Chapter 6
Integration: Mergers, Acquisitions, and Business Alliances
Answers to End of Chapter Discussion Questions
6.1 Why is the integration phase of the acquisition process considered so important?
Answer: If done correctly, the integration process can help to mitigate the loss of key talent or
6.2 Why should acquired companies be integrated quickly? What are the risks to rapid integration?
Answer:
a. Why should acquired firms be integrated quickly? Integration should be done
quickly to minimize key employee turnover, achieve expected productivity
improvements, and to realize cost savings. These factors accelerate the
realization of cash flows thereby contributing to the ability of the acquiring firm
6.3 Why is candid and continuous communication so important during the integration phase?
Answer: Any merger or acquisition creates substantial anxiety among employees, customers, and
suppliers of the target firm and in some instances among those of the acquiring firm. Target firm
6.4 What are the messages that might be communicated to the various stakeholders of the new firm?
Answer: Questions about job security, pay, and benefits must be addressed early in the integration.
Job security concerns are best addressed by communicating to the extent possible the plans for the
6.5 What are examples of difficult decisions that should be made early in the integration process?
Answer: Tough decisions that should be made early in the integration process include the
6.6 When Daimler Benz acquired Chrysler Corporation in 1998, it announced that it could take 6 to 8
years to fully integrate the combined firm’s global manufacturing operations and certain functions
such as purchasing. Why do you believe it might take that long?
Answer: Changing manufacturing operations requires changing union work rules, which are set by
contract. Such rules could only be re-negotiated when current contracts covering the plants expire.
6.7 In your judgment, are acquirers more likely to under-or-overestimate anticipated cost savings?
Explain your answer.
Answer: Acquirers are more prone to overestimate the amount of synergies and under-
estimate the time and money required to realize synergies. This conclusion is suggested by the
6.8 Cite examples of expenses you believe are commonly incurred in integrating target companies.
Answer: Common integration-related expenses include the following: severance, retraining, lease
6.9 A common justification for mergers of competitors is the potential for 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
6.10 Why did Citibank and Travelers resort to a co-CEO arrangement when they merged in 1998?
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
Solutions Chapter Case Study Questions
Culture Clash — AT&T Buys Time Warner
Discussion Questions and Answers:
What is corporate culture? Why is it important?
Answer: Corporate culture is a common set of values, traditions, and beliefs that influence
management and employee behavior within a firm. There is a significant body of research
underscoring the importance of building a strong culture. Leaving the evolution of a firm’s culture
2. Should the success or failure of the Time Warner acquisition be judged based on Time Warner
operated as a standalone business or as part of implementing AT&T’s larger media strategy?
Explain your answer.
Answer: The purchase of Time Warner was motivated by AT&T’s desire to utilize Time Warner’s
3. What key external and internal factors are likely to impact AT&T’s postmerger integration of
Time Warner?
Answer: The primary external factor is the trend away from cable TV subscription to internet
streaming options which will erode AT&T’s cash flow if nothing changes. The major internal
4. What is the key premise on which AT&T’s business strategy is based and why does it believe that
cultural differences between the two firms can be overcome? Be specific.
Answer: AT&T’s strategy is to develop an internet based direct to consumer streaming service
with access to TV and film libraries unparalleled in the media industry. It core cable and
5. If AT&T can fully integrate Time Warner into its operations, do you believe the firm can compete
successfully with Netflix? Explain your answer.
Answer: Yes, because AT&T will have both distribution and content, with the latter being
constantly updated and refreshed. In addition, AT&T has substantial cash flow from its cable and
6. 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
Examination Questions and Answers
True/False Questions: Answer True or False to the following questions.
