Chapter IV Managing Risks in Mergers, Acquisitions and Strategic Alliances

There is a serious problem facing senior executives who choose acquisitions as a corporate growth strategy. My study reveals that fully 65 per cent of major strategic acquisitions have been failures. nd some have been truly major failures resulting in dramatic losses of value for the shareholders of the acquiring company. !ith mar"et values and acquisition premiums at record highs# it is time to articulate demanding standards for what constitutes informed or prudent decision$ma"ing. The ris"s are too great otherwise.% $ Mar" & 'irower(.

Understanding the risks in mergers and acquisitions

A combination of factors - increased global competition, regulatory changes, fast changing technology, need for faster growth and industry excess capacity - has fuelled mergers and acquisitions (M&A) in recent times. he M&A phenomenon has been noticeable not only in de!eloped mar"ets li"e the #$, %urope and &apan but also in emerging mar"ets li"e 'ndia. 'n ())*, worldwide mergers and acquisitions were !alued + at ,+.- trillion. 'n ())), this figure increased . to ,..- trillion. 'n +///, the pace seemed to slow down, with only the 0laxo 1ellcome 2 $mith3line 4eecham merger !alued at o!er ,5/ billion. 6owe!er, the total !alue of the deals worldwide crossed ,..5 trillion. Much of this acti!ity too" place in the first half of +///. he recent merger proposal by 67 and 8ompaq is a clear indication that merger mania is well and truly ali!e. 9i"e capacity expansion, !ertical integration and di!ersification, a large merger or an acquisition is a strategic mo!e since it can ma"e or brea" a company. 6owe!er, mergers and acquisitions in!ol!e unique challenges such as the !aluation of the company being acquired and integration of the pre merger entities. :aluation is a sub;ecti!e matter, in!ol!ing se!eral assumptions. 'ntegration of the pre-merger entities is a demanding tas" and has to be managed s"illfully. $o, it ma"es sense to de!ote a separate chapter to co!er the ris"s associated with acquisitions- and how to manage them. Mar" $irower, an internationally acclaimed expert in the field of mergers and acquisitions found that two thirds of the (<* deals he analysed between ()=) and ())/, destroyed !alue for shareholders. 1hen he loo"ed at the shares of (// large companies that made ma;or acquisitions between ())- and ())=, $irower found that the acquirer>s stoc", on an a!erage trailed the $&7 5// by *.<?, one year after the deal was announced. </ of these stoc"s under-performed in relation to the mar"et, while .+ posted negati!e returns. Many of the companies acquired were often sold off later, sometimes at a loss.
( + . -

he $ynergy rap. According to $ecurity @ata 8o. he %conomist# &uly +/, +///. 'n this chapter, we use the terms, mergers and acquisitions interchangeably though there are some important differences. ($ee glossary).

8onsider 3imberly 8lar">s acquisition of $cott 7aper in ())5. his acquisition made 3imberly-8lar" the world>s largest tissue ma"er. Ane year later howe!er, sales were down and profits and operating income had shrun". 4y ())), the merged entity was trailing the $&7 5// $toc" 'ndex. A & ga!e se!eral seemingly !alid reasons for its acquisition of B8C. 4ut after fi!e years of incurring losses, amounting to more than ,+ billion, A & accepted that the acquisition would not wor". 'n ())5, it decided to spin the company off. Duite clearly, mergers and acquisitions in!ol!e hea!y ris"s. 'n their excitement and enthusiasm to close the deal fast, managers throw caution to the winds. 9ater, there is a gap between expectations and actual performance and shareholders> wealth is eroded. his chapter co!ers some of the important ris"s in M&As and pro!ides a framewor" for dealing with them.
Strategic Issues in Mergers & Acquisitions

Identifying Synergies

Valuation

Integration

Why mergers are risky

Ma;or acquisitions ha!e to be handled carefully because they lea!e little scope for trial and error and are difficult to re!erse. he ris"s in!ol!ed are not merely financial ones. A failed merger can disrupt wor" processes, diminish customer confidence, damage the company>s reputation, cause employees to lea!e and result in poor employee moti!ation le!els. $o the old saying, discretion is the better part of !alour, is well and truly applicable here. A comprehensi!e assessment of the !arious ris"s in!ol!ed is a must before stri"ing an M&A deal. 8ircumstances under which the acquisition may fail, including the worst case scenarios, should be carefully considered. %!en if the probability of a failure is !ery low, but the consequences of the failure are significant, one should thin" carefully before hastening to complete the deal. According to %ccles, 9anes and 1ilson5, most companies fail to underta"e a thorough ris" analysis before ma"ing an acquisition. 1hich is why they end up burning their fingers. he strategic implications of a merger should be understood carefully. Atherwise, the shareholders> wealth will be eroded. As Mar" $irower < puts it neatly, E1hen you ma"e a bid for the equity of another company, you are issuing cash or claims to the shareholders of that company. 'f you issue claims or cash in an amount greater than the
5 <

6ar!ard 4usiness Ce!iew, &uly 2August ())). he $ynergy rap.

economic !alue of the assets you purchase, you ha!e merely transferred !alue from the shareholders of your firm to the shareholders of the target 2 right from the beginning.F 'n an acquisition, the acquirer pays up front for the right to control the assets of the target firm, with the hope of generating a future stream of cash flows. 'f demanding standards are not set to facilitate informed and prudent decision-ma"ing, the in!estment made will not yield commensurate returns.
Target a!le I Some top M"A deals in #$$% Acquirer Value of deal ($ million) 5=,5-= .(,=.) +5,+<. +.,.)* (),<5< (-,)/(.,(.+ (+,*+( ((,)=. ((,5((

A & 4roadband & 'nternet (#$) 8omcast (#$) 6ughes %lectronics (#$) %chostar 8ommunications (#$) 8ompaq 8omputer (#$) 6ewlett 7ac"ard (#$) American 0eneral (#$) American 'nternational 0roup (#$) @resdner 4an" (0ermany) AllianG (0ermany) 4an" of $cotland (#3) 6alifax 0roup (#3) 1acho!ia (#$) Hirst #nion (#$) 4enacci (Mexico) 8itigroup (#$) elecom 'talia ('taly) Ali!etti ('taly) 4illiton (#3) 467 (Australia) )ompiled from various sources

here are two main reasons for the failure of an acquisition. *ne is the tendency to lay too much stress on the strategic# unquantifiable benefits of the deal . his results in o!er-!aluation of the acquired company. The second reason is the use of wrong integration strategies. As a result, actually realised synergies turn out to be well short of the pro;ected ones. Many companies are confident about generating cost sa!ings before the merger. 4ut they are unaware of the practical difficulties in!ol!ed in realising them. Hor example, a ;ob may be eliminated, but the person currently on that ;ob may simply be shifted to another department. As a result, the head count remains intact and there is no cost reduction. Many firms enter a merger hoping that efficiency can be impro!ed by combining the best practices and core competencies of the acquiring and acquired companies. 8ultural factors may howe!er, pre!ent such "nowledge sharing. he ())* merger of @aimler 4enG and 8hrysler is a good example. Also, it may ta"e much longer to generate cost sa!ings than anticipated. he longer it ta"es to cut costs, the lesser the !alue of the synergies generated. Ce!enue growth, the reason gi!en to ;ustify many mergers, is in general more difficult to achie!e than cost cutting. 'n fact, growth may be ad!ersely affected after a merger if customer or competitor reactions are hostile. 1hen 9oc"heed Martin acquired 9oral, it lost business from important customers such as Mc@onnell @ouglas, who were 9oc"heed>s competitors. $o, companies must also loo" at the acquisition in terms of the impact it ma"es on competitors. he acquisition should minimise the possibility of retaliation by competitors. $ome M&A experts loo" at re!enue enhancement as a soft synergy and discount it hea!ily while calculating synergy !alue.

ata ea& etley acquisition runs into pro!lems 'n mid +///, 'ndia>s largest tea company, ata ea announced it was buying the #3-based etley for I+=( million in a le!eraged buyout. etley, which earned a net profit of I.5 million in ())* on sales of I+*/ million was the third largest brand in the global ,<// million pac"aged tea mar"et - behind #nile!er>s 4roo" 4ond and 9ipton. ata ea !iewed the acquisition as a quic" way to gain access to mar"ets in the #$, 8anada, %urope and Australia. 't also loo"ed at the opportunities created by etley>s estimated wee"ly purchase of three million "g of tea from (/,/// estates in .5 different countries. 4esides, ata ea hoped to gain pac"aging expertise from etley. ata ea did not pay cash upfront. 'nstead, it pumped I=/ million of equity into a special purpose !ehicle. hen it le!eraged the equity to borrow I+.5 million from the mar"et. ata ea hoped that cash flows from etley would be adequate to pay off the debt. At the time of finalising the deal, there were press reports that ata ea was probably o!erpaying = - it had offered I(// million more than the second highest bidder. o ser!ice the debt, etley needed to generate cash flows of at least I-* million per year, whereas it generated only I+) million in ())). ata ea had hoped for a quantum ;ump in cash flows after the acquisition. 4ut unfortunately for ata ea, retail tea prices in the #3 mar"et fell. Moreo!er, the popularity of tea continued to decline in the #3 while the mar"et share for natural ;uices and coffee went up. 4y $eptember +//(, the deal was running into short-term financial problems. he atas announced they would bring in an additional I</ million as equity. his would facilitate retirement of expensi!e debt and reduce interest charges by about I * million per year. 'f cash flows touch I-/ million, the ris" of not being able to ser!ice the debt will be eliminated. his will howe!er not be an easy tas". ata ea Managing @irector, C 3 3rishna 3umar recently admitted * that additional in!estments will be needed to re!i!e demand.

8ompanies ma"ing an acquisition not only ha!e to meet the performance targets the mar"et already expects, but also the higher targets implied by the acquisition premium. 1hen they pay the acquisition premium, managers are essentially committing themsel!es to deli!ering more than what the mar"et expects on the basis of current pro;ections. his is a point which is often forgotten. %!en when the numbers do not ;ustify an acquisition, executi!es may insist on going ahead for strategic benefits that cannot be quantified. 'n the heat of finalising the deal, what is con!eniently o!erloo"ed is that most strategic benefits ultimately should be reflected in some form of cost reduction or re!enue growth. $imilarly, rushing ahead to finalise a deal before a competitor does so, is not always a wise mo!e. 'n many cases, it ma"es sense to allow the competitor to pay a higher price and wea"en its competiti!e position rather than rush into the deal. Acquisitions in!ol!e changes and often ha!e a destabilising effect. @uring the integration of the pre-merger entities, stress, tension, uncertainty and an exodus of employees are li"ely. o a!oid this, building a climate of trust among the employees of the merging entities is extremely important. Most companies underestimate the difficulties in!ol!ed in integrating the pre-merger entities. A recent example is the '8'8' 2 '8'8' ban" merger.

= *

4usiness 1orld, $eptember (/, +//(. 4usiness 1orld, $eptember (/, +//(.

International 'aper& Aggressi(e acquisitions strategy creates pro!lems he paper industry has been "nown to go through boom and bust cycles. $iGe and mar"et share are critical in the paper industry, whose products loo" more li"e commodities than brands. &ohn @illon, the 8%A of 'nternational 7aper ('7) the world>s largest paper company loo"s at acquisitions as a way to control prices. After paying ,=.( billion to acquire office paper company #nion 8amp in early ())), '7 purchased its ri!al, 8hampion 7aper 8orp for ,).< billion in &une +///. hese expensi!e acquisitions left '7 with a debt of ,(5.5 billion, (5/? of capital and four times cash flows) towards the end of +///. @illon has been di!esting non-core businesses such as petroleum and minerals to pay for the acquisitions. he mar"ets howe!er, remain cynical about '7>s mo!es. '7 is yet to pro!e it can integrate its acquisitions and realise the synergies it has pro;ected before its acquisitions. 't has been slow to close down factories, an important step in reducing industry capacity and consequently impro!ing prices. 'n Actober +///, @illon announced that he would be shutting (.+ million tonnes of capacity or 5? of total production. Much more howe!er needs to be done. Ceaction to the 8hampion deal has been lu"ewarm. he company>s stoc" price has fallen during the period ())5-+///. '7>s growth-by-acquisitions strategy may well turn out to be ris"y, especially at a time when the #$ economy has gone into a recession.

A disciplined approach to acquisitions is necessary to weed out un!iable deals. As %ccles, 9anes and 1ilson put it), EA!er half the deals being done today will destroy !alue for the acquiring company>s shareholders. 1hat>s the reason for the disparity between these simple lessons and these poor resultsJ 1e belie!e that far too many companies neglect the organiGational discipline needed to ensure that analytical rigour triumphs o!er emotion and ego.F 7orter(/ argues that acquisitions ma"e sense only when three conditions hold goodK he acquired company>s management is more "een on withdrawing, than continuing to run the operations. $o, the minimum price, it expects, is quite low. he mar"et for companies is imperfect and does not eliminate abo!e-a!erage returns through the bidding process. he buyer has unique abilities and competencies which it can use to manage the acquired company>s business far more efficiently and effecti!ely.
he collapse o) Indiain)o*com he experience of 'ndiainfo.com highlights the ris"s in!ol!ed in the "ind of rec"less acquisitions and alliances made by dotcom businesses in 'ndia. @uring the period @ecember ())) 2 Hebruary +///, 'ndiainfo "ic"ed off its launch in the 'ndian mar"et with an ad blit+ that cost Cs. ((-(5 crore and announced that it would catch up with leader Cediff.com. 1hen founder Ca; 3oneru brought some senior professionals into the management team, !enture capitalists expressed their happiness. 'mpressed by the company>s !ision and aggressi!e plans, Morgan $tanley decided to pay ,((.5 million to acquire a =? sta"e. 4ut, managing the rapid growth pro!ed difficult. A cultural clash between the erstwhile entrepreneurs whose websites had been ta"en o!er by 3oneru and the new breed of professional managers made matters worse. 1hile these entrepreneurs were "nown to li!e frugally, the professionals led a fancy lifestyle. Meanwhile, 3oneru plunged headlong into acquisitions without detailed consultations with his
) (/

6ar!ard 4usiness Ce!iew, &uly-August ())). 8ompetiti!e $trategy.

