide for a smoother and more efficient postmerger integration. Why?
5. What is the key premise(s) underlying Men’s Wearhouse’s belief that the two firms can be
successfully integrated? Was each premise correct? Be specific.
Answer: Men’s Wearhouse management believed from the outset that Jos. A. Bank customers
could be “reeducated” to accept less discounting and higher average selling prices. In addition,
6. What is the fatal flaw in the integration effort?
Answer: After more than two years of losing customers at Jos. A. Bank, Men’s Wearhouse
management continued to stay the course with respect to their strategy of weaning customers away
7. George Zimmer, the founder of Men’s Wearhouse, argued that the integration was too fast. Why
would his argument to slow the integration make sense only if the premium paid had been
smaller?
HOW A CHINESE OIL GIANT STUMBLED IN ITS LARGEST CROSS BORDER
POSTMERGER INTEGRATION EFFORT
KEY POINTS
• Postmerger integration often is a highly complex and lengthy process
• How smoothly postmerger integration goes often depends on actions taken prior to closing the
deal and developments beyond the control of the merger partners
• Protracted integration often reduces the ability of the acquirer to recover the premium paid for the
target firm.
Three years after having acquired Canadian oil and gas company Nexen Inc., China’s largest oil company,
CNOOC, was beset with problems managing its investment. Publicly traded CNOOC is 64% owned by
state-owned China National Offshore Oil Corporation. In its largest foreign takeover ever, CNOOC paid
Oil sands require high cost forms of extraction and produce heavy oil, not easily extracted during
production, that sells at a discount on the world market. Despite these limitations, technological innovation
and high crude prices triggered an oil sands production boom over the last decade. The process by which
When oil prices were in excess of $100 per barrel, the Nexen deal looked like a good bet. CNOOC
believed that they could make concessions necessary to get regulatory approval and that global energy
prices would continue to rise enabling the firm to earn back any premium paid for Nexen. In their rush to
get the deal done, CNOOC’s management seems to have downplayed the implications of such concessions
and the fact that historically oil prices have shown both sharp increases and decreases. CNOOC’s troubles
with Nexen really began before it actually took control.
To convince shareholders to sell and to appease those concerned about the impact on the environment,
the firm paid a 61% premium to Nexen shareholders and made certain public commitments to
Since closing, the Nexen acquisition has sopped up huge amounts of management time and corporate
capital to fix a unit contributing only 2% of the firm’s consolidated profits. CNOOC seriously
underestimated the challenges with its Canadian purchase including cost overruns in Canada, U.S.
investment controls that forced CNOOC to relinquish operating control over its Gulf of Mexico assets, and
a withdrawal from Nexen’s Yemen business amid a civil war.
In response to these developments, CNOOC has cut capital spending by 30% from earlier estimates and
reported a reduction in the value of the Nexen acquisition by $700 million in recognition that the unit’s fair
market value having dropped below its book value. The firm also reneged on a pre-closing pledge it had
made to retain existing management and minimize any layoffs related to the deal. Frustrated by CNOOC’s
refusal to share its long term strategy with Nexen senior management in Canada, Canadian managers ran
Has Proctor & Gamble Fully Recovered from Its 2005 Acquisition of Gillette?
Case Study Objectives: To illustrate
• The challenges in realizing revenue and cost-related synergies even when firms appear to be
substantially similar
• The potential long-term debilitating impact on corporate performance of a lengthy or incomplete
integration of a large acquisition.
Billed by pundits as a dream deal, the potential seemed limitless as Procter & Gamble Company (P&G)
consumer products would be studied in business schools for years to come. Given the belief that the two
firms appeared culturally compatible and that both revenue and cost synergies could be realized in a
reasonable time period, P&G’s board of directors and management anticipated that the financial
performance of the combined firms would accelerate following postclosing integration.
Nine years later, things have not turned out as expected. While cost savings targets were achieved,
operating margins faltered. Gillette’s businesses, such as its pricey razors, were buffeted by the 2008–2009
But the firm’s lagging financial performance during this period annoyed investors. Bill Ackman, CEO
of Pershing Square Capital Management, with a $2.2 billion stake in the firm, railed against the firm’s poor
financial showing asking publicly if the firm had ever “fully integrated its 2005 purchase of Gillette.”
Moreover, despite a history of new product innovation such as Pampers, Febreze, and Swifter cleaners, the
years since the acquisition have been largely bereft of blockbuster new products, the firm’s hallmark.
Ackman openly criticized the firm’s inadequate financial returns and bloated organizational overhead.