1. The integration process if done effectively can help to mitigate the potential loss of employees.
True or False
2. Integration is among the most important factors contributing to the success or failure of mergers
and acquisitions. True or False
3. Rapid integration helps to realize the planned synergies and may contribute to a higher present
value for the merger or acquisition. True or False
4. High employee turnover is rarely a problem during the integration of the target firm into the
acquirer. True or False
5. High employee defection during the integration period is an excellent way to realize cost savings?
True or False
6. Employees or so–called “human capital” are often the most valuable asset of the target firm. True
or False
7. Employees of both the target and acquiring firms are likely to resist change following a takeover.
True or False
8. Differences in the way the management of the acquiring and target firms make decisions, the pace
of decision-making, and perceived values are common examples of cultural differences between
the two firms. True or False
9. Focus on customers is generally considered a factor critical to the ultimate success or failure of the
merger or acquisition. True or False
10. Revenue growth is often sacrificed in an effort to engage in aggressive cost cutting during the
integration period. True or False
11. Divulging the true intentions of the acquiring firm to the target firm’s employees should be
deferred until it can be determined that such employees can be trusted. True or False
12. Communication plans should be developed for all stakeholder groups except for suppliers, because
they generally have a lower priority in the integration process. True or False
13. Developing staffing plans involves identifying staffing requirements and developing a
compensation strategy, among other things. True or False
14. Co-locating employees from the acquiring and target firms is rarely a good idea early in the
integration period because of the inevitable mistrust that will arise. True or False
15. So-called contract related transition issues often involve how the new employees will be paid and
what benefits they should receive. True or False
16. Employee health care or disability claims tend to escalate just before a transaction closes, thereby
adding to the total cost of the transaction. Who will pay such claims should be determined in the
agreement of purchase and sale. True or False
17. In hostile takeovers, the employees that are on the post-merger integration team should come from
the acquiring firm because of concerns that the target firm’s employees cannot be trusted.
True or False
18. The management integration team’s primary responsibilities should be monitoring the daily
operations of the work-teams assigned to complete specific tasks during the integration.
True or False
19. The management integration team’s primary responsibilities should be to focus on achieving long–
term profit goals, monitoring actual performance to the goals of the integration plan, and on cost
management. True or False
20. An acquiring firm that focuses heavily on integrating a target firm, which represents a sizeable
portion of its total operations, frequently sees deterioration in its own current operating
performance. True or False
21. It is generally more important to respond to current issues as they arise in your communication
plans even if it results in the appearance of a somewhat inconsistent theme throughout
communications made to stakeholders. True or False
22. Key stakeholders in the integration effort generally include employees, customers, suppliers,
communities, and regulators. True or False
23. A newly merged company will often experience at least a 5-10% loss of current customers during
the integration effort. True or False
24. Following an acquisition, long-term contracts with suppliers can generally be broken without
redress. True or False
25. In building a new organization for the combined firms, it is important to start with a clean sheet of
paper and ignore the organizational structures that existed prior to the merger or acquisition.
True or False
26. Highly decentralized organizational structures generally expedite the integration effort more so
than highly centralized structures. True or False
27. The extent to which compensation plans for the acquiring and acquired firms are integrated
depends on whether the two companies are going to be managed separately or fully integrated.
True or False
28. Benchmarking important functions such as the acquirer’s and the target’s manufacturing and
information technology operations and processes is a useful starting point for determining how to
integrate these activities. True or False
29. When two companies with very different cultures merge, the new firm inevitably adopts one of the
two cultures that existed prior to the merger. True or False
30. Sharing common goals, standards, services, and space can be a highly effective and practical way
to integrate disparate corporate cultures. True or False
31. It is crucial to focus on the highest leverage issues in implementing post-merger integration. True
of False
32. A merger agreement should specify how the seller should be reimbursed for products shipped or
services provided by the seller before closing but not paid for by the customer until after closing.
True or False
33. Pre-closing integration planning is likely to be easier in friendly than in hostile transactions. True
or False
34. Customers of newly acquired firms are usually slow to switch to other suppliers even if product
quality deteriorates due to inertia. True or False
35. Decentralized management control usually facilitates the integration of a newly acquired business.
True or False
36. Merging compensation systems can be one of the most challenging activities of the integration
process. True or False
37. Benchmarking important functions such as the acquirer’s and the target’s manufacturing and IT
operations and processes is a useful starting point for determining how to integrate these activities.