<

senior team. 'n many cases, payments were made in cash. Ane deal in!ol!ed a payment of Cs +// crore (,-5 million) to :$B9, 'ndia>s leading 'nternet $er!ice 7ro!ider, so that e!ery time a :$B9 user would log on, he would land on the 'ndiainfo home page. $enior executi!es first came to "now about the deal at a press conferenceL 3oneru apparently estimated that the increase in traffic would ta"e the company>s !aluation to about ,( billion. 3oneru also made a big mista"e in deciding to postpone his '7A. he reason for the delay was probably preoccupation with integrating the acquisitions which had been made at a furious pace, one after the other. he huge expenditures on ad!ertising, salaries and acquisitions added up to Cs. ./ crores by $eptember +///. Many senior executi!es began to desert the sin"ing ship.

Identi)ying the synergies

he aim of an acquisition is to ma"e the merged entity more !aluable than the sum of the !alues of the pre-merger entities. As mentioned earlier, synergies can add !alue only if the merged entity registers a performance that is better than what is already reflected in the mar"et prices of the pre-merger entities. 'n almost two out of three acquisitions, the acquirer>s stoc" price falls after the deal is announced. his is a clear indication that the mar"ets tend to be cynical about the realisation of the synergies pro;ected. Ane reason could be that the mar"ets ha!e already discounted the expectation of an impro!ement in the operating performance of the acquired company. 'n extreme cases, the mar"ets may e!en feel that by di!erting resources from stronger di!isions, for the purpose of realising synergies, !alue may be subtracted, rather than added. At a more strategic le!el, acquisitions, by engaging the top management in the integration process may allow competitors to leap ahead. 4oeing faced a ma;or crisis in its production line in the late ())/s, when its attention was entirely focussed on its integration with Mc@onnel @ouglas. ($ee 4ox item on pg. )) Much of the ris" in an M&A deal arises from the acquiring company>s inability to identify and quantify synergies accurately. Aften, the synergies which are highlighted, do not materialise, while those which may ha!e been completely o!erloo"ed become !ery important. #sually, it is years after the acquisition that it becomes clear whether the price paid for the acquisition was the right one or not. Alex Mandi, who negotiated the acquisition of Mc 8aw 8ellular on behalf of A & recalled, (( E%!erybody said we>d paid too much. 4ut with hindsight, it>s clear that cellular telephony was a critical asset for the telecommunications business and it would ha!e been a tough proposition to build that business from scratch. 4uying Mc 8aw was !ery much the right thing to do.F As mentioned earlier, it is easier to achie!e cost reduction than to boost sales. According to @ennis 3oGlows"i, 8%A of yco 'nternational (+K EMou can nearly always achie!e them because you can see up front where they are N 4ut there>s much more ris" with re!enue enhancementsO they are much more difficult to implement.F 3oGlows"i adds that people are often too optimistic about re!enues. 1hen 8itiban" merged with ra!elers, the merged entity quic"ly reaped profits from cost cutting, but its expectations on cross selling different financial ser!ices to customers did not quite materialise. 6owe!er, achie!ing re!enue enhancement through an acquisition, though difficult, is not impossible. 1hen the specialty chemical company, Cohm and 6aas acquired Morton, it aggressi!ely used the acquired company>s expertise in polyurethane adhesi!es and powder coatings and its access to new mar"ets, to generate more sales. he ime 1arner- urner 4roadcasting $ystem merger was also quite successful in this regard. he
(( (+

6ar!ard 4usiness Ce!iew, May-&une +///. 6ar!ard 4usiness Ce!iew, May-&une +///.

AA9-time 1arner merger has also shown a lot of promise for cross selling, though it is too early to pass a final ;udgment.

Arri(ing at the premium

Ane of the most thoughtful analyses of the premium in!ol!ed in acquisitions is pro!ided by 7orter(.. 7orter points out that an efficient mar"et precludes the possibility of the new company generating more returns than what the pre-merger entities generated before the merger. 'f the management of the acquired company is sound and the company itself has a bright future, its mar"et price would already ha!e been bid up. An the other hand, if its future is blea" or the management is wea", the stoc" price could be low, but the infusion of capital and effort required to turn it around could also be massi!e. As 7orter puts itK E o the extent that the mar"et for companies is wor"ing efficiently, then, the price of an acquisition will eliminate most of the returns for the buyerN he mar"et for companies and the seller>s alternati!e of continuing to operate the business, wor" against reaping abo!e-a!erage profits from acquisitions. 7erhaps, this is why acquisitions so often seem not to meet managers> expectations.F 1hile acquiring a company, firms must be careful about irrational bidders with non-profit moti!es or those who are pursuing the deal purely because of the idiosyncrasies of the top management. 'n the race to the finishing line, companies may end up paying too high a price because of the influence of such bidders. he board should exercise some control in such situations. According to $irower, the acquiring company must consider the following while wor"ing out the premiumK Mar"et expectations about the acquired company, when considered alone. 'mpact on competitors and their possible responses angible performance gains from the merger and the management talent necessary to achie!e the gains Milestones in the implementation plan Additional in!estments which will be necessary 8omparison of the acquisition with alternati!e in!estments.
he ime Warner urner +roadcasting System Merger he ime 1arner ( 1) 2 urner 4roadcasting $ystem ( 4$) merger of ())5 has been one of the more successful mergers of our times. he two 8%As, 0erald 9e!in of 1 and ed urner of 4$ became unli"ely partners in a merger deal that few expected to clic". At the time of the merger, 4$ was in serious financial difficulty. After buying M0M in ()*< for its content, 4$ had accumulated a lot of debt. 4$ was also dependent for distribution on two cable systems companies, ele-communications 'n ( 8') and 1, which had been in!esting hea!ily in cable infrastructure. Meanwhile, 1>s competiti!e position was threatened by the merger of 1alt @isney and 8apital 8ities P A48. 1hen the merger was announced, analysts were cynical and few thought that 9e!in and urner would be able to wor" together. he two companies had significant differences in management style. 4$ managers went by instinct, while 1 was more methodical. 4$ managers initially felt uncomfortable when their decisions were sub;ected to a rigorous analysis. 4ut gradually, the two parties realised the benefits that could be reaped from the merger. 8able networ"s could buy material from the mo!ie business and le!erage the publishing assets li"e ime and $ports 'llustrated. A brand li"e 4atman could be exploited by the mo!ie studio, publishing and cable tele!ision. Many brands not only gained more !isibility but also generated more re!enues.
(.

8ompetiti!e $trategy.

1ith a presence in both content and distribution, the merged entity could change the relationship between the two to its ad!antage. 'n the past, mo!ies, reached the cable stations !ery late, typically six to eight years after they were released. 'n other words, cable was regarded as the Qend of the line>. 1ith its clout in distribution, 1 could now bring mo!ies to the cable networ" much faster. his increased subscription and cable ad!ertising re!enues. 'n!estors> perception of the merger impro!ed rapidly. 1 de!eloped the image of a formidable media company with a presence in publishing, mo!ie and tele!ision production, music, cable systems, cable networ"s and a small tele!ision broadcast networ". he strategy of using different media platforms to distribute the same piece of content seems to ha!e wor"ed. Bow, 1 has entered a new phase after the merger with America Anline. ($ee 4ox 'tem on pg. *).

4eha!ioral issues also affect the way in which the premium is arri!ed at. A study by 1harton professor, &ulie 1ulf(- has re!ealed that 8%As often stri"e deals that benefit them personally, but are not in the interests of the shareholders. 8%As of poorly performing companies and of companies in industries which are rapidly consolidating, are more concerned about retaining their position on the board rather than negotiating the best deal for their shareholders. he board has to ensure that senior management>s personal interests do not supersede the interests of shareholders, while fixing the premium.

Stock Vs Cash deals

he way the deal is financed determines how ris" is shared between the buyer and the seller. 'n general, there are two types of financial ris" faced during an acquisition 2 the fall in the share price of the acquiring company from the time of announcement of the deal to its closing, and the possibility of synergies not being realised after the deal is closed. 'n a cash deal, the acquiring company assumes both the ris"s completely. 'n a stoc" swap, where a fixed !alue of the acquiring company>s shares is offered to the acquired company, the first ris" remains with the acquiring company, but the second ris" is shared by the two companies. 'n a stoc" swap where a fixed number of shares is offered to the acquired company, both the ris"s are shared between the two companies. he method of financing the deal is influenced by se!eral factors. 'f the acquirer feels its shares are under!alued, it prefers a cash deal as any fresh issue of shares would further erode the wealth of existing shareholders. 'f the acquirer is !ery confident about actually realising the pro;ected synergies, a cash deal ma"es sense. 1here such confidence is lac"ing, a stoc" deal allows the ris" to be at least partially hedged. 'n general, a fixed !alue offer is an indication of greater confidence on the part of the acquirer than a fixed number of shares and tends to be better recei!ed by the mar"et. A fixed share offer, ironically enough, by minimising the pre-closing mar"et ris" for the acquirer, acts as a "ind of self fulfilling prophecy and dri!es the share price downwards.

Integration
Many mergers fail at the integration stage. $o, it is important to understand the ris"s in!ol!ed in integration and the ways to manage these ris"s. All acquisitions must begin with a strategic !ision, which should ser!e as a guide for the integration process. here should also be an operating strategy which addresses the issue of how the !alue chain performance can be impro!ed, whether competitors will react aggressi!ely, and if they
(-

"nowledge.wharton.upenn.edu. &anuary -, +///.

do, how they can be dealt with. :ision and operating strategy must be bac"ed by proper systems and processes to align the beha!ior of managers with corporate ob;ecti!es. $ome operations should be tightly integrated while others should be left alone. 1hat to integrate and what to lea!e alone is a matter of ;udgement but there are some guidelines, that could pro!e useful. 1e will co!er this point later in the chapter.
he A,- ime Warner Merger An &anuary (/, +///, America Anline (AA9) and ime 1arner ( 1) announced that they were merging. Hor all practical purposes, the deal was a re!erse ta"eo!er by AA9. 1hile the icon of the internet world had ;ust +/? of 1>s re!enues and (5? of its wor"force, its large mar"et cap made it the senior partner. AA9 shareholders recei!ed one share in the merged entity while 1 shareholders got (.5 shares for each of their existing shares. AA9 shareholders owned 55? and 1 shareholders -5? of the new company. %ffecti!ely, AA9 paid a premium of =(? o!er the mar"et !alue of 1. he combined entity was !alued at ,.5/ billion. hough the two companies were confident of boosting re!enues, many analysts expressed concerns that the merger would slow down AA9 and rob it of its entrepreneurial dri!e. AA9 howe!er, remained confident that 1>s cable networ" and content would generate new growth opportunities. 4efore the announcement of the deal, 1 shares traded at a multiple of (- times %4' @A (%arnings 4efore 'nterest ax depreciation and Amortisation ) while AA9 shares traded at a multiple of 55. he immediate reaction to the deal was negati!e. 4y &anuary (+, the combined mar"et capitalisation was actually lower at ,+</ billion, compared to ,+=/ billion before the announcement. he mar"et !alue of AA9 shares fell by ()? while that of 1 shares went up by ,++ billion. AA9 which had a strong brand and en;oyed a large customer base was clearly one of the pioneers in the new economy. 6owe!er, anticipating the rapid commoditisation of the 'nternet access business, AA9 realised it needed the Qpipes> of cable tele!ision to carry 'nternet content. Moreo!er, AA9 did not really ha!e much content of its own. 't decided to mo!e fast and ma"e full use of its high mar"et capitalisation. 'n Actober ())), $te!e 8ase, 8%A of AA9 called 1 8%A, 0erald 9e!in to discuss the merger, 9e!in sensed an opportunity as his company>s stoc" was not doing particularly well in the mar"et. 'n @ecember ())*, 1 had been worth more than AA9. 4ut by @ecember ())), AA9>s worth was +.5 times that of 1. Duite clearly, 1 was on the decline. 8ase also sweetened the deal for 1 by in!iting 9e!in to be the merged entity>s 8%A. After the merger was announced, the Hederal rade 8ommission (H 8) began to interrogate the senior executi!es of the two companies to determine whether the merger would come under the pur!iew of anti trust legislation. 8ase and 9e!in refused to accept a demand by H 8 to regulate the placement of AA9- 1 content. 6owe!er, they agreed to report any complaints from competitors if they were denied AA9- 1 content. E9ow hanging fruitF synergies were quic"ly identified. 8BB.com programs could be featured on AA9, while AA9 discs would be bundled with 1 product shipments. 1arner mo!ies could be promoted on AA9-owned Mo!iefone. he merged entity could offer boo"s, mo!ies, magaGines and music to customers on :, paper, 78, cell phone or any of the other wireless de!ices. %!en as the H 8 was in the process of appro!ing the merger, integration efforts began. 'nterdi!isional committees were set up to facilitate the integration. %fforts to generate cross selling opportunities in the areas of subscriptions, ad!ertising and promotions began. An attempt to sell 'M%>s magaGines through AA9 was !ery successful. A year later, the merger was showing signs of trouble. he pro;ected re!enue growth of (+-(5? and ,( billion in cost sa!ings loo"ed way off target. According to Merrill 9ynch estimates, growth would only be ((?, while losses would cross ,5 billion due to merger write-offs. A slowing #$ economy and a sharp cutbac" on ad spending by companies was hitting growth. 4y early +//(, AA9>s stoc" had dropped by -*? to ,.=.5/. ($ee graph showing the stoc" price mo!ement). Ane positi!e feature of the merger is that the transition at the highest le!el of management has been smooth. 9e!in has been clearly in charge of both day-to-day operations and "ey strategic and personnel mo!es. 8ase has disengaged from day-to-day operations to concentrate on macro le!el issues. 'n

(/

an email to ,ortune(5# 8ase said that the management set-up "ept him informed about what was happening and allowed him to pro!ide his perspecti!e where required, without in any way meddling with the day-today operations. 't is now clear that the fortunes of AA9- 1 are closely tied to the erstwhile AA9 group. Many of the top executi!e positions ha!e gone to AA9. Most of its senior executi!es are still around, (* months after the merger was announced. 1hile AA9>s performance in the first quarter of +//( was good, 1 has continued to struggle due to falling ad!ertising re!enues. Moreo!er, ma"ing 6ollywood mo!ies remains an unpredictable, low margin business. he mar"ets percei!e the integration to be still incomplete. 'n response to the +//( second quarter results, the share price declined by )? e!en though %@' @A ;umped by +/? o!er the pre!ious year. 8ultural differences continue to be a formidable barrier to the integration process. As the -conomist(6 recently reportedK E here is a wide cultural gap between the restless +/ 2 somethings from AA9 and Bew Mor" institutions such as the =* year old ime 'ncN here is much grumbling among ;ournalists (at ime 1arner)N about a new tightness with money and the fears, this has prompted for editorial quality.F AA9 feels things are mo!ing in the right direction. As an example of the synergies being generated, it cites a recent Madonna world tour arranged by 1arner 4rother Cecords, in which AA9 subscribers can buy ad!ance tic"ets and see unreleased photos and !ideos. AA9 remains confident that its community can be persuaded to buy a range of entertainment products.

