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. And some have been truly major failures resulting in dramatic losses of value for the shareholders of the acquiring company. With market values and acquisition premiums at record highs, it is time to articulate demanding standards for what constitutes informed or prudent decision-making. The risks are too great otherwise.” - Mark L Sirower1.

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. The M&A phenomenon has been noticeable not only in developed markets like the US, Europe and Japan but also in emerging markets like India. In 1998, worldwide mergers and acquisitions were valued2 at $2.4 trillion. In 1999, this figure increased3 to $3.4 trillion. In 2000, the pace seemed to slow down, with only the Glaxo Wellcome – SmithKline Beecham merger valued at over $50 billion. However, the total value of the deals worldwide crossed $3.5 trillion. Much of this activity took place in the first half of 2000. The recent merger proposal by HP and Compaq is a clear indication that merger mania is well and truly alive. Like capacity expansion, vertical integration and diversification, a large merger or an acquisition is a strategic move since it can make or break a company. However, mergers and acquisitions involve unique challenges such as the valuation of the company being acquired and integration of the pre merger entities. Valuation is a subjective matter, involving several assumptions. Integration of the pre-merger entities is a demanding task and has to be managed skillfully. So, it makes sense to devote a separate chapter to cover the risks associated with acquisitions4 and how to manage them. Mark Sirower, an internationally acclaimed expert in the field of mergers and acquisitions found that two thirds of the 168 deals he analysed between 1979 and 1990, destroyed value for shareholders. When he looked at the shares of 100 large companies that made major acquisitions between 1994 and 1997, Sirower found that the acquirer’s stock, on an average trailed the S&P 500 by 8.6%, one year after the deal was announced. 60 of these stocks under-performed in relation to the market, while 32 posted negative returns. Many of the companies acquired were often sold off later, sometimes at a loss.
1 2 3 4

The Synergy Trap. According to Security Data Co. The Economist, July 20, 2000. In this chapter, we use the terms, mergers and acquisitions interchangeably though there are some important differences. (See glossary).


Consider Kimberly Clark’s acquisition of Scott Paper in 1995. This acquisition made Kimberly-Clark the world’s largest tissue maker. One year later however, sales were down and profits and operating income had shrunk. By 1999, the merged entity was trailing the S&P 500 Stock Index. AT&T gave several seemingly valid reasons for its acquisition of NCR. But after five years of incurring losses, amounting to more than $2 billion, AT&T accepted that the acquisition would not work. In 1995, it decided to spin the company off. Quite clearly, mergers and acquisitions involve heavy risks. In their excitement and enthusiasm to close the deal fast, managers throw caution to the winds. Later, there is a gap between expectations and actual performance and shareholders’ wealth is eroded. This chapter covers some of the important risks in M&As and provides a framework for dealing with them.
Strategic Issues in Mergers & Acquisitions

Identifying Synergies



Why mergers are risky
Major acquisitions have to be handled carefully because they leave little scope for trial and error and are difficult to reverse. The risks involved are not merely financial ones. A failed merger can disrupt work processes, diminish customer confidence, damage the company’s reputation, cause employees to leave and result in poor employee motivation levels. So the old saying, discretion is the better part of valour, is well and truly applicable here. A comprehensive assessment of the various risks involved is a must before striking an M&A deal. Circumstances under which the acquisition may fail, including the worst case scenarios, should be carefully considered. Even if the probability of a failure is very low, but the consequences of the failure are significant, one should think carefully before hastening to complete the deal. According to Eccles, Lanes and Wilson5, most companies fail to undertake a thorough risk analysis before making an acquisition. Which is why they end up burning their fingers. The strategic implications of a merger should be understood carefully. Otherwise, the shareholders’ wealth will be eroded. As Mark Sirower6 puts it neatly, “When you make a bid for the equity of another company, you are issuing cash or claims to the shareholders of that company. If you issue claims or cash in an amount greater than the economic value of the assets you purchase, you have merely transferred value from the shareholders of
5 6

Harvard Business Review, July –August 1999. The Synergy Trap.


your firm to the shareholders of the target – right from the beginning.” In 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. If demanding standards are not set to facilitate informed and prudent decision-making, the investment made will not yield commensurate returns.
Target Table I Some top M&A deals in 2001 Acquirer Value of deal ($ million) 57,547 31,739 25,263 23,398 19,656 14,904 13,132 12,821 11,973 11,511

AT&T Broadband & Internet (US) Comcast (US) Hughes Electronics (US) Echostar Communications (US) Compaq Computer (US) Hewlett Packard (US) American General (US) American International Group (US) Dresdner Bank (Germany) Allianz (Germany) Bank of Scotland (UK) Halifax Group (UK) Wachovia (US) First Union (US) Benacci (Mexico) Citigroup (US) Telecom Italia (Italy) Olivetti (Italy) Billiton (UK) BHP (Australia) Compiled from various sources