True or False
38. Plant consolidation rarely requires the adoption of a common set of systems and standards for all
manufacturing activities. True or False
39. The extent to which the sales forces of the two firms are combined depends on their relative size,
the nature of their products and markets, and their geographic location. True or False
40. Enabling the customer to see a consistent image in advertising and promotional campaigns is often
the greatest challenge facing the integration of the marketing function. True or False
41. The speed with which two firms are merged is an important factor determining the long-term
success of the merger. True or False
42. Whenever possible, integration planning should begin before closing. True or False
43. Newly merged firms frequently experience a loss of existing customers as a direct consequence of
the merger. True or False
44. Integration planning involves addressing human resource, customer, and supplier issues that
overlap the change of ownership. True or False
45. Integration of a new business into an existing one rarely affects current operations of either
business. True or False
46. When news about the integration is bad, it is critical never to share it with employees. True or
False
47. The newly integrated firm must be able to communicate a compelling vision to investors. True or
False
48. An effective starting point in setting up a structure is to learn from the past and to recognize that
the needs of the business drive structure and not the other way around. True or False
49. Staffing plans should be postponed to relatively late in the integration process. True or False
50. The extent to which compensation plans are integrated depends on whether the two companies are
Multiple Choice Questions: Circle only one of the alternatives.
1. Rapid integration is usually important for all of the following reasons except for
a. Minimizes employee turnover
b. Improves the morale and productivity of current employees of both the acquiring and
acquired firms
c. Builds confidence in current employees in the competence of management
d. Dispenses with the need for pre-integration planning
e. Reduces customer turnover
2. All of the following are often cited as factors critical to the ultimate success of the integration
effort except for
a. Plan carefully, act quickly
b. The use of project management techniques
c. Early communication from the top of the organization
d. Salary and benefit reductions for many employees of the acquired company in order to
realize cost savings
e. Making the tough decisions as early as possible
3. Certain post integration issues are best addressed prior to the closing. These include all of the
following except for
a. Who will pay for employee severance expenses
b. How will employee payroll be managed during ownership transition
c. What will be done with checks from customers that the seller continues to receive after
closing
d. How will the seller be reimbursed for monies owed to suppliers for products sold prior to
closing
e. Who will pay for health care and disability claims that often arise just before a business is
sold?
4. Which of the following is not true about the primary responsibilities of the management
integration team (MIT)?
a. The MIT should direct the daily operations of the individual work teams set up to
implement certain activities.
b. Focus the organization on meeting ongoing business commitments and operational
performance targets
c. The creation of an early warning system to determine when performance targets are
likely to be missed.
d. Establish a rigorous communication program
e. Establishing a master schedule of what should be done by whom and by what date.
5. Which of the following is generally not true about communication during the integration period?
a. Communication should be as frequent as possible
b. Employees should be sheltered from bad news
c. The CEO of the combined firms should lead the effort to communicate to employees at
all levels
d. Regularly scheduled employee meetings are often the best way to communicate progress
to plan
e. The reasons for changing work practices and compensation must be thoroughly explained
to employees
6, Customer attrition following an acquisition is commonly related to uncertainty about
a. On time product delivery
b. Product quality
c. Pricing and payment terms
d. A and B only
7. All of the following are generally considered stakeholders in the integration process except for
a. Suppliers
b. Employees
c. Competitors
d. Regulators
e. Customers
8. All of the following are generally true about creating new organizations except for
a. Learn from prior organizational strengths and weaknesses
b. Business needs should drive structure and not the reverse
c. Centralized organizations facilitate the pace of the integration
d. The structure employed during the integration must be the one used in the long-run
e. Senior managers should be given responsibility for selecting their own subordinates
9. Developing staffing plans requires which of the following?
a. Identifying personnel requirements
b. Determining the availability of skilled employees to fill these requirements
c. Developing compensation plans
d. A and B only
e. A, B, and C
10. All of the following are true about the challenges of integrating firms with different corporate
cultures except for
a. Cultural issues can run the gamut from dress codes to compensation
b. The acquired firm’s overarching culture is generally rapidly accepted by the target firm’s
employees
c. Small companies are usually highly unstructured and informal
d. There are often differences in culture even between firms in the same industry
e. Integration may be inappropriate if acquirer and acquired firm’s cultures are extremely
different.