AOL Time Warner

100 90 80 70 Merger

US $

60 50 40 30 20 1/1/00 3/1/00 5/1/00 7/1/00 9/1/00 1/1/01 3/1/01 5/1/01 7/1/01 9/1/01 11/1/99 11/1/00 11/1/01 1/1/02

Date Closing Stock Price

he ()*< merger of 4orroughs and $perry illustrates some of the difficulties in!ol!ed in the integration of pre-merger entities. he two computer ma"ers who came together to form #nisys, felt that the merger would generate economies of scale, impro!e efficiencies and boost price competiti!eness. he integration of the distribution systems was howe!er a disaster. he companies had different order-entry and billing procedures. After the attempted integration, equipment orders were executed late and customers were frequently frustrated by delayed deli!ery. 4y Bo!ember ())/, the stoc" price of #nisys was only ,. per share. About )/? of shareholder !alue had been destroyed.
(5 (<

&uly +., +//(. &uly +(, +//(.

((

he ()*< acquisition of Cepublic Airlines by Borthwest Airlines also ran into integration problems. he two computer systems could not be synchronised. 'ntegration of crew and gate scheduling and human resources functions also ran into serious problems. Cepublic>s employees, on an a!erage, drew lower salaries than those of Borthwest. 9ow morale led to a deterioration in customer ser!ice. 'n August ()*=, a Borthwest plane crashed after ta"ing off from @etroit. Matters continued to worsen till ()*), when Borthwest was bought out by a group of pri!ate in!estors. 7ersonal chemistry, especially at the top, matters a lot during the integration of the pre-merger entities. 'n general, it is ad!isable not to ha!e two bosses. @ecisi!e leadership is best pro!ided by a single indi!idual, not by a two-man team or a committee. 'ndeed, if two co-8%As are named after the merger, there will ensue a period of uncertainty during which people wait to see who finally gains the upper hand. 'n the 8iticorp- ra!ellers 0roup merger, $andy 1eill of ra!ellers has ta"en control, ousting 8iticorp>s &ohn Ceed and in the @aimler 8hrysler merger, &urgen $chrempp has gained ascendancy o!er 8hrysler>s 4ob %aton. 'n both cases, until a clear leader emerged, things were in a state of flux and employees remained confused. atenbaum(= has argued that, a top 6uman Cesources (6C) executi!e must be in!ol!ed in the negotiations before a merger deal is finalised. 6C managers usually enter much later, to deal with issues li"e compensation. 'nstead, if they ;oin the discussions at an early stage and conduct a cultural audit, potential trouble spots can be identified, !ery early on. atenbaum pro!ides se!en guidelines for managing the integration process. he integration team should build organisational capability by retaining talented manpower. atenbaum>s research re!eals that -=? of the senior managers in an acquired firm lea!e within the first year of the acquisition and =+? within the first three years. @ownsiGing acti!ities must be managed smoothly and sensiti!ely. Atherwise, they may fuel a large scale exodus of people. A related issue is finding the right roles for the people. 8isco for example tells employees clearly what their new ;obs will be after the merger and to whom they will report. $ystems and procedures that are implemented must be in line with the strategic intent of the acquisition. Hor example, bureaucratic procedures can be highly counterproducti!e if the acquired company is "nown to ha!e a flexible, entrepreneurial culture. he integration team must identify the cultural traits that are consistent with the business goals of the merged entity and ta"e steps to spread them across the two entities. he team must manage cultural differences by collaborating with managers throughout the organisation. $uperordinate goals can be set to moti!ate the two entities to wor" together. 7ost merger drift tendencies should be minimised by managing the transition quic"ly. 'f decisions and changes are not implemented fast, the acquirer may become focussed on internal issues and lose sight of customers and competitors. @ecisions about layoffs, restructuring, reporting relationships, etc must be made within days of the deal being signed and communicated quic"ly to the employees. 6owe!er, care must be ta"en to ensure that people are treated with respect and sensiti!ity.
(=

ArganiGational @ynamics, Autumn ())).

(+

6earing of employees tends be selecti!e during the early days of a merger, when anxiety le!els are high. $o, some messages may ha!e to be repeated. 4esides internal communication with employees, management must also "eep external sta"eholders such as customers, !endors and the community informed. 1hen a company has decided to pursue a strategy of growth by acquisitions, clearly defined integration plans can be helpful. he company should identify the team which will conduct the due diligence and the team which will plan and implement the merger. 8hec"lists must be prepared to indicate the tas"s and suggested deadlines. 8isco, which ma"es acquisitions at regular inter!als, uses a standard business process for managing acquisitions.

he +oeing Mc .onnell .ouglas Merger 'n ())., the #$ go!ernment announced that its military procurement budget was being cut by 5/? and informed defence contractors that they must consolidate. Ane company which loo"ed at the turn of e!ents with concern was Mc @onnell @ouglas (M@), a leading manufacturer of military aircraft. Meanwhile, the much stronger 4oeing realised that its excessi!e dependence on the cyclical mar"et for ci!il aircraft was ris"y. o address this concern, it acquired a ma;or sta"e in Coc"well 'nternational, a defence supplier. 1hen M@ realised its competiti!e position was deteriorating rapidly, it e!en considered acquiring the defence businesses of 6ughes %lectronics and exas 'nstruments. At this point, 4oeing 8%A, 7hil 8ondit and M@ 8%A, 6ary $torecipher felt that the time had come to re!i!e merger tal"s which had failed in ())5. 4oeing "new that if M@ went ahead with other acquisitions, it would be priced beyond its own reach. $o, it rushed to close the deal. he merger was announced in @ecember ())< and recei!ed appro!als from competition authorities in the #$ and %urope by August, ())=. After the merger, 4oeing ran into problems on account of a factor it had totally failed to anticipate. 'n the wa"e of competition from Airbus, it had aggressi!ely boo"ed orders by slashing prices. 1hen demand rose sharply, 4oeing>s production system was thrown out of gear. @ue to a parts shortage, much wor" had to be done outside the normal production system. 4y $eptember ())*, 4oeing was in big trouble. 't had to ta"e a charge of ,- billion. Duite clearly, the tas" of implementing the merger had distracted the attention of the top management from operational issues. 'n Hebruary ())), 4oeing>s share price reached a low. 8ondit warned his top management that the company was a potential ta"eo!er target. hese were rumours that 0% had its eyes on 4oeing, but 0% denied them. 4oeing made some changes in senior management and put in place a new organisation structure with different businesses focussed on different customer needs. 't decided to tap new businesses such as broad-band communications, satellite na!igation for air traffic controllers and ser!ices such as running airforce bases. 4oeing also realised the importance of sharing "nowledge and le!eraging its research capabilities across the organisation. 7hantom 1or"s, the C&@ centre of M@ became the focal point for new initiati!es to impro!e manufacturing processes across the group. he idea was to integrate the expertise of 4oeing, M@ and Coc"well, through both short-run and long-run programs. 9oo"ing bac", it is quite e!ident that the 4oeing-M@ merger was not really well planned. he integration process was faulty and consumed a lot of precious management time. 8ore functional areas did not recei!e the attention they needed. Most of the synergies realised came by sheer chance than by any great planning. An important lesson from the 4oeing 2 M@ merger seems to be that synergies often come in areas where they are least expected. 'ource. This box item draws heavily from the article# /uilding a new /oeing#% The -conomist# ugust (0# 1000.

(.

Boeing
73 68 63 58 53 US $ 48 43 38 33 28 23 1/3/97 5/3/97 1/3/98 5/3/98 9/3/98 1/3/99 5/3/99 5/3/00 9/3/00 1/3/01 5/3/01 9/3/01 1/3/02 9/3/97 9/3/99 1/3/00 Merger

Date

Closing Stock Price

Understanding the role o) communication

8ommunication plays an important role during the integration of the pre-merger entities. 0enuine communication increases the percei!ed bene!olence of the management and consequently promotes trust. 't minimises the negati!e reactions of employees in the acquired company. As a popular saying goes, the certainty of misery is better than the misery of uncertainty. 9ac" of communication increases uncertainty and wea"ens the confidence of employees in the management. A good communication strategy is necessary to ensure that rumours are not allowed to fill the information gap. %mployees must be informed about the acquiring company, the proposed changes and the impact of these changes on the employees. All efforts should be made to reassure the employees of the acquired firm and ma"e them understand the intentions and philosophy of the acquiring company. 'n the case of cross-border acquisitions, the role of communication is e!en more critical. 'mmediately after the acquisition, employees need to "now what will happen to their ;ob, their colleagues and their company. 't is only through honest communication that their anxieties can be set at rest. 6ere, the quality of communication is the o!erriding factor. 9ater, when employees ha!e to ad;ust to the changes, frequency of communication becomes important. Hrequent communication howe!er does not mean that all details must be communicated, especially when the management itself is not clear about what will happen. A high le!el of transparency will send the right signals to the employees e!en if all the information cannot be shared with them. Acquirers also need to demonstrate to the employees of the acquired company that there will be consistency and openness in the new en!ironment. 1hen 'ntel acquired 8hips & echnologies in ())=, it decided to integrate it with one of its di!isions, though it had at first announced that it would "eep it as a separate unit. Many "ey people left and

(-

the benefits of the acquisition were sharply undermined. $imilarly, when '4M acquired telecommunication equipment ma"er Colm in ()*-, it made the mista"e of dictating terms to the acquired company>s employees. $ome "ey technical employees left. he ta"eo!er was not effecti!e and '4M sold Colm to $iemens.
/rance elecom& 0ro1th !y acquisitions leads to huge de!t !urden 1ith its traditional telecom business shrin"ing due to deregulation and intensifying competition, Hrance elecom (H ), has been strengthening its presence in faster growing segments such as mobile phones and internet ser!ices. #nder 8%A Michel 4on, H has purchased Arange, the mobile phone ser!ices pro!ider for ,-/ billion, Hree $er!e, 4ritain>s biggest internet ser!ice pro!ider, for ,+.5 billion and %quant, the data ser!ices pro!ider, for ,- billion. he go!ernment controlled H is now %urope>s second largest cell phone company after :odafone. 't has ;oined Anline and elefonica as one of the leading '$7s in %urope. H generates (early +//( figures) almost +/? of its re!enues outside Hrance, compared to only +? fi!e years bac". Acquisitions ha!e bolstered H >s mar"et share, but resulted in a debt burden of some ,5. billion. he company faces a cash crunch at a time when it has to in!est hea!ily in next generation wireless networ"s, which ha!e long gestation periods. 'n!estors are worried about H >s financial health and ha!e dri!en down the share price by almost </? during the period early +/// to early +//(. 4on himself has admitted, Q't>s frightening.> Anly time will tell whether H will be able to manage the ris"s arising out of its aggressi!e acquisition strategy. 'ource. )arol Matlac" and 'tanley 2eid# ,rance Telecom3s 455 billion burden#% /usiness !ee"# 6anuary 7# 100(# pp. 11$15.