There are two main reasons for the failure of an acquisition. One is the tendency to lay too much stress on the strategic, unquantifiable benefits of the deal. This results in over-valuation 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 projected ones. Many companies are confident about generating cost savings before the merger. But they are unaware of the practical difficulties involved in realising them. For example, a job may be eliminated, but the person currently on that job 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 improved by combining the best practices and core competencies of the acquiring and acquired companies. Cultural factors may however, prevent such knowledge sharing. The 1998 merger of Daimler Benz and Chrysler is a good example. Also, it may take much longer to generate cost savings than anticipated. The longer it takes to cut costs, the lesser the value of the synergies generated. Revenue growth, the reason given to justify many mergers, is in general more difficult to achieve than cost cutting. In fact, growth may be adversely affected after a merger if customer or competitor reactions are hostile. When Lockheed Martin acquired Loral, it lost business from important customers such as McDonnell Douglas, who were Lockheed’s competitors. So, companies must also look at the acquisition in terms of the impact it makes on competitors. The acquisition should minimise the possibility of retaliation by competitors. Some M&A experts look at revenue enhancement as a soft synergy and discount it heavily while calculating synergy value.

managers are essentially committing themselves to delivering more than what the market expects on the basis of current projections. This would facilitate retirement of expensive debt and reduce interest charges by about £ 8 million per year. it makes sense to allow the competitor to pay a higher price and weaken its competitive position rather than rush into the deal. rushing ahead to finalise a deal before a competitor does so. By September 2001. This is a point which is often forgotten. Tata Tea announced it was buying the UK-based Tetley for £271 million in a leveraged buyout. A recent example is the ICICI – ICICI bank merger. uncertainty and an exodus of employees are likely. Companies making an acquisition not only have to meet the performance targets the market already expects. 2001.4 Tata Tea: Tetley acquisition runs into problems In mid 2000. Tetley. executives may insist on going ahead for strategic benefits that cannot be quantified. Tata Tea did not pay cash upfront. Most companies underestimate the difficulties involved in integrating the pre-merger entities. Business World. September 10. If cash flows touch £40 million. In many cases. R K Krishna Kumar recently admitted8 that additional investments will be needed to revive demand. tension. the risk of not being able to service the debt will be eliminated. September 10. building a climate of trust among the employees of the merging entities is extremely important. the deal was running into short-term financial problems. whereas it generated only £29 million in 1999. there were press reports that Tata Tea was probably overpaying 7 . is not always a wise move. The Tatas announced they would bring in an additional £60 million as equity. India’s largest tea company. 2001.000 estates in 35 different countries. In the heat of finalising the deal. what is conveniently overlooked is that most strategic benefits ultimately should be reflected in some form of cost reduction or revenue growth. the popularity of tea continued to decline in the UK while the market share for natural juices and coffee went up. Similarly. Europe and Australia. it pumped £70 million of equity into a special purpose vehicle. Besides. had offered £100 million more than the second highest bidder. which earned a net profit of £35 million in 1998 on sales of £280 million was the third largest brand in the global $600 million packaged tea market . Tata Tea Managing Director. but also the higher targets implied by the acquisition premium. To service the debt. At the time of finalising the deal. Tata Tea viewed the acquisition as a quick way to gain access to markets in the US. Tata Tea hoped that cash flows from Tetley would be adequate to pay off the debt. During the integration of the pre-merger entities. Instead. Tetley needed to generate cash flows of at least £48 million per year. When they pay the acquisition premium. This will however not be an easy task. retail tea prices in the UK market fell. Acquisitions involve changes and often have a destabilising effect. . Even when the numbers do not justify an acquisition. But unfortunately for Tata Tea. Then it leveraged the equity to borrow £235 million from the market. To avoid this. It also looked at the opportunities created by Tetley’s estimated weekly purchase of three million kg of tea from 10. 7 8 Business World.behind Unilever’s Brook Bond and Lipton. stress. Tata Tea hoped to gain packaging expertise from Tetley. Canada. Tata Tea had hoped for a quantum jump in cash flows after the acquisition.