11. Which of the following represent commonly used techniques for integrating corporate cultures?
a. Employees are encouraged to share the same overall goals
b. “Best practices” in one department are employed in other departments
c. Multiple businesses share the same service such as the legal department
d. Employees are co-located
e. All of the above
12. Which of the following is not true about integrating business alliances?
a. Teamwork is the underpinning that makes alliances work.
b. Control is best exerted through coordination
c. Decisions are made at the top of the organization
d. Decisions are based on the premise that all participants to the alliance have had an
opportunity to express their opinions.
e. The failure of one party to meet commitments will erode trust
13. Successfully integrated mergers and acquisitions are frequently those which
a. Communicate candidly and continuously
b. Appoint an integration manager and team with clearly defined goals and responsibilities
c. Establish well defined lines of authority
d. Focus on issues that have the greatest near-term impact
e. All of the above
14. Post-closing integration may be viewed in terms of a process consisting of the following activities
a. Integration planning
b. Developing communication plans
c. Creating a new organization
d. Developing staffing plans
e. All of the above
15. The acquirer’s sales force sells very complex software solutions to its customers. The target firm
manufactures commodity hardware products. Customers of the two firms sometimes buy both
products. The benefits of integrating the sales force of both the acquirer and target firms includes
all of the following except for
a. Generates significant cost savings by eliminating duplicate sales representatives
b. Eliminates related sales support expenses
c. Minimizes potential customer confusion by enabling customers to deal with a single sales
representative
d. Facilitates communication of a consistent brand image
e. Makes product cross-selling more effective
16. The post-closing integration process consists of all of the following activities except for
a. Integration planning
b. Developing communication plans
c. Creating a new organization
d. Developing staffing plans
e. Identifying the acquisition vehicle
17. Which of the following activities are likely to extend beyond what is normally considered the
conclusion of the post-closing integration period?
a. Developing communication plans
b. Cultural integration
c. Integration planning
d. Developing staffing plans
e. None of the above
18. Delay in integrating the acquired business contributes to which of the following?
a. Employee anxiety
b. Customer attrition
c. Supplier anxiety
d. Deteriorating employee productivity
e. All of the above
19. Successfully integrated M&As are those that demonstrate leadership by candidly and continuously
communicating which of the following?
a. A clear vision
b. A set of values
c. Unambiguous priorities for each employee
d. A & B only
e. A, B, & C
20. Which of the following represent important decisions that must be made early in the integration
process?
a. Identifying the appropriate organizational structure
b. Defining key reporting relationships
c. Selecting the right managers
d. Identifying and communicating key roles and responsibilities
e. All of the above
21. Poorly executed integration often results in high employee turnover. The costs of such turnover
include which of the following?
a. Declining morale among those that remain
b. Retraining costs
c. Declining productivity
d. Deteriorating customer service
e. All of the above
22. Which of the following factors affect customer attrition that normally accompanies post-merger
integration?
a. Customer uncertainty about on-time delivery
b. More aggressive pricing from competitors
c. Deteriorating customer services
d. Deteriorating product quality
e. All of the above
23. Which of the following is not true about the recommendation that integration should occur
rapidly?
a. All significant operations of the two firms must be integrated immediately.
b. Rapid integration helps to minimize customer attritition.
c. Rapid integration reduces unwanted employee turnover.
d. Rapid integration reduces employee anxiety.
e. None of the above
24. Key management integration team responsibilities include all of the following except for
a. Building a master schedule of activities that need to be accomplished
b. Establishing work teams
c. Tracking the daily operation of the firms
d. Monitoring and expediting key decisions
e. Establishing a rigorous communications program
25. When corporate cultures are substantially different, it may be appropriate to
a. Integrate the businesses as rapidly as possible
b. Leave the businesses separate indefinitely
c. Initially leave the businesses separate but integrate at a later time
d. A or B
e. B or C
Case Study Short Essay Examination Questions
CULTURE CLASH—WALMART BUYS JET.COM
____________________________________________________________
Case Study Objectives: To illustrate
• The challenges of integrating firms with profoundly different corporate cultures,
• The value of human capital,
• How earnouts can be used to retain key personnel, and
• When an acquisition should be viewed in the context of a larger business strategy and not on a
standalone basis.
______________________________________________________________________________
The majority of retail sales growth is online and much of that growth it going to Amazon.com (Amazon).
Its major retail competitor, Walmart Stores Inc. (Walmart), has been jockeying to catch up, but it still has a
long way to go. In 2016, Amazon recorded $136 billion in net sales, a 27% increase over 2015. Of this
total, $94.7 billion came from e-commerce and remainder from services (e.g., cloud servers).1 In stark
contrast, Walmart’s e-commerce business accounts for about $15 billion. How can Walmart close this gap?
to its e-commerce customers. Amazon, through its own direct fulfillment and Amazon Marketplace,2 offers
nearly 350 million products to its customers. That number alone would seem to make it extremely difficult
for Walmart to make much headway in penetrating Amazon’s online business.