France Telecom
220 200 180 160 140 120 100 80 60 40 20 10/20/99 10/20/00 10/20/97 10/20/98 10/20/01 1/20/98 4/20/98 7/20/98 1/20/99 4/20/99 7/20/99 1/20/00 4/20/00 7/20/00 1/20/01 4/20/01 7/20/01

US $

Date Closing Stock Price

(5

he +ayerische Vereins!ank 2ypo!ank Merger 'n &uly ())=, the two 4a!arian ban"s, 4ayerische :ereinsban" and 6ypoban" merged to form 6ypo :ereinsban" (6:4). he mo!e seemed to ma"e sense in the context of 0ermany>s inefficient and fragmented ban"ing mar"et. he two ban"s were long time ri!als, located close to each other. 1ith a similar branch networ" and a similar mix of businesses, they identified se!eral opportunities to cut costs. 6:4 also hoped the merger would enable it to become a ma;or player in the 0erman mortgage ban"ing mar"et. 6owe!er, the merger was more a reaction to the pre!ailing circumstances than a proacti!e, wellthought-out strategy. :ereinsban" was on the !erge of a hostile ta"eo!er by @eutsche 4an". 't had approached 8ommerGban" for support in warding off this ta"eo!er attempt but later resigned itself to a deal with 6ypoban". An its part, 6ypoban" e!en though it was ma"ing decent profits was worried about being ta"en o!er by @resdner 4an". 4a!arian politicians acti!ely supported the merger as they wanted to create a national champion. his was a part of their grandiose plan to con!ert Munich into a financial centre that could ri!al Hran"furt. he go!ernment offered a one-off tax wai!er on the exchange of shares in!ol!ed in the transaction. 1ithout this concession, the merger might not ha!e gone ahead. 't was quite clear that se!eral issues had been left unresol!ed at the time of the merger. Moreo!er, there was tension in the air due to rumours that :ereinsban">s ultimate goal was a ta"eo!er of 6ypoban". Albrecht $chmidt, the head of :ereinsban", too" charge of the merged entity. :ereinsban" too" nine of the (- seats on the 4oard of Management and also gained control o!er many "ey departments. %benhard Martini, the 8hief of 6ypoban" decided to mo!e on to the more ornamental $uper!isory 4oard. (#nder 0erman laws, limited companies typically ha!e two boards, a 4oard of Management, !ested with executi!e powers and a $uper!isory 4oard which o!ersees the functioning of the 4oard of Management). hese mo!es were howe!er, consistent with Martini>s delegating philosophy and $chmidt>s hands on management style. Martini>s hands-off-approach could also ha!e been due to 6ypoban">s non performing assets (B7A) in the property business. hese assets had resulted from 6ypoban">s aggressi!e lending in %ast 0ermany during the construction boom following 0erman unification. Anly a year after the merger, did the seriousness of the bad loans problem become e!ident. 'n Actober ())*, $chmidt announced that loan pro!isions of ,+.( billion would ha!e to be made. 6e also hinted that these losses had been co!ered up by 6ypoban". his led to a serious clash with Martini. he merged entity>s reputation was damaged. 7eople felt that a bac"room struggle was going on between the chief executi!es of the pre-merger entities. Anly in Actober ())), after an auditor submitted his report, was $chmidt>s assessment !indicated. Martini and the four remaining members on the 4oard of Management, from 6ypoban" resigned. 9ater, $chmidt signalled peace by putting ex-6ypoban"ers in charge of the property di!ision and gi!ing them many of the top ;obs in accounting and controlling. Meanwhile, the integration proceeded smoothly. 5// o!erlapping branches were closed. Much of the systems integration was also completed in less than three years, well ahead of schedule. 'n May +///, encouraged by the performance of 6:4, $chmidt announced he was acquiring 4an" Austria, the biggest ban" in Austria. 'ource. This box item is drawn heavily from the article# /avarian botch$up#% The -conomist# ugust 5# 1000# pp. 67$68.

Understanding the importance o) cultural di))erences

More often than not, significant cultural differences exist between the pre-merger entities. Managing these cultural differences is the strategic challenge during integration. 8onsider the following examples. he merger of #3-based 4eecham and the #$ based $mith3line in!ol!ed not only two national cultures but also two business cultures - one !ery scientific and academic and the other more commercially oriented. he American pharmaceutical company, #p;ohn>s centralised and aggressi!e culture clashed with $wedish ma;or 7harmacia>s decentralised laid bac" management style.

(<

After the merger between @aimler 4enG and 8hrysler, the 0ermans and Americans ha!e struggled to understand each other and their ways of wor"ing. @aimler>s bureaucratic engineering culture in which different departments wor" separately has clashed with 8hrysler>s free-wheeling, cross-functional product de!elopment approach. ($ee case at the end of the chapter). 8ultural clashes can be significant in industries such as the media, where egos tend to be big. his was so in the case of the ()*) merger between ime and 1arner. 8ultural differences became an important issue when Aetna, a tradition-bound, stodgy and slow-mo!ing organiGation merged with #$ 6ealthcare, generally considered to be a brash, aggressi!e and entrepreneurial 6ealth Maintenance Arganisation (6MA). 8iticorp>s staid buttoned-down world of traditional commercial ban"ing has had to ta"e on ra!eller group>s free wheeling, deal ma"ing, in!estment ban"ing culture. Ane pressing issue in this merger has been the o!erbearing attitude of in!estment ban"ers who are typically paid much higher salaries than their counterparts in commercial ban"ing. ($ee case at the end of the chapter). he %xxon-Mobil merger has also seen the coming together of two contrasting cultures. %xxon is generally considered to be independent and not particularly good at managing the media. Mobil on the other hand, is more accessible, accepts new ideas and is good at public relations. %xxon>s slow decision-ma"ing processes focus on cutting costs, while Mobil has been "nown to ta"e big ris"s. 't mo!ed into central Asia in the aftermath of the brea"-up of the $o!iet #nion, ahead of many other oil companies. 8ultural problems ha!e been an important issue in the AA9- ime 1arner ($ee 4ox item the end of the chapter) and BorwestP1ells Hargo deals as well.
Cisco& 0ro1th through Acquisitions

'n technology-dri!en businesses, mergers and acquisitions (M&A) gi!e quic" access to new s"ills, competencies and people. $ince $eptember ())., 8isco has acquired =. companies. 'n spite of the recent slowdown of the #$ economy, the company has not gi!en up acquisitions. . 'n +//(, (till Actober), 8isco completed four acquisitions. 'n Actober +//(, &ohn 8hambers, 8isco>s 8%A announced that the company would buy eight to (+ small companies in the near future, primarily in the fibre optics business. 4efore ma"ing a new acquisition, 8isco assesses the merits and downsides. 't examines the target company>s !ision, its success with customers, its long-term strategy, its compatibility with its own culture and its geographic proximity to 8isco. A team headed by Mi"e :olpi (:olpi), senior !ice president, (4usiness @e!elopment and Alliances), examines the depth of talent of the target company, the quality of the management and !enture funding. he engineering team examines the technology, while the finance executi!es scrutiniGe the company>s boo"s. :olpi>s team consults 8isco>s business units and customers to "now more about their technological needs. $ometimes, customers influence 8isco>s acquisition strategy. Hor example, in March ())*, at the instance of #$ 1est, an important customer, 8isco acquired Betspeed, which made high-speed 'nternet access products for home users. 8isco has a separate integration team, which tailors the integration process to suit the specific needs of each new acquisition. he team assembles a customiGed pac"et of information that includes a description of 8isco>s organiGational structure and employee benefits and the strategic importance of the newly acquired company. 'mmediately after an acquisition is announced, 8isco>s human resource and business de!elopment teams tra!el to the acquired company>s headquarters and meet people in small groups to set expectations and clarify doubts.

(=

8isco>s integration team collaborates with the acquired company>s management in EmappingF employees based on their experience. 'n general, product engineering and mar"eting groups remain as independent business units, while sales and manufacturing groups are merged into 8isco>s existing departments. he integration team puts the employees of the acquired company through a tailor-made orientation program, that introduces them to 8isco>s hiring practices, its products and de!elopment pro;ects. An August +<,())), 8isco announced that it was paying ,<.) billion (in a stoc" deal) to acquire 8erent, a two year old start-up, with cumulati!e sales of only ,(/ million. 8erent>s technology integrated !oice and data traffic and Gipped into optical fibres efficiently. 8isco !iewed 8erent>s technology as critical for lin"ing the 'nternet and telephone systems and for ta"ing on ri!als li"e Bortel Betwor"s. 8hambers won o!er 8erent 8%A 8arl Cusso by assuring him that all personnel decisions concerning the employees of the acquired company would be made ;ointly. $ome of 8isco>s acquisitions ha!e made a significant contribution to its growth. 8rescendo 8ommunications, acquired for ,)5 million in ())., generated re!enues of ,= billion in +///. 6owe!er, not all the deals ha!e been successful, a good example being 0ranite $ystems, for which 8isco paid ,++/ million in stoc". 8isco>s in!estment in Ardent 8ommunications, (whose product range includes integrated !oice, !ideo and data equipment that can connect a company>s branches with its headquarters) has also not been !ery successful. hough 8isco obtained two seats on the board and wor"ed closely with Ardent>s engineers, :olpi later ac"nowledged that 8isco had interfered too much in the acquired company>s operations and that results had not been satisfactory. Another acquisition which has run into trouble is Monterrey (())(). 1hen it was acquired, Monterrey was two years old and a year away from a mar"etable product. Cecently, 8isco dropped the Monterrey wa!elength router from its product line. 9oo"ing bac", analysts feel the company was acquired too early in its life. 8isco has written off ,(/* million from the ,5(= million acquisition. Many of 8isco>s acquisitions ha!e been funded with its highly !aluable stoc". 6owe!er, it has also used cash or a combination of both stoc" and cash to fund acquisitions. he way in which the purchase is funded depends on the ob;ecti!es of 8isco and the target company, the tax implications and finally liquidity. 8isco>s share declined from a pea" of ,*/./< in March +/// to ,((.-* in early +//(. $o, the company will presumably use more of its ,(*.5 billion cash pile, rather than its stoc" to ma"e acquisitions in the immediate future. A recent change in the method of accounting in the #$ will ha!e a significant impact on 8isco>s future acquisition plans. All deals ha!e to be classified as purchases. his means goodwill, the difference between the purchase price and the !alue of assets, must be written off, if impaired. 8isco has traditionally used the pooling method of accounting in which no goodwill is created. 'n pooling, at least )/? of the purchase must be conducted in stoc". Ane of the reasons for the relati!e success of 8isco in managing acquisitions has been the clear !alue proposition it has brought to the table. he company has targeted small start-ups on the !erge of ta"eoff. #sing its well oiled distribution channels, it has been able to increase sales of the acquired company>s products significantly, in most cases. 8isco>s broad product line has strengthened its relationship with customers who li"e one company to ta"e care of their networ"ing requirements. According to 6oward 8harney, 8%A of 0rand &unction Betwor"s at the time it was acquired by 8isco (*, E%!en though at moments, it was painful, what sa!ed it was that they wanted us to become bigger by two orders of magnitude. Aur engineers could see we really had the potential to go from 5? mar"et share to +5?F.

(*

9eading the Ce!olution.

(*

Cisco
90 80 70 60 50 40 30 20 10 0 03 01 97 03 05 97 03 09 98 03 01 99 03 05 99 03 09 00 03 01 01 03 05 01 03 09 01 03 09 97 03 01 98 03 05 98 03 09 99 03 01 00 03 05 00 03 01 02

US $

Date Closing Stock Price

3ilman(), et al, ha!e !i!idly described, the culture clashes which often ta"e place during integrationK E7icture two icebergs in the ocean, where the tip of each represents the top management groups 2 primarily financial people 2 deciding the fate of the two companies and how the merger will wor". As these top management groups set the merger in process, the two icebergs begin mo!ing towards one another until the tips meet and mesh as one. $uch a consolidation, howe!er, can ne!er ta"e place. As the icebergs approach one another, it is not the tops that meet, rather it is the much larger mass below the surface of the water, the respecti!e cultures that collide. 'nstead of synergy, there is a culture clash.F 't was mentioned earlier that a decision regarding the degree to which the premerger entities should be integrated is a matter of ;udgement. o a great extent, the degree of integration depends on cultural factors. 8layton 8hristensen +/ ma"es an interesting obser!ation on integration. 6e points out that an organisation has three broad types of capabilities 2 resources, processes and !alues. Cesources can be easily transferred, while processes and !alues are deeply entrenched and are difficult to change. 'f the acquired company>s processes and !alues ha!e been the main reason for its success, the company should be left well and truly alone. he parent company can pump resources into the acquired company. 'f a company is being acquired for its resources, tight integration may ma"e sense. Many of 8isco>s acquisitions ha!e been aimed at acquiring resources in the form of products and people. he company>s acquisitions are typically start-ups, which do not ha!e deeply entrenched !alues. 8isco typically transfers the acquired company>s resources into the parent company>s processes and systems. 'n general, management of cultural differences is a critical issue while integrating the basic
() +/

0aining control of the corporate culture, &ossey-4ass, ()*5. Cead his boo", he 'nno!ator>s @ilemma. 1e referred to this boo" in chapter '''.

()

wor" processes, and systems. 1hen the cultural differences are too sharp, it may ma"e more sense to "eep the acquiring and acquired entities separate.

Managing high tech acquisitions

Acquisition is an important growth strategy in high tech businesses. 't ta"es quite a bit of time to de!elop new technology in-house. Acquisitions not only allow a firm to ma"e use of a new technology faster, but also bring talented manpower into the organisation. 9i"e in other acquisitions, due diligence is !ery important when high tech companies are in!ol!ed. he acquiring company needs to ma"e sure that the capabilities of the firm being acquired are both unique and !aluable. A & acquired B8C in ())(, hoping that telecommunications and des"top computing technologies would con!erge. After the acquisition, A & disco!ered that substantial differences existed between its competencies in switching and B8C>s 7ersonal 8omputer (78) technology. 8onsequently, synergies were !ery difficult to achie!e. B8C>s 78 capabilities were also wea"er than what A & expected. Ad!anced Micro @e!ices (AM@) conducted a thorough chec" on Bex 0en before acquiring it in ())<. Bex 0en>s unique chip design capabilities enabled AM@ to de!elop new products and ta"e on the mighty 'ntel. All acquisitions ha!e to be managed with a high degree of sensiti!ity to people. 4ut this is e!en more so in the case of high tech acquisitions. 6ow the purchased company fits in and the role of the employees of the acquired company need to be clearly communicated. Aften, it ma"es sense to "eep the new people together in a separate di!ision and ma"e the owner of the purchased company a "ey member of the integration team. 'n particular, companies acquired for their s"ill in de!eloping brea"through technologies, must generally be allowed to continue as separate entities. :ery often, it is a good idea not to disturb the "ey technical teams of the acquired company. 4y "eeping people with complementary capabilities in one place, their producti!ity can be significantly enhanced. 1hene!er a high tech acquisition is planned, it is important to examine whether employees of the company being acquired ha!e enough incenti!e to stay. %mployees whose stoc" options are already !ested, if they sense that their importance will diminish or their creati!ity will be stifled after the merger, may decide to quit. $o, hostile ta"eo!ers are almost always bad in high tech businesses. hey create suspicion in the minds of the employees of the acquired company. Ance trust is breached, retaining talented people is !irtually impossible. 1hen 8isco acquired 8rescendo, the head of the acquired company, Mario MaGGola became a rich man. 4ut he decided to stay on rather than retire or form a new company. 8isco ga!e him plenty of responsibilities and made him the head of the company>s line of enterprise products. According to 6oward 8harney, 8%A of 0rand &unction Betwor"s, another 8isco acquisition+(, E8hambers (8isco>s 8%A) treated me li"e a peer. 6e as"ed me what ' thought and ne!er tal"ed down to me. @espite differences in siGe, 8isco treats e!ery acquisition li"e a merger of equals. 8isco deli!ered on its promise.F

+(

9eading the Ce!olution, pp. +.<-+.=.

