former Lucent managers and generate a “brain” drain. Other challenges include language and
cultural differences due to the firm’s headquarters centered in France. Moreover, the French
government remains a major shareholder in Alcatel and given the reluctance of French unions to
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
result in especially great challenges during integration due to a lack of trust and cooperation. Such
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
reasons. Mergers dubbed “mergers of equals” are those in which the firms are relatively alike in
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
boards, it is clear that Alcatel will play the dominant role. Alcatel is larger than Lucent and the
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 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.
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
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
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
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.
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.
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
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.
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
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
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
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.
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
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
quality of Chrysler products, while Chrysler’s project management skills could be used to shorten
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
equipment and procedures by plant, benchmark performance, identify best practices, and convince
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
two firms together. Moreover, while Daimler appeared on the surface to recognize that 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
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
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
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.
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
negotiating and closing a substantial deal for his firm, he was less agile in meeting customer needs during
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?
Answer: Case should have made decisions more rapidly and exhibited the ability to multitask.
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
Discussion Question:
1. In your judgment, are acquirers more likely to under- or overestimate anticipated cost savings?
Explain your answer.
Answer: Acquirers are more prone to overestimate both the amount of synergies and under-
estimate the time and money required to realize synergies. This conclusion is suggested by the
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
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.
Answer: Common integration-related expenses include the following: severance, retraining,
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
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
employees. In the long-run, Allianz encouraged loyalty on the part of the Pimco employees by
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
temporary assignments with the parent. Likewise, Allianz employees could have taken
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,
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
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
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
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
adds to the acquirer’s ability to earn back any premium paid for the target. However, some
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
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.
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
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
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
corporate cultures. Citibank was widely viewed as a strong marketing and planning organization,
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.
Answer: The core competencies of the two businesses, e.g., Citibank’s marketing and planning
exploit the best of both firms in order to strengthen its overall competitiveness.
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
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.
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.