Walmart’s options are limited: focus on organic growth by reinvesting excess cash flow in e-commerce
related activities, joint ventures with third-parties, or acquire e-commerce firms with the potential to
leapfrog the competition. Previously, the firm had been trying to do it on its own. While its online revenue
growth has been rapid, it was still slower than industry leader Amazon. Joint ventures take time to negotiate
and sometimes are difficult to implement when you don’t have control. Walmart needed a bold move to
jumpstart its e-commerce business. That move turned out to be the acquisition of Jet.com Inc. (Jet).
Walmart and Jet announced on August 8, 2016 that they had reached an agreement in which Walmart
would acquire Jet for $3.3 billion consisting of $3 billion in cash and a contingent payout of $.3 billion in
Walmart stock. The size of the purchase price appears to have been a record for an e-commerce startup.
Despite the firm’s meteoric growth, Jet was not profitable at the time of the acquisition and was burning
through its cash holdings.
Jet brings Walmart at least three things: access to its attractive millennial dominated customer base, its
e-commerce capabilities including logistics and distribution, and its management team. Of these, retaining
the management team may be the most crucial to Walmart. Toward this end, Walmart issued 3.5 million
Walmart shares to Marc Lore, to be paid over a five-year period. Known as restricted stock units3 (RSUs),
these shares represent a portion of the $300 million of Walmart equity included in the deal. The agreement
E-commerce demands an entrepreneurial culture where risk taking is the norm. The size of the challenge
is daunting. Walmart is a bureaucratic cost-cutting behemoth steeped in the ways of traditional “brick and
mortar” retailing. Walmart has 260 million customers who visit the firm’s 11,257 stores weekly in 28
countries and e-commerce sites in 11 countries. The firm’s 2.3 million employees worldwide generated
2016 net revenue of $482 billion.
Marc Lore is the man Walmart is relying on to help the firm make the transition to a much larger online
retailer. For Walmart and Lore to be successful in this merger, Jet’s ecommerce business needs to blend
with the other Walmart operations such as logistics and distribution, marketing, and suppliers. This will
require substantial coordination.
Walmart and Jet will maintain their distinct brands, with Walmart.com focusing on delivering the firm’s
Everyday Low Price strategy, while Jet will continue to provide a unique and differentiated customer
experience. Over time, the two firms will collaborate to develop new offerings to help customers to save
time and money.
Since the deal closed, Lore, as Walmart’s domestic CEO of e-commerce, has been shaking things up.
He is realigning leadership to better match how customers are shopping today. The leadership
reorganization is taking place not just at the stores but on its website and Jet.com. Among Walmart
President and CEO Doug McMillon’s first communications to employees following the takeover included
statements such as “we need more speed and less bureaucracy” to better serve shoppers to save them money
and time. Some positions must be eliminated, he noted, “to stay lean and fast.” Reflecting this new
philosophy, the decision was made to combine corporate IT personnel at Walmart’s Arkansas headquarters
with its e-commerce team in Silicon Valley. Historically, brick and mortar retailers launched brick and
mortar websites with separate management teams. As the world has changed, many consumers shop both
online and in store causing retailers to integrate these separate teams into a single team.
By incorporating the smaller electronic retailer’s inventory, retail partnerships, and operations within
Walmart’s giant infrastructure, the company should be able to bolster online revenue growth. An important
advantage Walmart has over Amazon is its approximate 4,800 U.S. stores including 3,500 super centers,
many of which are used to ship online orders. In late 2016, the firm began offering discounts to customers
that pick up online orders in a nearby Walmart store.
Discussion Questions and Solutions:
1. Should the success or failure of Walmart’s acquisition of Jet be judged based on Jet as a standalone
business or as part of implementing the firm’s larger online strategy? Explain your answer.
Answer: The purchase of Jet by Walmart is analogous to Google buying YouTube. Neither is
likely to earn competitive returns on a standalone basis, but each has the potential of serving as an
2. What key external and internal factors are likely to impact Walmart’s postmerger integration of
Jet?