P&G had long been viewed as a premier marketing and product innovator of products targeted largely to
women. Consequently, P&G assumed that its R&D and marketing skills in developing and promoting
women’s personal care products could be used to enhance and promote Gillette’s women’s razors. In
contrast, Gillette’s marketing strengths centered on developing and promoting products targeted at men.
Gillette was best known for its ability to sell an inexpensive product (e.g., razors) and hook customers to a
The broad geographic presence of P&G was expected to facilitate the marketing of such products as
razors and batteries in huge developing markets, such as China and India. Cumulative cost cutting was
expected to reach $16 billion, including layoffs of about 4% of the new company’s workforce of 140,000.
Such cost reductions were to be realized by integrating Gillette’s deodorant products into P&G’s structure
as quickly as possible. Other Gillette product lines, such as the razor and battery businesses, were to remain
intact.
P&G’s corporate culture was often described as conservative, with a “promote-from-within”
philosophy. P&G also had a reputation for being resistant to ideas that were not generated within the
With this as a backdrop, what worked and what didn’t? The biggest successes appear to have been the
integration of the two firms’ enormously complex supply chains, cost reduction, and achieving general
acceptance of a uniform corporate culture; the biggest failures may be the inability to retain most senior
Gillette managers and to realize revenue growth projections made at the time the deal was announced. The
failure to achieve more aggressive revenue growth may explain the lackluster performance of P&G’s share
price.
Supply chains describe the activities required to get the manufactured product to the store shelf from the
time the orders are placed until the firm collects payment. Together the firms had supply chains stretching
across 180 countries. Merging the two supply chains was a high priority from the outset because senior
management believed that it could contribute, if done properly, $1 billion in cost savings annually and an
Implementation was done in phases. Latin America was selected first because the integration challenges
there were similar to those in other regions and the countries were small. This presented a relatively low-
risk learning opportunity. In just 6 months after receiving government approval to complete the transaction,
the integration of supply chains in five countries in Latin America was completed. In 2006, P&G merged
P&G’s SAP software system, thereby creating a single IT platform worldwide for all order shipping,
billing, and distribution center operations.
Integrating corporate cultures, once considered highly compatible, turned out to be a challenge. It was
not that the two firms had deeply rooted differences in terms of mission and values. Rather, it was the more
mundane things. Each firm had a significantly different way of communicating and decision making.
Gillette managers were inclined to communicate by sending memos, while P&G executives preferred to
meet face to face to reach consensus. Moreover, Gillette managers were inclined to make decisions rapidly,
while P&G decisions often were made only after lengthy deliberations.
While these differences were eventually resolved, it did require substantial time and expense. For
example, in 2009, Gillette completed a $50 million renovation of its headquarters in Boston and forced its
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
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
and product innovator. Gillette had a widely recognized skill in brand management and in
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
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
Google was heavily criticized as having overpaid in 2006 when it acquired YouTube for $1.65
billion. Google’s business strategy was to increase usage of its search engine and websites to
attract advertising revenue. Today, YouTube is widely recognized as the most active site featuring
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
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.
$1.5 billion.
Anticipated synergies often are not realized on a timely basis. Many airline mergers in the past have hit
rough spots that reduced anticipated ongoing savings and revenue increases. Pilots and flight attendants at
US Airways Group, a combination of US Airways and America West, were still operating under separate
Assessing Procter & Gamble’s Acquisition of Gillette:
What Worked and What Didn’t
____________________________________________________________________________________
Key Points
Realizing synergies depends on how quickly and seamlessly integration is implemented.
Cost-related synergies often are more readily realized since the firms involved in the integration tend to
have more direct control over cost-reduction activities.
Realizing revenue-related synergies is more elusive due to the difficulty in assessing customer response to
new brands as well as marketing and pricing strategies.
____________________________________________________________________________________
The potential seemed limitless as Procter & Gamble Company (P&G) announced that it had completed its
purchase of Gillette Company (Gillette) in late 2005. P&G’s chairman and CEO, A.G. Lafley, predicted
that the acquisition of Gillette would add one percentage point to the firm’s annual revenue growth rate and
cost savings would exceed $1 billion annually, while Gillette’s chairman and CEO, Jim Kilts, opined that
the successful integration of the two best companies in consumer products would be studied in business
schools for years to come.
Six years later, things have not turned out as expected. While cost-savings targets were achieved,
operating margins faltered. Gillette’s businesses, such as its pricey razors, were buffeted by the 2008–2009
recession and have been a drag on P&G’s top line. Most of Gillette’s top managers have left. P&G’s stock
price at the end of 2011 stood about 20% above its level on the acquisition announcement date, less than
P&G had long been viewed as a premier marketing and product innovator of products targeted largely to
women. Consequently, P&G assumed that its R&D and marketing skills in developing and promoting
women’s personal care products could be used to enhance and promote Gillette’s women’s razors. In
contrast, Gillette’s marketing strengths centered on developing and promoting products targeted at men.