+/

.ilemmas3parado4es in mergers and acquisitions 'low 9s quic" changeK $ome ad!ocate rapid change within the first (// days of the merger. Athers suggest a slower process that carries people along. More than speed howe!er, compassion and goal congruence are the more important factors . :nformation sharing. hough all efforts should be made to share as much information as possible, it must be "ept in mind that people caught in the process of integration will still tend to percei!e that they are not being "ept fully informed. Managing 9s coping. 't is important to ha!e a plan, but also to "eep in mind that all factors may not be fully within the control of managers. 7eople>s fears and tensions will always disrupt organisational processes to some extent. 'trategic significance. $tudies indicate that the more significant, the target is to the acquirer, the greater the li"elihood that the acquiring company will step in and ta"e control of the situation, especially when progress is below expectations. (@aimler 4enG certainly seems to be doing that to 8hrysler). his creates antagonism among !arious employee groups and pre!ents a more iterati!e, e!olutionary process that seems to characterise many successful mergers. &ong$term and short$term focus. $ometimes, integration efforts tend to ha!e an o!erly long-term focus. 6owe!er, it is often the handling of short-term people-related issues that tend to ha!e the biggest impact on the integration process. :t ta"es time. Mergers and acquisitions result in se!ere disruptions and impose a tremendous strain on those in!ol!ed. 't may ta"e up to fi!e years for the change process to be fully completed. %xpectations on both sides must be ad;usted accordingly. 'ource. *; 2is" 'ervices# -dition 5# (887.

Anti5trust issues
An important ris" in the case of mergers and acquisitions is anti-trust action. 1hene!er a big merger deal is announced, competition authorities !iew it with suspicion. 'f they feel that the merger will limit competition, they may impose se!eral restrictions on the new company. 1orld 8om>s planned ,((5 billion ta"eo!er of $print in &une +///, and the recently announced deal between 0% & 6oneywell were bloc"ed by the %uropean #nion>s competition authorities. ($ee 4ox item on the 0%-6oneywell deal in 8hapter :''). 1hen a company is big and en;oys an o!erwhelmingly large mar"et share, competition authorities tend to watch it !ery closely. a"e the case of Microsoft. he global software giant has by and large concentrated on acquiring small companies or has ta"en minority sta"es in large companies. he image of the company ma"es a difference here. A company li"e 8isco, with a !ery positi!e, friendly image will be !iewed more positi!ely by the anti-trust authorities than Microsoft, which is percei!ed to be a tough no-non-sense competitor. A more detailed discussion on anti-trust issues is included in 8hapter :''.

Managing risks in strategic alliances

Acquisitions are different from strategic alliances. 1hile an acquisition in!ol!es gaining control of another corporate entity, a strategic alliance is a more flexible and open-ended arrangement, in which the different partners retain their indi!idual identities e!en if they exchange equity sta"es. $trategic alliances offer more flexibility than acquisitions. 'n an acquisition, an unduly high premium may be paid. Another problem with acquisitions is that only a part of the acquired business may be !aluable, and along with it may come undesirable parts. 1here uncertainties about the mar"et siGe and technology are large, acquisitions can be

+(

!ery ris"y. $trategic alliances are much more flexible than acquisitions, because they generate more options.
0uide to a happy merger <uestion the logic. As" how exactly the combination will generate synergies. 'pecify roles clearly. Arri!e at an agreement o!er the degree of integration and define clearly the roles of top leaders. =esign the integration process carefully. 8ombine the pre-merger entities in ways that preser!e the anticipated sources of strategic le!erage. =on3t escalate commitment carelessly. A!oid ma"ing additional acquisitions to ;ustify the deal. 'f one deal does not clic", cut losses and withdraw, instead of throwing good money after bad. =on3t give autonomy without a clear logic. 'n some cases, the acquired company must be allowed to operate with a great degree of independence. 'n other cases, this should not be so. Autonomy should be gi!en based on the merits of the situation, not ;ust because the acquired company demands it. pply what has wor"ed in the past. 8ore practices that ha!e contributed to past success, must be applied to the new business. =on3t be carried away by favourable short$term results. 'n many cases, it ma"es sense to grant autonomy to the acquired company>s managers only after a period of sustained excellence. =on3t give "ey jobs to top executives who missed out on promotions earlier. $uch a mo!e often creates problems. hese executi!es may be upset at ha!ing been o!erloo"ed for the top ;ob. As a result, trust may become a problem o!er time. =on3t compromise on values. Bo matter how good the numbers loo", if the core !alues of the merging entities clash, the merger is heading for big trouble. 'ource. =avid !adler# The ;ew >or" Times# (887.

4ut, strategic alliances are also more difficult to manage. A Mc3insey study of -) multinational alliances conducted in the early ())/s re!ealed that two thirds of these had run into serious problems in the first two years. &oel 4lee"e and @a!id %rnst ++, Mc3insey consultants, ha!e mentioned that in many alliances, one of the partners opts out. 'n ())/, 7orter argued that strategic alliances in!ol!e significant costs in terms of coordinating, reconciling goals and sharing profits, and could at best be transitional. hus, one needs to understand the pros and cons before going ahead with a strategic alliance. Much time and effort ha!e to be in!ested in managing alliances to ma"e them succeed. According to 0ary 6amel, M!es 9 @oG and 83 7rahalad +., an alliance is nothing but competition in a different form. $ince the partner might ta"e unfair ad!antage of the situation, the strategic ob;ecti!es should be clearly defined and the company must understand how these ob;ecti!es may be influenced by the hidden agenda of the partners. 'n the late ()*/s, $chwinn, America>s largest bicycle manufacturer tied up with 0iant of aiwan, since it needed additional capacity to meet the soaring demand. he bicycles made by 0iant turned out to be cheaper and better than those made in the #$. Hrom thereon, 0iant went from strength to strength. 4y ())+, $chwinn had gone ban"rupt, while 0iant emerged as one of the leading bicycle manufacturers in the world. ypically, alliances in!ol!e a delicate balancing act between control and autonomy. 't is often the attempt made by one partner to dominate the other that leads to

++ +.

6ar!ard 4usiness Ce!iew, &anuary 2 Hebruary, ())5.

6ar!ard 4usiness Ce!iew, &anuary 2 Hebruary, ()*).

++

the brea"-up of an alliance. As 3enichi Ahmae 1? puts it, EMou cannot own a successful partner any more than you can own a husband or a wife.F Alliances often create new strategic options for the partners, who may start controlling the tas"s and competencies most critical to the success of the alliance. As a result, the sharing of benefits may become lopsided. 't is precisely because of such difficulties that strategic alliances ha!e to be concei!ed and structured carefully. 4efore going ahead with an alliance, companies should carefully analyse the !alue chain to determine which acti!ities should be retained internally and which can be shared with partners. 't is also important to examine carefully whether the scope of the alliance should be limited to start with and expanded o!er time. A related issue is whether to choose one partner for many acti!ities or different partners for different acti!ities. @nintended lea"age of "nowledge is a big ris" in strategic alliances. 1hile friendly relations between the partners are desirable, information lea"age must be discouraged by putting in place proper controls and firewalls. 'ndeed, occasional complaints from the partner that lower le!el employees are not pro!iding the necessary information should be !iewed as a positi!e indication. he company which systematically monitors the type of information the partner is requesting and the extent to which these requests are being met, may well turn out to be the ultimate winner. A systematic and pragmatic approach right from the negotiation stage can minimiGe ris"s in strategic alliances. he executi!es in!ol!ed in the negotiation should be allowed sufficient time to get to "now each other and to de!elop personal equations. Hree and fran" discussions and realistic targets will help the firm a!oid future disappointments. he partners should painsta"ingly identify potential problems and de!ise ways to sol!e them. 8risis situations should be anticipated and a code of beha!iour prescribed for dealing with them. 't may also be useful to maintain written records of informal and oral commitments and agreements. hese records can be referred to, as and when disputes arise. 9i"e in many other business acti!ities, top management commitment holds the "ey to the success or failure of an alliance. 1hen senior executi!es of the companies in!ol!ed are willing to in!est time and effort in building strong personal relationships with each other, the chances of success multiply. he success of a strategic alliance depends critically on the partners> commitment to learning. 1hen top management sends out clear signals that learning is !ery important, employees ta"e the message seriously. he top management should also properly brief the lower le!el employees on what can be learnt from the partner and how this "nowledge will strengthen the company>s competiti!e position. %mployees can be trained and encouraged to as" probing questions such asK 1hy is their design betterJ 1hy are they in!esting in a technology when we are not doing soJ 8ompanies can also learn more about the competiti!e beha!iour of their partners - how they respond to price changes, how they launch a new product, etc. Management of expectations is a crucial issue in strategic alliances. 1hen two partners !iew an alliance differently, they may ha!e different expectations. Hor example, one may treat it as an acquisition while the other may belie!e it to be an equal partnership. Ane way of bridging this gap is for each partner to put itself in the other>s
+-

he 4orderless 1orld, p (().

+.

shoes. he partners could also share with each other, the problems they ha!e faced in the past while managing alliances. At the same time the differences between the past experiences and the new situation should be appreciated. 7eople who will be acti!ely in!ol!ed in the negotiation should be carefully selected. Managers who are familiar with the cultural differences and command respect in their respecti!e organiGations will come off as more credible when they interact with their counterparts in the partner company. Alliances can run into rough weather for !arious reasons. he siGe of the mar"et may ha!e been o!erestimated at the time the alliance was formed. 'f technology is changing rapidly, the !alue of the alliance for each partner may change dramatically o!er time. he actions of competitors can turn a potentially attracti!e alliance into a wea" arrangement. Cegulatory changes, in industries which go!ernments !iew as strategic, may totally upset the initial calculations of alliance partners. Hor all these reasons, partners may switch loyalties. he right approach to deal with these potential problems is to thin" and act flexibly. According to 6amel and @oG+5K E8alls for commitment ma"e good rhetoric but are a poor basis for action. 8ommitment increases only o!er time and an uncritical belief in commitment is nai!e and misleading. 7eople being largely ris" a!erse, will always be tempted to hedge commitments and "eep their options open in the face of uncertainty.F Alliance partners must appreciate that their ob;ecti!es are bound to change with time and not cling to the initially set ob;ecti!es. 'ndeed, if the partners are alert, unforeseen opportunities for "nowledge generation and sharing can be tapped. Ane common reason for conflicts is that one partner may ha!e s"ills that are not easily transferable, while the other may ha!e expertise which can be more easily pic"ed up. he design of a component or a product can normally be learnt through a manual or an engineering drawing. An the other hand, manufacturing s"ills are more intricate, typically de!eloped o!er a period of time and combine se!eral competencies. A discrete, stand-alone technology, such as the design of a semi conductor chip, can be more easily transferred than a process competence. &apanese companies often tend to learn more from their American partners because their manufacturing s"ills are less transferable than the design s"ills of western companies. 8ontrary to popular notions, absence of conflicts may not necessarily imply that the alliance is succeeding. 't is quite possible that the two partners ha!e Qgi!en up> or one partner is dominating the other. Accasional conflicts may reflect a more normal situation. he tric" ob!iously lies in managing these conflicts tactfully.

Concluding 6otes
'n this chapter, we ha!e tried to understand the ris"s associated with mergers, acquisitions and strategic alliances. 'n their anxiety to close the deal or in their enthusiasm to grow, companies often stri"e deals of questionable merit. A dispassionate analysis of the potential benefits and pitfalls in!ol!ed is important before going ahead with a merger or a strategic alliance. 4oard members ha!e an important role to play here, especially the external directors. 8%As must be thoroughly grilled and as"ed to explain the benefits of the merger. Ance the decision to go ahead with the merger is announced, the focus shifts to integration. his is a tas" which is underestimated by most companies.
+5

'n their boo", Alliance Ad!antage.

+-

'n the final analysis, it is the efficiency with which the integration process is managed that decides whether the pro;ected synergies materialise. he difficulties in planning and executing acquisitions and alliances ma"e them !ery ris"y. Managers should ne!er underestimate these ris"s when they stri"e such deals.

+5

Case 7*% 5 he .aimler Chrysler Merger

Introduction
An May <, ())*, two of the world>s leading car manufacturers, @aimler-4enG and 8hrysler, agreed to combine their businesses to form the third largest automobile company in the world in terms of re!enues, mar"et capitaliGation and earnings (fifth in terms of the number of units of passenger-cars and commercial !ehicles sold). 'n the new company, called @aimler8hrysler (@8R) &uergen % $chrempp and Cobert &.%aton the 8%As of @aimler and 8hrysler respecti!ely were named co-8%As. 4oth appeared confident that the merger would generate !arious synergies and growth opportunities. $chrempp remar"ed+<, E he two companies are a perfect fit of two leaders in their respecti!e mar"ets. 4oth companies ha!e dedicated and s"illed wor"forces and successful products, but in different mar"ets and different parts of the world. 4y combining and utiliGing each other>s strengths, we will ha!e a pre-eminent strategic position in the global mar"etplace for the benefit of the customers. 1e will be able to exploit new mar"ets, and we will impro!e return and !alue for our shareholders. his is a historic merger that will change the face of the automoti!e industry.F According to %aton, E4oth companies ha!e product ranges with world class brands that complement each other perfectly. 1e will continue to maintain the current brands and their distinct identities. 1hat is more important for success is our companies share a common culture and missionNN. both clearly focussed on ser!ing the customerNN.. both ha!e a reputation for inno!ation and qualityNN.. 4y realiGing synergiesNNN we will be ideally positioned in tomorrow>s mar"et placeF.