Answer: The primary external factor impacting the integration process is the accelerating shift
from brick and mortar retail sales to online purchases. This is likely to pressure Walmart to
accelerate its online spending and its acquisition of small online retailers. However, with speed
can come implementation errors. Increasingly, Walmart’s once largely homogeneous culture will
become increasingly fragmented creating a series of subcultures: some contributing to the
3. What is the key premise(s) underlying Walmart’s belief that the two firms can be successfully
integrated? Be specific.
Answer: Aware of the huge cultural divide between the two firms, Walmart is clearly accepting
5. Speculate as to whether the Jet acquisition will be successful in moving Walmart from a largely
brick and mortar retailer to one having a much larger online business? Explain your answer.
Answer: Yes. Walmart’s board and management have publicly committed to changing the firm’s
6. Describe Walmart’s online strategy. Do you think Walmart has a reasonable chance of overtaking
Amazon? Explain your answer
Answer: Walmart needs to clearly differentiate itself from Amazon. Simply becoming Amazon-
like is not going to enable them to once again dominate the retail space as it has in the past. The
7. What is corporate culture? Why is it important?
Answer: Corporate culture is a common set of values, traditions, and beliefs that influence
management and employee behavior within a firm. There is a significant body of research
underscoring the importance of building a strong culture. Leaving the evolution of a firm’s culture
8. Why did the earnout focus on the length of time managers stayed and not financial performance
targets for Jet? What might your answer to question tell you about Walmart’s primary motivation
for buying Jet?
Answer: Walmart placed a high value on skills of the Jet management team and wanted to retain
POSTMERGER INTEGRATION CHALLENGES
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
products companies, and brick-and-mortar retailers nosedived. Headlines screamed that Amazon Prime4
would spread Amazon’s marketing reach across the consumer spectrum from ecommerce to shoes to
grocery shopping.
Pundits at times seemed almost giddy in imagining changes Amazon could make to Whole Foods. For
example, some opined that Amazon could reconfigure the layout of Whole Foods stores given its finely
honed data analytic capabilities. This could entail Amazon removing apparel departments entirely from
Whole Foods stores and scaling back departments such as vitamins where pricing is high compared to
High tech Amazon announced that it would integrate its “brick and mortar” acquisition into the firm’s
ecommerce platform opening up an array of cross-selling opportunities. Amazon Prime would become a
part of Whole Foods’ rewards program, offering Amazon Prime members savings and other in-store
benefits. Eventually, popular Whole Foods private label products such as 365 Everyday Value, Whole
Catch and pet foods oriented Whole Paws would be integrated with Amazon Fresh, Prime Pantry and Prime
Amazon reiterated at the closing that John Mackey would remain as Whole Foods’ CEO and that its
headquarters would stay in Austin Texas. And while many have predicted that Amazon could eventually
automate Whole Foods with cashier-less store formats, the company has stated that it has no plans to
replace Whole Foods cashiers with Amazon Go5 operations. Instead, Amazon indicated that they would try
to conduct the postmerger integration in a manner that limited disruption in order to preserve what Whole
The challenges for Amazon are substantial. Change is required but what is in question is the optimal
pace of that change. Amazon must move to resolve operating inefficiency within Whole Foods without
pushing valued staff, customers, and suppliers out the door. This would only accelerate and extend the
same-store sales decline experienced by Whole Foods since early 2016.
Historically, Amazon has managed many of its acquisitions by defining clear goals to be achieved and
allowing the acquired firm’s management to figure out how to best achieve these goals all the while being
The greatest challenge may be the distinctly different corporate cultures of the two firms. Whole Food’s
store managers are accustomed to autonomy in how they operate their stores. Whole Foods has a reputation
for rewarding employee loyalty as measured by their tenure at the firm and less through performance
accountability. In contrast, Amazon has sought to apply best practices across its operations prizing
MEN’S WEARHOUSE AND JOS. A. BANK STUMBLE
DURING POSTMERGER INTEGRATION
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,
• How the size of acquisition premiums impact the pace and extent of postmerger integration, and
• Potential conflicts of interest of activist investors promoting a takeover.