6 billion in June 2000.1 billion to acquire office paper company Union Camp in early 1999. Reaction to the Champion deal has been lukewarm. While these entrepreneurs were known to live frugally.5 International Paper: Aggressive acquisitions strategy creates problems The paper industry has been known to go through boom and bust cycles. These expensive acquisitions left IP with a debt of $15. remain cynical about IP’s moves. the professionals led a fancy lifestyle. Koneru plunged headlong into acquisitions without detailed consultations with his senior team. So.5 billion. Dillon announced that he would be shutting 1. Morgan Stanley decided to pay $11.2 million tonnes of capacity or 5% of total production. Champion Paper Corp for $9. is quite . 11-15 crore and announced that it would catch up with leader Rediff. In October 2000. A disciplined approach to acquisitions is necessary to weed out unviable deals. After paying $7. The company’s stock price has fallen during the period 1995-2000. the minimum price. John Dillon. (50% of capital and four times cash flows) towards the end of 2000. Competitive Strategy. What’s the reason for the disparity between these simple lessons and these poor results? We believe that far too many companies neglect the organizational discipline needed to ensure that analytical rigour triumphs over emotion and ego. As Eccles. India’s leading Internet Service Provider. Impressed by the company’s vision and aggressive plans. Size and market share are critical in the paper industry. IP purchased its rival. When founder Raj Koneru brought some senior professionals into the management team. • The buyer has unique abilities and competencies which it can use to manage the acquired company’s business far more efficiently and effectively. During the period December 1999 – February 2000. IP’s growth-by-acquisitions strategy may well turn out to be risky. Much more however needs to be highlights the risks involved in the kind of reckless acquisitions and alliances made by dotcom businesses in India. it expects. so that every 9 10 Harvard Business Review. payments were made in cash. than continuing to run the operations. IP is yet to prove it can integrate its acquisitions and realise the synergies it has projected before its acquisitions. It has been slow to close down factories. July-August 1999.” Porter10 argues that acquisitions make sense only when three conditions hold good: • The acquired company’s management is more keen on withdrawing.5 million to acquire a 7% stake. venture capitalists expressed their happiness. especially at a time when the US economy has gone into a recession. whose products look more like commodities than brands. Dillon has been divesting non-core businesses such as petroleum and minerals to pay for the acquisitions. But. The collapse of Indiainfo. One deal involved a payment of Rs 200 crore ($45 million) to The experience of Indiainfo. the CEO of International Paper (IP) the world’s largest paper company looks at acquisitions as a way to control prices. In many cases. “Over half the deals being done today will destroy value for the acquiring company’s shareholders. an important step in reducing industry capacity and consequently improving prices. Meanwhile. • The market for companies is imperfect and does not eliminate aboveaverage returns through the bidding process. managing the rapid growth proved difficult. The markets however. A cultural clash between the erstwhile entrepreneurs whose websites had been taken over by Koneru and the new breed of professional managers made matters worse. Lanes and Wilson put it9. Indiainfo kicked off its launch in the Indian market with an ad blitz that cost Rs.

11 “Everybody said we’d paid too much. Usually. the markets may even feel that by diverting resources from stronger divisions. May-June 2000. salaries and acquisitions added up to Rs.” As mentioned earlier. The huge expenditures on advertising. At a more strategic level. by engaging the top management in the integration process may allow competitors to leap ahead. This is a clear indication that the markets tend to be cynical about the realisation of the synergies projected. Identifying the synergies The aim of an acquisition is to make the merged entity more valuable than the sum of the values of the pre-merger entities. one after the other. Senior executives first came to know about the deal at a press conference! Koneru apparently estimated that the increase in traffic would take the company’s valuation to about $1 billion. Buying Mc Caw was very much the right thing to do. May-June 2000. for the purpose of realising synergies. When Citibank merged with Travelers. The Time Warner-Turner Broadcasting System merger was also quite successful in this regard. 30 crores by September 2000. the acquirer’s stock price falls after the deal is announced. 9) Much of the risk in an M&A deal arises from the acquiring company’s inability to identify and quantify synergies accurately. do not materialise. According to Dennis Kozlowski. But with hindsight. The AOL-time Warner merger has also shown a lot of promise for cross selling. though difficult. they are much more difficult to implement. when its attention was entirely focussed on its integration with McDonnel Douglas. Alex Mandi. to generate more sales. Boeing faced a major crisis in its production line in the late 1990s. though it is too early to pass a final judgment. Rohm and Haas acquired Morton. Many senior executives began to desert the sinking ship. it is years after the acquisition that it becomes clear whether the price paid for the acquisition was the right one or not.” Kozlowski adds that people are often too optimistic about revenues.6 time a VSNL user would log on. Often. . 11 12 Harvard Business Review. Koneru also made a big mistake in deciding to postpone his IPO. acquisitions. the synergies which are highlighted. it is easier to achieve cost reduction than to boost sales. rather than added. but its expectations on cross selling different financial services to customers did not quite materialise. One reason could be that the markets have already discounted the expectation of an improvement in the operating performance of the acquired company. it aggressively used the acquired company’s expertise in polyurethane adhesives and powder coatings and its access to new markets. achieving revenue enhancement through an acquisition. synergies can add value only if the merged entity registers a performance that is better than what is already reflected in the market prices of the pre-merger entities. the merged entity quickly reaped profits from cost cutting. In extreme cases. it’s clear that cellular telephony was a critical asset for the telecommunications business and it would have been a tough proposition to build that business from scratch. However. CEO of Tyco International12: “You can nearly always achieve them because you can see up front where they are … But there’s much more risk with revenue enhancements. The reason for the delay was probably preoccupation with integrating the acquisitions which had been made at a furious pace. who negotiated the acquisition of Mc Caw Cellular on behalf of AT&T recalled. value may be subtracted. As mentioned earlier. In almost two out of three acquisitions. (See Box item on pg. while those which may have been completely overlooked become very important. When the specialty chemical company. Harvard Business Review. he would land on the Indiainfo home page. is not impossible.