Chrysler
'n ())., the 8hrysler board had appointed Cobert %aton, then a senior 0eneral Motors (0M) executi!e, as the new chairman and 8%A, following the legendary 9ee 'accoca>s retirement. %aton di!ested unrelated businesses to concentrate on car and truc" ma"ing acti!ities. 6e emphasised quality and efficiency, strengthened the balance sheet by reducing debt and increased 8hrysler>s commitment to new product de!elopment. 4y ())5, 8hrysler>s position had significantly impro!ed. 8hrysler reported net earnings of ,+.- billion in ())., ,..= billion in ())- and ,+ billion in ())5. 'n ())=, Horbes which selected 8hrysler as the Q8ompany of the Mear>. mentioned+=K EBo company in recent years has faced greater odds than 8hrysler. $tarting as a wea" number three in a murderously competiti!e business facing competitors with far greater resources, 8hrysler management de!ised a disciplined strategy out of chaos and rose to the top of the American car industry in profitability.F %aton recei!ed praise from analysts for ma"ing 8hrysler a customer oriented company and for de!eloping a close "nit team of talented managers dri!en by a clear !ision.

+< +=

7ress release, May =, ())*. Hling &erry, E8ompany of the year 8hrysler,F Horbes, &anuary (., ())=, pp. *.-*=.

+<

Daimler Chrysler
120 100 US $ 80 60 40 20 26 07 98 26 10 98 26 01 99 26 04 99 26 07 99 26 10 99 26 01 00 26 04 00 26 07 00 26 10 00 26 04 01 26 07 01 26 10 01 26 01 01 Merger

Date Closing Stock Price

.aimler +en8
1hen &uergen $chrempp had ta"en o!er as @aimler>s 8%A in May ())5, the company was facing a crisis. o some extent, $chrempp himself was responsible for this state of affairs. o cite an example, he had supported the acquisition of Ho""er, the @utch airplane manufacturer. 6owe!er, price wars, unfa!orable exchange rates and global recession had resulted in massi!e losses. Ho""er slid into ban"ruptcy less than three years later. $chrempp howe!er, made up for these mista"es through ruthless restructuring. 6e announced that @aimler would return to its roots as a car ma"er and began di!esting unprofitable businesses. hese di!estitures, helped in reducing headcount and sharpened the business focus. he Aerospace di!ision alone lost around -/,/// people through layoffs, attrition and di!estiture. %!en the Mercedes di!ision, which had employed (*/,/// people in ())(, saw its manpower strength fall to (-/,/// by ())5. After restructuring @aimler, $chrempp set about re!italiGing the culture and promoted what he called E!alue dri!en managementF. %ach of @aimler>s +. business units had to earn a return of at least (+? on the capital employed (CA8%). @uring the first half of ())=, @aimler showed a remar"able impro!ement with CA8% of )?. 'n ())=, @aimler generated re!enues of @M (+- billion and net profits of nearly @M < billion.

he merger
'n the early ())/s, @aimler executi!es noticed that their traditional mar"ets were becoming saturated and started loo"ing for new growth opportunities. he price of the !aunted Mercedes marque was beyond the reach of most customers in emerging mar"ets. 'f matters were allowed to drift, Mercedes would remain a niche player and lose its competiti!e strength. $o @aimler began to loo" for a partner to broaden its appeal and

+=

gi!e it the scale it needed to retain its technological strengths. After considering !arious car manufacturers in the world, @aimler executi!es decided that 8hrysler topped the list because its product line and geographical reach were both complementary. 'n ())5, @aimler and 8hrysler began exploratory tal"s, and discussed ways of dealing with their wea"nesses in the rapidly growing Asian mar"ets and, to a lesser extent, $outh American mar"ets. hey proposed to set up a new, ;ointly owned pro;ect code-named D $tar that would operate outside the #$ and %urope to de!elop !ehicles, build factories, and establish dealer networ"s in new mar"ets. he tal"s howe!er ran into a stalemate o!er issues of responsibility and money -- who would manage which pro;ects and how the costs would be allocated. 8hrysler, howe!er, realiGed !ery soon that it was too thinly staffed to boost o!erseas sales by deploying managers around the world. Moreo!er, due to smaller !olumes, its C&@ cost per !ehicle was higher than that of its formidable ri!als, 0M and Hord. 8learly, 8hrysler was too small to ta"e on its bigger ri!als. 't made sense to ha!e a partner. Meanwhile, @aimler was ha!ing its own problems. After building a plant in Alabama to assemble the M-class sport-utility !ehicle, many defectsPproblems appeared during its first year of production, ma"ing it the most defect-ridden !ehicle in its class. he 0erman manufacturer had to spend about ,(*/ million in ())= to retrofit an inno!ati!e small car called A-class, because it lost balance when turning around corners at high speeds. he company formed a partnership agreement in ())= with $watch +* to de!elop a two-seater, plastic-bodied city car called $mart. 4ut the co-!enture dissol!ed in acrimony. Meanwhile, larger manufacturers li"e oyota and :ol"swagen, were building competiti!ely priced premium cars such as 9exus and Audi. An the positi!e side, $chrempp had restructured @aimler>s non-auto businesses, adopted #$ 0AA7 accounting principles and listed @aimler on the Bew Mor" $toc" %xchange. his would greatly facilitate any transatlantic deal. he ground realities they faced, moti!ated @aimler and 8hrysler to get bac" to the negotiating table. 'n &anuary ())=, $chrempp met %aton at 8hrysler headquarters during the @etroit Auto $how. 4ut doubts about the deal again arose when Hord chairman Alex rotman approached $chrempp in @etroit in &anuary ())* for a ;oint !enture. op executi!es from Hord and @aimler held two days of discussions in 9ondon in March. @aimler had ne!er !iewed Hord as a possible partner since it was big enough to sur!i!e on its own. he 9ondon meeting was successful. 6owe!er, a second meeting, was cancelled at the last minute after rotman informed $chrempp that the Hord family did not want to lose management control. After the tal"s with Hord bro"e down, the negotiations between @aimler and 8hrysler proceeded smoothly. An March +, ())*, %aton and $chrempp met in 9ausanne, $witGerland, to discuss issues li"e go!ernance and organiGation structure for the merged entity. 'n April, wor"ing teams went into details and reached agreements on big issues (8omputer operations would be centraliGed the 8hrysler way, with a 8hrysler executi!e in charge) to small issues (4usiness cards would be wider and longer, %uropean style). An May <, @aimler and 8hrysler signed the merger agreement which was announced worldwide the following day. An May (-, the @aimler super!isory board agreed to the merger. 'n &uly, the %uropean and American competition authorities ga!e
+*

A leading $wiss watch manufacturer.

+*

their nod. An $eptember (*, 8hrysler and @aimler shareholders appro!ed the merger. 8hrysler stoc"holders recei!ed /.5-= share of @8R for each share they held. @aimler shareholders held a 5= ? sta"e in the new company. @8R had re!enues of ,(55.. billion in ())*, and unit sales of - million cars and truc"s, with a presence across se!eral mar"et segments. 8hrysler made moderately priced cars and light truc"sO @aimler made Mercedes luxury cars and hea!y truc"s. 8hrysler was strong in Borth America, but wea" in 1estern %urope, where @aimler was strong. 8hrysler>s strengths lay in product de!elopmentO while @aimler>s engineering and technological capabilities were well established. he merger was pro;ected to generate synergies of nearly ,(.5 billion in ())) and around ,../ billion in +///. Much of the cost-sa!ings would come through rationalisation of purchasing and technology sharing acti!ities.

Integration
Ance the deal was finaliGed, $chrempp named a management team for the new company. $chrempp would share the title of co-chairman with %aton for three years (+//() or until %aton retired. 6owe!er, management control of @8R seemed to be in the hands of former @aimler executi!es. he new organiGation structure for worldwide mar"eting operations, aimed to generate sales growth while protecting the identity of the company>s six brands in the passenger car business (A class, M class, 893 con!ertible, 8hrysler 8oncorde, @odge 'nterpret and %agle :ision), and four brands in the commercial !ehicle business (Mercedes-4enG, Hreightliner, $terling and $etra). he indi!idual brands were managed by specific brand managers. 'n %urope and Borth America, the two companies decided to maintain separate showrooms. 'n mar"ets where @8R had a wea" presence, such as Asia, they decided to integrate the distribution channels and cut costs by combining different functions li"e logistics, warehousing, technical training and after sales ser!ice. &ames 6olden, a senior 8hrysler executi!e became responsible for brand management and mar"eting for the 8hrysler, @odge, 7lymouth and &eep brands worldwide. @ieter Setsche, a highly regarded @aimler manager was made in charge of the global brand management of Mercedes-4enG and $mart cars. 3urt 9au" became head of global brand management of the commercial !ehicle brands -- Mercedes-4enG, Hreightliner, $terling and $etra (buses), as well as sales of Hreightliner and $terling products. heodor 8unningham was as"ed to coordinate the worldwide integration of common systems and processes. he geographic region responsibilities were di!ided among 6olden (Borth America), Setsche (%urope, Asia, Africa, Australia) and 8unningham (9atin America). @8R also announced plans to establish a Mar"eting 'ntegration 8ouncil, consisting of 8unnigham, 6olden, 9au" and Setsche. he 8ouncil became responsible for establishing central mar"eting ser!ices, and setting !olume and profit targets. 'n the pre-merger phase, @aimler had assumed that the cross border nature of the transaction would not create any special problems. @aimler felt agreeing on the broad terms of the merger was more important and attached greater importance to efficiency and planning. 6owe!er, during integration, cultural differences became the most critical issue.

+)

@aimler was characteriGed by methodical decision-ma"ing while 8hrysler encouraged creati!ity and represented American adaptability and resilience. 6a!ing almost gone ban"rupt before its celebrated ()=) bailout, it had turned around under 8%A 'acocca, and then %aton, to become one of the most efficient car companies in the world. @aimler, meanwhile, had long represented the epitome of 0erman industrial might and was one of the best examples of 0erman quality and engineering. here were ma;or disparities in pay structures between the two pre-merger entities. @aimler had a !ery egalitarian pay structure. 'n the #$, 8%As were rewarded handsomely. %aton, earned a total compensation of ,(/.) million in ())=, significantly higher than what $chrempp did. $ituations such as an American manager being posted to $tuttgart, reporting to a 0erman manager who was earning half his salary became tic"lish. An the other hand, 8hrysler could cut pay only at the ris" of losing its talented managers. $chrempp mooted the idea of o!ercoming the problem through a low basic salary and high performance-based bonus. 4asic pay would be lower than what 0ermans were used to, with more !ariables such as stoc" options. 1hile 8hrysler executi!es were used to higher pay, the 0ermans seemed to relish their per"s. hey li"ed to tra!el first class and stay at top class hotels o!er the wee"ends. he 0ermans were also used to lengthy reports and extended discussions. 4ut, the Americans performed little paperwor" and li"ed to "eep their meetings short. he Americans fa!ored fast-paced trial-and-error experimentation, whereas the 0ermans laid painsta"ing plans, and implemented them methodically. 'n general, the 0ermans percei!ed the Americans to be totally chaotic while the Americans felt the 0ermans were stubborn . @8R too" se!eral initiati!es to address the cultural dissimilarities. 0ermans were encouraged to try out casual dress and also attend classes on cultural awareness. Americans were as"ed to ma"e more specific plans, while the 0ermans were urged to experiment more freely. he Americans were impressed by their 0erman counterparts> s"ill in %nglish. o reciprocate, many Americans began ta"ing lessons in 0erman.

'ro!lems !egin
@espite all these initiati!es to bridge the cultural differences, problems in implementing the merger began to be noticed from the middle of ())). 'n $eptember ())), homas $tall"amp, the president of the #$ operations, who had played an important role in 8hrysler>s comebac" in the early ())/s, resigned. $tall"amp had apparently argued that the merger must go ahead slowly. Many 8hrysler executi!es were upset by $tall"amp>s resignation as he was considered to be the only senior executi!e prepared to stic" his nec" out to protect the Americans> turf from the 0ermans. 1ith %aton expected to lea!e by early +///, the Americans felt threatened. Around this time, $chrempp felt it made sense to let 8hrysler and Mercedes operate as separate business units. 1hile it minimised ego clashes, realisation of pro;ected synergies became more difficult in areas such as sharing of components. 8hrysler had begun to share Mercedes> rear-wheel-dri!e technology. 4ut, when it wanted to use some of these components in the @odge 'ntrepid and the 8hrysler 8oncorde, the 0ermans resisted because they were not sure whether they would ha!e enough parts to spare after ta"ing into account their own consumption.

./

'n Bo!ember ())), following criticism that 8hrysler was being tightly controlled by the 0ermans, &ames 6olden, $tall"amp>s successor announced a reorganisation that would enable the company to get bogged down by the integration processes and concentrate on competing with main ri!als, 0M and Hord. he restructuring aimed at centralising product planning functions and enhancing control o!er product de!elopment acti!ities. 'n @ecember ())), @8R announced that sales had risen (+? dri!en by strong demand for Mercedes-4enG>s $-8lass luxury cars and 8hrysler>s &eep 8hero"ee. :ehicle sales in both Borth America and %urope were strong. $chrempp expressed satisfaction that the merged entity had consolidated and strengthened its competiti!e position in many mar"ets. 4ut "eeping in mind its wea" presence in Asia, @8R decided to form new strategic alliances to expand its presence in the region. An March +=, +///, @8R forged a strategic alliance with Mitsubishi of &apan. 'n &une, it spent ,-+* million to acquire a (/? sta"e in 6yundai of $outh 3orea. owards the middle of +///, the mar"ets were increasingly coming around to the opinion that the integration process had run into problems. $chrempp remained optimistic though slightly defensi!e about the prospects for the merger +), EAt present, the merger is ;udged on the basis of the stoc" which ' appreciate is not where it should be. 4ut that>s not the point. he point is, we are a solid companyN 1e are now one company. 't>s wor"ing well.F Meanwhile, @8R faced some serious problems in the "ey Borth American mar"et. 8ompetition from &apanese and %uropean manufacturers had resulted in shrin"ing margins for 8hrysler>s mini !ans and sports utility !ehicles. 8hrysler had miscalculated the demand for their aging mini!ans. 1hen it introduced its new model, its price was percei!ed to be too high in relation to the old !ans which had flooded the mar"et. $o, 8hrysler had to offer big incenti!es for !ehicles sold in +///. @uring the second half of +///, 8hrysler lost ,(.* billion. 'n hindsight, 8hrysler>s fundamentals had probably been much wea"er at the time of the merger, than widely percei!ed. As +/// progressed, it became e!ident that $chrempp>s decision to allow @aimler and 8hrysler to operate separately, had put paid to any plans to generate synergies. As the %conomist./ put itK E1hen they merged, @aimler-4enG and 8hrysler said that together they would create tremendous synergies. hat these ha!e not materialised is partly because of the decision to "eep the %uropean and American operations, Mercedes-4enG and 8hrysler, wor"ing separately, after full integration plans became bogged down. he 0erman side is acting as if it is still alone, partly for fear of sullying the imperious Mercedes brand with the rugged 8hrysler image. At one le!el, arm>s length operations might ha!e made sense. 4ut insiders say this strategy has been ta"en to extremes.F According to an expert quoted in /usiness !ee"5( K E hey>re erring too much on the side of cautionN 'f they continue to operate as separate companies, they won>t achie!e the same "ind of global reach as Hord, which shares some parts among its upscale brands with the lower-cost Hord brand.F /usiness !ee"51# would later remar", E4oth the 0ermans and the Americans ha!e been out of synch(ronisation) from the start. he two proud management teams resisted wor"ing together, were wary of change and weren>t
+) ./ .( .+

4usiness 1ee", August =, +///. Actober (+, +///. August =, +///. $eptember (=, +//(.