Gillette was best known for its ability to sell an inexpensive product (e.g., razors) and hook customers to a
lifetime of refills (e.g., razor blades). Although Gillette was the number 1 and number 2 supplier in the
lucrative toothbrush and men’s deodorant markets, respectively, it was less successful in improving the
profitability of its Duracell battery brand. It had been beset by intense price competition from Energizer and
Rayovac Corp., which generally sell for less than Duracell batteries.
P&G’s corporate culture was often described as conservative, with a “promote-from-within” philosophy.
P&G also had a reputation for being resistant to ideas that were not generated within the company. While
Gillette’s CEO was to become vice chairman of the new company, the role of other senior Gillette
managers was less clear in view of the perception that P&G is laden with highly talented top management.
Gillette managers were perceived as more disciplined and aggressive cost cutters than their P&G
counterparts.
With this as a backdrop, what worked and what didn’t? The biggest successes appear to have been the
Supply chains describe the activities required to get the manufactured product to the store shelf from the
time the orders are placed until the firm collects payment. Together the firms had supply chains stretching
across 180 countries. Merging the two supply chains was a high priority from the outset because senior
management believed that it could contribute, if done properly, $1 billion in cost savings annually and an
additional $750 million in annual revenue. Each firm had been analyzing the strengths and weaknesses of
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,
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
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
unrelated firm because of the potential for substantial synergies due to overlapping overhead,
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
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.6 With 2007 revenues of $105 billion and its steel production accounting for about
10% of global output, the behemoth has 320,000 employees in 60 countries, and it is a global leader in all
its target markets. Arcelor was a product of three European steel companies (Arbed, Aceralia, and Usinor).
Similarly, Mittal resulted from a series of international acquisitions. The two firms’ downstream (raw
material) and upstream (distribution) operations proved to be highly complementary, with Mittal owning
ArcelorMittal’s top management set three driving objectives before undertaking the postmerger
integration effort: achieve rapid integration, manage daily operations effectively, and accelerate revenue
and profit growth. The third objective was viewed as the primary motivation for the merger. The goal was
to combine what were viewed as entities having highly complementary assets and skills. This goal was
quite different from the way Mittal had grown historically, which was a result of acquisitions of turnaround
targets focused on cost and productivity improvements.
The formal phase of the integration effort was to be completed in six months. It was crucial to agree on
the role of the management integration team (MIT); the key aspects of the integration process, such as how
decisions would be made; and the roles and responsibilities of team members. Activities were undertaken
in parallel rather than sequentially. Teams consisted of employees from the two firms. People leading task
forces came from the business units.
Owing to the employee duress resulting from the merger, uncertainty was high, as employees with both
firms wondered how the merger would affect them. To address employee concerns, managers were given a
well-structured message about the significance of the merger and the direction of the new company.
Furthermore, the new brand, ArcelorMittal, was launched in a meeting attended by 500 of the firm’s top
managers during the spring of 2007.
Within the first three months following the closing, customers were informed about the advantages of
the merger for them, such as enhanced R&D capabilities and wider global coverage. The sales forces of the
two organizations were charged with the task of creating a single “face” to the market.
ArcelorMittal’s management viewed the merger as an opportunity to conduct interviews and surveys
with employees to gain an understanding of their views about the two companies. Employees were asked
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
be realized, the greater their contribution to the net present value of the deal. Rapid
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
frequent flyer program. The teams consisted of personnel from both airlines. Members included managers
from such functional departments as technology, human resources, fleet management, and network
planning and were structured around such activities as operations and a credit card partnership with
JPMorgan Chase. In most cases, the teams agreed to retain at least one of the myriad programs already in
place for the passengers of one of the airlines so that at least some of the employees would be familiar with
the programs.
If she was unable to resolve disagreements within teams, Gobillot invited senior managers to join the
deliberations. In order to stay on a tight time schedule, Gobillot emphasized to employees at both firms that
the integration effort was not “us versus them” but, rather, that they were all in it together. All had to stay
focused on the need to achieve integration on a timely basis while minimizing disruption to daily
operations if planned synergies were to be realized.
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.
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
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
Discussion Questions:
1. Explain the logic behind combining the two companies. Be specific.
Answer: The two firms have overlapping product lines and complementary strengths. As
competitors, the combined firms are expected to generate annual cost savings of about 10% by
2. What are the major challenges the management of the combined companies are likely to face?
How would you recommend resolving these issues?