Pressured by activist investors to pursue growth, Men’s Wearhouse is the story of a clothing retailer which
undertook an expensive and ultimately value destroying acquisition. The firm had a history of growth and
To restore growth in revenue and profitability, the firm acquired competitor Jos. A. Bank in late 2014
for $1.8 billion after a heated bidding war. The final bid of $65 in cash for each Jos. A. Bank’s share
represented a 56% premium to the closing price in early October 2013.The combined company had annual
revenue of $3.5 billion and projected annual savings of $100 to $150 million consisting of lower overhead,
more efficient marketing, and improved customer service. The combination of Jos. A. Bank’s, a seller of
men’s tailored and casual clothing, U.S. retail operations seemed to line up geographically with the larger
A specialty retailer of men’s suits and a provider of tuxedo rental in the United States and Canada, the
new Men’s Wearhouse Inc. operates in two segments: retail and corporate apparel. The retail operation
Private equity firm, Eminence Capital, which owned a 4.9% stake in Jos. A. Bank and a 10% position in
Men’s Wearhouse prior to the takeover, had been pushing Jos. A. Bank to make a deal for months. In fact,
both Men’s Wearhouse and Jos. A. Bank’s management teams had clung stubbornly to their desire to
Eminence Capital, which had at first backed Jos. A. Bank’s bid to acquire Men’s Wearhouse switched
sides and encouraged Men’s Wearhouse to adopt a so-called Pac Man defense in which the hunted becomes
the hunter. Eminence Capital was hedging its bets with investments in both firms, and the combination of
the two firms offered to be a winner for the private equity firm. As evidenced by the firm’s increased
ownership stake after the merger, Eminence fervently believed that substantial synergy between the two
clothiers would unlock substantial value for shareholders.
Another private equity firm that also stood to benefit from a deal between Jos. A. Bank and Men’s
Wearhouse was Golden Gate Capital, which owned outdoor gear retailer Eddie Bauer. Jos. A. Bank had
agreed to buy Eddie Bauer for $825 million in a bid to discourage Men’s Wearhouse’s takeover bid. The
merger agreement with Eddie Bauer stipulated that any alternative bidder such as Men’s Wearhouse that
Once the merger was completed, Men’s Wearhouse was faced with the task of figuring out how to make
good on its publicly stated commitment to eliminate $100 to $150 million in costs over three years. These
anticipated synergies were a major part of the justification for paying the substantial premium for Jos. A.
Bank, and Men’s Wearhouse was under considerable pressure to realize these savings as quickly as
possible. To assist in the integration, the firm hired advisory firm AlixPartners, a well-known retailer
turnaround firm, to support the integration process.
While overly aggressive promotional campaigns can hurt profitability, it can be far more damaging to
revenue by eroding store traffic. History has not been kind to retailers who have tried to alter customer
expectations. Men’s Wearhouse founder and former CEO George Zimmer expressed concern that the
aggressive cost cutting to make the integration work was going too quickly and that it would undermine the
firm’s ability to grow sales. Zimmer, who had been fired by Men’s Wearhouse over governance and
In addition to changing its promotional strategy, Men’s Wearhouse sought to update Jos. A. Bank’s
merchandise by adding more tailored fits and accessories, such as shoes. The chain also rolled out a new ad
campaign and worked to retrain employees to sell products under the new promotional strategy. Postmerger
integration efforts also included integrating the brands and upgrading the e-commerce system. The buy-
one-get-three free promotions have ended and were replaced with a buy-one-and get-two free promotion at
Jos. A. Bank. In addition to promotional changes, the firm has launched a new loyalty program.
Furthermore, Men’s Wearhouse signed an agreement with Macy’s to open licensed tuxedo rental shops
aiming to attract new customers.
Two years after buying rival Jos. A. Bank, Men’s Wearhouse has seen the market value of its equity and
debt plunge as investors and bondholders question the firm’s ability to reverse the decline in sales at Jos. A.
Bank. When the deal closed in September 2014, the firm’s equity value exceeded $2.6 billion eventually
topping out at $3.2 billion in October 2015. Since then the firm’s equity value has fallen to less than $700
million by the end of 2016. The firm’s 7% bonds due in 2022 also plunged to $.65 cents per dollar of face
value from $104 during the same period. Standard & Poor’s lowered the firm’s credit rating to well below
investment grade.
Discussion Questions and Answers:
1. How does the size of the premium paid for Jos. A. Bank affect the pace and extent of postmerger
integration?
Answer: The faster an acquirer can earn back the premium paid to target shareholders the greater
the likelihood that it can earn its cost of capital. Men’s Wearhouse paid a 56% premium for Jos. A.
Bank, valuing the firm’s equity value at $1.8 billion. The dollar value of the premium paid is