.(

willing to compromise. @aimler and 8hrysler ha!e combined nothing beyond some administrati!e departments, such as finance and public relationsN Mercedes executi!es worried their buyers might feel cheated if they shared parts with the American auto ma"er, 8hrysler resented the implication that its technology was inferiorF. 4y late +///, @8R>s mar"et capitalisation was less than that of @aimler-4enG before the merger. Many 8hrysler executi!es had left the company, dissatisfied with the way the merger was progressing while some had been fired. he 0ermans seemed to be gaining the upper hand with $chrempp e!en admitting that the marriage of equals was only a sales pitch to ma"e the deal palatable to the Americans. $o, it did not come as a surprise when $chrempp announced plans to scrap the automoti!e and sales councils the two companies had set up after the merger and replace them by a tightly "nit executi!e committee, consisting only of 0ermans. his committee was empowered to ma"e all "ey strategic decisions and coordinate production and mar"eting acti!ities across the group>s di!isions. $chrempp hoped the mo!e would speed up decision ma"ing on many issues including sharing of technology among 8hrysler, @aimler & Mitsubishi and 6yundai. $chrempp also fired &im 6olden and replaced him with @ieter Setsche as 8%A of the 8hrysler di!ision. 8ost cutting initiati!es were renewed and suppliers as"ed to reduce prices by 5? immediately. Duality impro!ements, particularly for truc"s were introduced at a furious pace. Mar"eting programs were rationalised and coordinated efforts initiated to emphasise that 8hrysler>s cars were EcoolF. Setsche also started attempts to strengthen relations with the dealers. 'nitiati!es to share platforms and parts among 8hrysler, Mercedes, 6yundai and Mitsubishi gathered momentum. @aimler howe!er, understood that the Americans still had an important role to play in managing the #$ operations. 7artly by design and partly by circumstances, a 0erman 2 American Management team began to e!ol!e. 3ey members of the management team, $chrempp, Setsche and 1olfgang 4ernhard were 0ermans but Americans li"e &ames @onlon (8orporate 8ontroller), 0ary 8 :alade (0lobal procurement & supply chief), homas $idlic (7rocurement and supply chief of 8hrysler) and Cichard $chaum (6ead of 7roduct @e!elopment and Duality) were also gi!en important roles. Setsche himself admitted the need for insights from the Americans in the efforts to turn around 8hrysler..K E' would be the first to say that '>m not smarter than the people who are here.F As /usiness !ee" .- reported, EHor all the tal" about the 0ermans in!ading the executi!e ran"s of 8hrysler, $chrempp has sent only a pair of wor"out guys to handle the biggest wor"out in the automoti!e world. Hor the rest of the team, he is relying on 8hrysler !eterans who ha!e been pluc"ed from relati!e obscurity following a rash of high-ran"ing defectionsN he presence of so many Americans points to something elseK a tacit ac"nowledgement by the 0ermans that they ha!e a lot to learn about the wor"ings of a mass-mar"et giant li"e 8hrysler.F

/uture ,utlook
he 0erman-American team faced stiff challenges 'n ())*, 8hrysler had made more profits per !ehicle than other ma;or car manufacturers. 'n +///, 8hrysler>s operating profit declined sharply by )/? to ,5// million on a sales turno!er of ,<-.+ billion. 'n
.. .-

4usiness 1ee", &anuary (5, +//(. &anuary (5, +//(.

.+

+//(, it is expected to lose at least ,+ billion. 8hrysler>s #$ mar"et share has been shrin"ing ((..5? in $eptember +//(, from (<.+? in ())*) and is in danger of losing the Bo. . position in the #$ to oyota. 'n August, +//(, 8hrysler spent an a!erage of ,+,.*) per !ehicle in customer incenti!es, more than that of 0M or Hord. Setsche>s plans to mo!e towards an e!eryday low pricing strategy ha!e not materialised. Hollowing the $eptember (( attac" on the 1 8, first 0M and then Hord started offering free financing on their cars. 8hrysler had to follow suit. An Hebruary +<, +//(, @8R announced it would ma"e a loss in the range of %uro +.+ 2 +.< billion. $chremp howe!er remained optimistic that by +//., the company would be ma"ing profits in the range %uro *.5 2 ).5 billion. An Actober .(, +//(, $tandard and 7oor downgraded @8R>s credit rating, ma"ing it the wea"est among the 4ig three. he @8R share after pea"ing at ,(/* in &anuary ())) traded at about ,.5 as on Actober .(, +//(. 'n the first three quarters of +//(, 8hrysler lost an estimated ,(.= billion. 4ut the strong performance of the Mercedes-4enG luxury car business is expected to generate the targeted operating profit of ,(.( billion during the year. Meanwhile, @8R>s super!isory board has passed a !ote of confidence in $chrempp>s leadership by extending his contract.5 by two years and that of his close ally, &urgen 6ubbert, who heads the Mercedes-4enG car di!ision also by two years. $chrempp remains confident that the implementation of the merger, though incomplete will proceed smoothly. he choice of a 0erman li"e Setsche to manage 8hrysler seems to ha!e brightened the prospects for the American partner. Setsche>s good relationship with $tuttgart may result in faster access to 0erman technology for 8hrysler cars. he first 8hrysler !ehicle to use Mercedes parts extensi!ely will be the 8rossfire, a two-seat roadster to be launched in +//.. Setsche has indicated plans to install a wide array of Mercedes parts in 8hrysler cars by +//-. Many formidable challenges still remain for @8R. As a recent report in the -conomist56, has summed upK E@aimler has to integrate two struggling companies and in the process reform itself. he stately product-de!elopment process that suffices for a luxury brand has to be speeded up for the more competiti!e mar"ets that Mercedes, 8hrysler and Mitsubishi now find themsel!es in. Mr $chrempp is a tough boss who clawed his way up from garage mechanic, fixing lorry engines, to the top ran" of 0erman business. Bow belatedly, he needs to get to grips with the nuts and bolts of what is, in effect, a three-way merger.F 7roblems remain to be addressed in critical areas such as component sharing. According to 6ubbert.=, EAne million Mercedes customers a year are willing to pay a premium for something that is better than what the competition is deli!ering. 1e ha!e to be !ery careful to ma"e sure they feel that what they>re getting for their money is unique.F 'ndeed, this will be a tric"y issue as the premium Mercedes charges is crucial to the well being of the group. @8R ;ust cannot afford to do anything that will hurt the image of its Mercedes cars.

.5 .< .=

he announcement was made on $eptember +=, +//(. March (, +//(. 4usiness 1ee", Bo!ember (+, +//(.

..

Case 7*# 5 he Citicorp ra(elers 0roup Merger

Introduction
'n April ())*, the financial ser!ices giants, 8iticorp and ra!elers 0roup announced they would merge to form 8itigroup with a mar"et capitalisation of ,(</ billion and assets of ,=// billion. 8itigroup would sell a range of products to indi!iduals, corporates and go!ernments across the world. 't would operate in di!erse businesses such as traditional ban"ing, consumer finance, credit cards, in!estment ban"ing, securities bro"erage and asset management, and property, casualty and life insurance. he two companies indicated that this would be a merger of equals. &ohn Ceed, the 8iticorp 8%A and $andy 1eill, the ra!els 0roup 8%A, were named co-8%As of 8itigroup.

Citicorp and ra(elers !e)ore the merger

8iticorp (8iti) and ra!elers had come to the merger table with different bac"grounds. 8iti had become the leading consumer ban" in the world by the ())/s. 't had largely depended on organic growth. ra!elers had grown through acquisitions. 8iti had struggled with the few acquisitions it had made, a notable example being Deutron, the securities data firm. 1eill, on the other hand, was a seasoned expert in implementing acquisitions. 'n ()*<, after quitting American %xpress, 1eill bought 8ommercial 8redit, a small consumer lending firm. A!er a period of time, through a series of mergers, this became ra!elers, an insurance and bro"erage conglomerate. 'ts subsidiaries included $alomon 4arney (bro"erage ser!ices, in!estment ban"ing and underwriting)O 8ommercial 8redit (consumer loans)O 7rimerica Hinancial $er!icesO ra!elers 4an" 8redit cards and ra!elers 9ife and Annuity. 1eill belie!ed in mo!ing fast after an acquisition, select a management team carefully and dri!e under managed businesses to their full potential.

Synergies
1hen 1eill and Ceed met on Hebruary +5, ())*, Ceed was surprised by 1eill>s merger proposal. 4ut gradually, the 8iticorp 8%A realised that the two companies were in complementary businesses with little o!erlaps. 'n the third wee" of March, Ceed and 1eill agreed to go ahead with the merger. hey met leading luminaries in 1ashington including 7resident 8linton, Alan 0reenspan and Cobert Cubin to get their support. 8iti and ra!elers were confident that the merger would facilitate Ecross-sellingF of each other>s products. he merged entity loo"ed better placed to compete with specialist credit card issuers, home equity lenders and mutual fund companies. hese competitors, using niche mar"eting techniques had been steadily eroding 8iti>s mar"et share in the ())/s. Also, while ra!elers had an insignificant presence o!erseas, it had one of the strongest distribution systems in the #$. 8iti on the other hand had an impressi!e networ" outside the #$. 't had -<- branch offices in %urope, (<< in 9atin America and ). in Asia. he two companies also complemented each other>s customer segments. 1hile 8iti had a younger, less affluent customer base, ra!elers targeted older, more affluent indi!iduals. 8iti could sell its 8iti0old and 7ri!ate 4an"ing $er!ices more efficiently to ra!elers> +/ million #.$. customers after the merger. 8iti, could also benefit from ra!eler>s expertise in mutual funds.

.-

Citigroup
60 50 Merger US $ 40 30 20 10 16 #an 98 15 #&n 98 03 !o" 97 06 !o" 98 11 !o" 99 30 #an 01 22 #an 99 18 #&n 99 26 #an 00 21 #&n 00 26 #&n 01 31 $&g 99 26 $&g 98 26 !o" 01 14 !o" 00 01 Se% 00 07 Se% 01 01 $%r 98 07 $%r 99 07 $%r 00 12 $%r 01

Date Closing Stock Price

8iti had expertise in mail and telephone distribution of cards and branch ban"ing. 'ts sales force howe!er paled before ra!elers which had (/,.// $alomon $mith 4arney bro"ers, */,/// part time 7rimerica Hinancial $er!ices insurance agents and (//,/// agents selling ra!elers> insurance. %!en though cross selling remained a challenge, it seemed the two companies had little to lose. here was !ery little duplication of acti!ities. $o, there was little danger of the pre merger entities losing any of their momentum. Another positi!e feature of the deal was that no huge premium was being paid by the acquiring company. 8iticorp shareholders would get +.5 shares of ra!elers for each 8iti share they held, implying a modest premium o!er 8iti>s ongoing mar"et price. $o, there was a good chance of generating higher earnings after the merger. he main hurdle in the implementation of the merger was the 4an" 6olding 8ompany Act, which prohibited ban"ing companies from engaging in insurance underwriting, an important business for ra!elers. 6owe!er the regulation made it possible for a non ban"ing company to buy a ban", become a ban" holding company, and comply with the law within a prescribed period. he law allowed two years for this to happen and also pro!ided for three one-year extensions at the discretion of the Hederal Ceser!e. 8iti and ra!elers hoped that ban"ing laws would be suitably amended by then. ('f the existing laws were not amended, the Hed would possibly insist on di!estment of the insurance underwriting business within two years).

Integration
'mportant hurdles stood in the way of integrating 8iti and ra!elers. he compensation policies were !ery different in the two companies. 8iti offered stoc" options to talented

.5

managers it wished to retain. 4ut it did not exert pressure on them to retain their holding. As a consequence, all the officers and directors at 8iti put together owned less than /.5? of the company>s stoc". 'n contrast, 1eill himself owned (..? of ra!elers> stoc", worth about ,)5/ million. ra!ellers> officers and directors together owned +.-5?. hese sta"es had been built by ra!elers> con!ention of Eblood oathF that pre!ented the top management team and the directors from selling shares. Ane director, after being denied permission to be relie!ed of the oath, had resigned from the ra!elers 4oard ;ust to cash his shares. Another important difference lay in the degree of teamwor". ra!elers encouraged teamwor". 'nter-di!isional support in selling products was quite common. 4ut, 8iti>s talented, smart and ambitious executi!es were more aggressi!e and indi!idualistic. Ceed admitted.*K E'>!e been struggling for years to try to impro!e the management and energy le!els within 8iti. ' thin" there is an intensity and a sales capability in ra!elers that we don>t ha!e as well de!eloped. his is going to impro!e our management @BAF. ransferring ra!eler>s good practices to 8iti howe!er remained a ma;or challenge. As ,ortune.), mentioned, E he problem is going to be getting the cells transferred into a 8iti biochemical ma"eup that has traditionally been resistant to teamwor". 8iti is "nown for a go-it-alone attitude bordering on outright arroganceF. $ome analysts were worried that the arrangement of co-8%As would not wor" out, "eeping in !iew the big egos of 1eill and Ceed. hey felt that it was better for both to wor" indi!idually. As the integration ad!anced, the differences in the management styles of Ceed and 1eil began to be noticed. Ceed, a loner disli"ed tal"ing to the press. 'n contrast, 1eill was more outgoing and communicati!e. Ceed was more of an intellectual while 1eil relied on gut instinct rather than briefing papers. As /usiness !ee"?0 put itK E1eill and Ceed ha!e little in common. 6e (1eill) is a street-smart personable, outgoing man who lo!es nothing more than tal"ing about his latest !ictory. 1all $treet lo!es 1eill for his relentless focus on the bottomline and the stoc" price... Ceed is probably the most !isionary ban"er of his generation... Much of his time is spent alone, reading and thin"ing.F After the merger, most of the positions were di!ided among the 8iticorp and ra!elers managers. 6alf of the new board>s members came from 8itiban" and half from ra!elers. he %conomist-( described it as a Boah>s Ar" approach. he committee system of decision ma"ing howe!er led to delays. Animosity de!eloped between the in!estment ban"ers of $alomon $mith 4arney (a part of ra!elers) and 8iticorp. he in!estment ban"ers were much better paid but 8iti>s corporate ban"ers resented this as they felt they were handling far more sophisticated clients.

'ro!lems !egin
'n Actober ())*, many 8itigroup executi!es began to complain that the merger was not proceeding smoothly. 'mmediately thereafter, ma;or changes in the top management were made. &amie @imon, long considered 1eill>s heir apparent, quit in Bo!ember ())*.
.* .) -/ -(

Hortune, May ((, ())*. May ((, ())*. &une =, ())). August +<, +///.

.<

Apparently, @imon had de!eloped sharp differences with 1eill. he -conomist?1 felt that @imon>s resignation was a clear indication that turf wars were gaining in intensityK EMr @imon>s departure may ha!e strengthened clan loyalties. 6e recei!ed a standing o!ation from disappointed wor"ers on the trading floor at $alomon, 4y contrast, employees, from the old 8itiban" were 8oc"-a-hoop at the news. hey saw it as a !ictory for their hero, &ohn Ceed o!er Mr 1eill, the ra!elers man who had until then been thought to be in the dri!er>s seat.F $enior 8iti executi!e, :ictor MeneGes and 1eill loyalist, Michael 8arpenter were made responsible for selecting a new top management team and quic"ly sort out pressing problems. 'n &uly ())), 8iti>s biggest shareholder, $audi 7rince Alwaleed bin alal expressed his concern about the deteriorating relationship between Ceed and 1eill. 8onsequently, the responsibilities of Ceed and 1eill were clearly delineated. 1eill too" charge of day-to-day operations while Ceed became responsible for internet strategy. 'n Actober ())), former reasury $ecretary, Cobert Cubin ;oined the senior management team apparently to act as a bridge between Ceed and 1eill. Around this time, Ceed himself started expressing doubts about the success of the merger. 6e e!en remar"ed that while the wisdom of the merger was unquestionable, success in integration loo"ed doubtful. 6e explained the peculiar problems which the merger had created-.K E$andy and ' both ha!e the problem that our children loo" up to us as they ne!er did before and re;ect the other parent with equal !igour, saying $andy wouldn>t want to do this, so what do ' care about what &ohn wants.F Moreo!er, 1eill>s trusted lieutenants were increasingly handling most of the important ;obs while Ceed>s fa!ourites were lea!ing. And in April +///, Ceed resigned, mar"ing a final !ictory for 1eill in the power struggle. 1eill announced that a committee would be appointed to nominate his successor to ta"e o!er in +//+. Many analysts remained cynical. As The -conomist?? put it, E'ts hard to imagine 1eill retiring. 1hen as"ed about succession, he often mentions Alan 0reenspan, still going strong at the Hederal Ceser!e, at =. and points out that he is a sprightly <<. And if anybody is named heir-apparent, they should watch their bac". &ust as" &amie @imon, who though widely tipped as Mr 1eill>s successor, was abruptly sac"ed some (5 months ago.F

Concluding 6otes
At the time of the merger, many cross2selling opportunities had been identified. @ifficulties in integrating technology platforms and clashes at business unit le!el o!er what products to cross-sell ha!e slowed down the retail cross-selling efforts. 'n consumer finance, where it was en!isaged that ra!elers> products could be sold through 8iti>s global networ", success has been limited. he greatest success has been achie!ed in an unli"ely business 2 corporate and in!estment ban"ing. $ome of the opportunities which ha!e been tapped after the merger, include selling of ra!elers> insurance products to 8iti credit card holders with an attracti!e ris" profile. $alomon $mith 4arney mutual funds ha!e been sold to 8iti customers. ra!elers> annuities are also being sold through the 8iti branch networ". Many wealthy $alomon $mith 4arney customers ha!e been gi!en (//? mortgages by 8iti, secured against their
-+ -. --

Bo!ember 5, ())*. he %conomist, August +<, +///. March +, +///.

.=

bro"erage accounts. 8iti>s global networ" has also helped ra!elers to enter emerging mar"ets. 8osts ha!e been cut and asset utilisation has impro!ed. ra!elers seems to ha!e introduced an aggressi!e sales culture in 8itigroup branches. A ma;or challenge ahead is that with the ra!elers management seemingly in charge, the top management>s experience in penetrating o!erseas mar"ets is limited. 1eill has a good record in turning around and expanding under-managed companies but his s"ills at managing a large global corporation are still untested. Many senior executi!es ha!e left after the merger. Many blame 1eill>s inability to draw up a succession plan as the main reason for this exodus. Duite clearly, 1eill faces the challenge of con!incing analysts that 8itigroup is not a one man show.

.*

References:
(. C 6 3ilman, M & $axton and C $erpa, E0aining control of the corporate culture,F 6ossey$/ass, ()*5. +. 0ary 6amel, M!es 9 @oG and 8 3 7rahalad, E8ollaborate with your 8ompetitors and 1in,F Aarvard /usiness 2eview, &anuary-Hebruary ()*), pp. (..-(.). .. &oel 4lee"e and @a!id %rnst, E's your $trategic Alliance Ceally a $aleJF Aarvard /usiness 2eview, &anuary-Hebruary ())5, pp. )=-(/5. -. Hling &erry, E8ompany of the year 8hrysler,F ,orbes, &anuary (., ())=, pp. *.-*=. 5. 8layton 8hristensen, E he 'nno!ator>s @ilemma,F Aarvard /usiness 'chool Bress, ())=. <. Mar" 9 $irower, E he $ynergy rap,F The ,ree Bress, Bew Mor", ())=. =. Conald A Ash"enas, 9awrence & @eMonaco and $uGanne 8 Hrancis, EMa"ing the @eal Ceal,F Aarvard /usiness 2eview, &anuary 2 Hebruary, ())*, pp. (<5-(=5. *. E1atch out for the egos,F The -conomist, April ((, ())*, pp. <5-<<. ). EMercedes goes to Motown,F The -conomist# May ), ())*, p. (5. (/. 4arnett $eaman and Con $todghill '', E6ere comes the road test,F Time, May (*, ())*, pp. .--.=. ((. EHall guy,F The -conomist# Bo!ember 5, ())*. (+. M!es 9 @oG and 0ary 6amel, EAlliance Ad!antage,F Aarvard /usiness 'chool Bress, ())*. (.. Cobert 0 %ccles, 3ersten 9 9anes and homas 8 1ilson, EAre Mou 7aying oo Much for hat AcquisitionJF Aarvard /usiness 2eview, &uly-August, ())), pp. (.<-(-<. (-. $cott Miller and &effrey 4all, E@aimler 8hrysler set to o!erhaul board,F The !all 'treet 6ournal, $eptember ++, ())). (5. 1arren 4rown, E#$ 8hief out as @aimler reshuffles,F The !ashington Bost, $eptember +-, ())). (<. E hree>s company,F The -conomist, Actober +*, ())), p. *+. (=. &effrey 4all, E8hrysler announces sha"e up to show its autonomy within @aimler 8hrysler,F The !all 'treet 6ournal, Bo!ember (, ())). (*. Alfred Cappaport and Mar" 9 $irower, E$toc" or 8ash,F Aarvard /usiness 2eview, Bo!ember-@ecember, ())), pp. (-=-(5*. (). &effrey 4all, E$tall"amp to lea!e @aimler 8hrysler,F The !all 'treet 6ournal, @ecember (=, ())). +/. &ustin 6yde, E6olden says after a rough year, @aimler 8hrysler is a better company,F ssociated Bress ;ews !ires, @ecember (*, ())). +(. 4rian 8ar!alho, E@eal HrenGy,F /usiness !orld, @ecember +/, ())), pp. +/-+=. ++. oby & etenbaum, E4eating the odds of Merger & Acquisition failureK $e!en "ey practices that impro!e the change for expected integration and synergies,F *rgani+ational =ynamics, Autumn ())), pp. ++-.<. +.. &ulie 1ulf, E8%As ser!e themsel!es first in mergers of equals,F "nowledge.wharton.upenn.edu, &anuary -, +///. +-. @aniel A"rent, E6appily e!er afterJF Time, &anuary +-, +///, pp. +)-.). +5. E1ily 1eill wins again,F The -conomist# March +, +///, p. *-. +<. E he @aimler 8hrysler emulsion,F The -conomist# &uly +), +///, pp. <5-<<.

.)

+=. @enis 8arey, E9essons from Master Acquirers,F Aarvard /usiness 2eview, May-&une +///, pp. (-5-(5-. +*. E6ow mergers go wrong,F The -conomist# &uly +/, +///, p. (5. +). EAne house many windows,F The -conomist# August (=, +///, pp. =/-=(. ./. 8hristine ierney, et al, E@efiant @aimler,F /usiness !ee", August (=, +///, pp. +--+). .(. E0aining employee trust after acquisitionK 'mplications for managerial action,F -mployee 2elations, August +-, +///, pp. ..--.55. .+. EHirst among equals,F The -conomist, August +<, +///, pp. <.-<-. ... EManaging alliances,F The -conomist, August +<, +///, pp. 5<-5=. .-. E$chrempp>s trap,F The -conomist, Bo!ember +., +///, p. +-. .5. Cobert. & Aiello and Michael @ 1at"ins, E he Hine Art of Hriendly Acquisition,F Aarvard /usiness 2eview, Bo!ember-@ecember, +///, pp. (//-(/=. .<. Hran" 0ibrey &r., E$core one for AA9 1,F Time, @ecember +5, +///, pp. =*-*/. .=. Conald B Ash"enas and $uGanne 8 Hrancis, E'ntegration Managers,F Aarvard /usiness 2eview, Bo!ember-@ecember, +///, pp. (/*-((<. .*. &oann Muller, &eff 0reen, 8hristine ierney, E8hrysler>s rescue team,F /usiness !ee", &anuary (5, +//(, pp. (*-+(. .). E he great merger wa!e brea"s,F The -conomist# &anuary +5, +//(, pp. 5)-</. -/. @a!id A 9ight, E1ho 0oes, 1ho $taysJF Aarvard /usiness 2eview, &anuary +//(, pp. .5---. -(. E$chrempp>s repair ;ob,F The -conomist, March ., +//(, pp. 5=-5*. -+. 8hristine ierney and 3atharine $chmialt, E$chrempp, the sur!i!orJF /usiness !ee", March 5, +//(, p. +<. -.. Alex aylor ''', E8an the 0ermans rescue 8hryslerJF ,ortune, April ./, +//(, pp. 5+-5<. --. Hran" $woboda, EA Model 8omebac"JF The !ashington Bost, May (., +//(. -5. :i"as 4a;a;, E1rite-downs heighten losses of telecom firms. Acquisitions are less !aluable.F The =allas Morning ;ews, &une +(, +//(. -<. Marc 0unther, E1hat does AA9 wantJ 0rowth, growth and more growth,F ,ortune# &uly +., +//(, pp. )(-)=. -=. &oann Muller and 8hristine ierney, E8an this man sa!e 8hryslerJF /usiness !ee", $eptember (=, +//(, pp. -*-5-. -*. $cott Miller, E@aimler 8hrysler may be forced to re!iew 8hrysler pro;ections,F The !all 'treet 6ournal -urope, $eptember +<, +//(. -). E$chrempp sur!i!es shares slump but unions shown the door,F ,inancial Times, $eptember +*, +//(. 5/. $cott Miller, E$chrempp is as"ed to extend tenure at @aimler 8hrysler,F The !all 'treet 6ournal -urope, $eptember +*, +//(. 5(. @a!id C 4a"er, E8isco says it still see"s to buy small companies,F The 'an ,rancisco )hronicle, Actober ., +//(. 5+. &ennifer Hiles, E8isco to expand Hiber-optic 4usiness,F 'an 6ose Mercury ;ews, Actober ., +//(. 5.. &effrey 4all, E@aimler 8hrysler turnaround seems to be going in re!erse,F The !all 'treet 6ournal, Actober ((, +//(.

-/

5-. &effrey 4all, E@aimler 8hrysler net declines =/? as losses continue at #$ units,F The !all 'treet 6ournal, Actober +-, +//(. 55. &effrey 4all, E@aimler 8hrysler>s credit rating is cut by $&7 due to doubt on profit targets,F The !all 'treet 6ournal, Bo!ember (, +//(. 5<. 8hristine ierney, E@ownshifting ambitions at @aimler 8hrysler,F /usiness !ee", Bo!ember (+, +//(, pp. +*-+). 5=. 3atin"a 4i;lsma 2 Hran"ema, EAn managing cultural integration and cultural change processes in mergers and acquisitions.F 6ournal of -uropean :ndustrial Training +//(, 'ssue +(.P-, pp. ()+-+/=.