” While acquiring a company. its market price would already have been bid up. analysts were cynical and few thought that Levin and Turner would be able to work together. When the merger was announced. At the time of the merger. TBS was also dependent for distribution on two cable systems companies. Cable networks could buy material from the movie business and leverage the publishing assets like Time and Sports Illustrated. when considered alone. which had been investing heavily in cable infrastructure. if its future is bleak or the management is weak. TBS was in serious financial difficulty. movies. Meanwhile. A brand like Batman could be exploited by the movie studio. . the merged entity could change the relationship between the two to its advantage. In the past. Tele-communications In (TCI) and TW. The two companies had significant differences in management style. On the other hand. this is why acquisitions so often seem not to meet managers’ expectations. TBS had accumulated a lot of debt. Gerald Levin of TW and Ted Turner of TBS became unlikely partners in a merger deal that few expected to click. the two parties realised the benefits that could be reaped from the merger.7 Arriving at the premium One of the most thoughtful analyses of the premium involved in acquisitions is provided by Porter13. then. reached the cable stations very late. the stock price could be low. firms must be careful about irrational bidders with non-profit motives or those who are pursuing the deal purely because of the idiosyncrasies of the top management. But gradually. The two CEOs. while TW was more methodical. TBS managers initially felt uncomfortable when their decisions were subjected to a rigorous analysis. According to Sirower. publishing and cable television. companies may end up paying too high a price because of the influence of such bidders. typically six to 13 Competitive Strategy. The board should exercise some control in such situations. Many brands not only gained more visibility but also generated more revenues. Perhaps. Porter points out that an efficient market precludes the possibility of the new company generating more returns than what the pre-merger entities generated before the merger. the price of an acquisition will eliminate most of the returns for the buyer… The market for companies and the seller’s alternative of continuing to operate the business. As Porter puts it: “To the extent that the market for companies is working efficiently. After buying MGM in 1986 for its content. The Time Warner –Turner Broadcasting System Merger The Time Warner (TW) – Turner Broadcasting System (TBS) merger of 1995 has been one of the more successful mergers of our times. If the management of the acquired company is sound and the company itself has a bright future. • Impact on competitors and their possible responses • Tangible performance gains from the merger and the management talent necessary to achieve the gains • Milestones in the implementation plan • Additional investments which will be necessary • Comparison of the acquisition with alternative investments. In the race to the finishing line. the acquiring company must consider the following while working out the premium: • Market expectations about the acquired company. TBS managers went by instinct. work against reaping aboveaverage profits from acquisitions. but the infusion of capital and effort required to turn it around could also be massive. TW’s competitive position was threatened by the merger of Walt Disney and Capital Cities / ABC. With a presence in both content and distribution.

cable networks and a small television broadcast network. it is important to understand the risks involved in integration and the ways to manage these In other words. Julie Wulf14 has revealed that CEOs often strike deals that benefit them personally. In a stock swap. So. In general. a cash deal makes sense.8 eight years after they were released. With its clout in distribution. both the risks are shared between the two companies. In a cash deal. how they can be dealt with. a stock deal allows the risk to be at least partially hedged. a fixed value offer is an indication of greater confidence on the part of the acquirer than a fixed number of shares and tends to be better received by the market. TW developed the image of a formidable media company with a presence in publishing. Where such confidence is lacking. If the acquirer is very confident about actually realising the projected synergies. (See Box Item on pg. If the acquirer feels its shares are undervalued. TW has entered a new phase after the merger with America Online. ironically enough. January 4. acts as a kind of self fulfilling prophecy and drives the share price downwards. Stock Vs Cash deals The way the deal is financed determines how risk is shared between the buyer and the seller. Vision and operating strategy must be backed by proper systems and processes to align the behavior of managers with corporate objectives. which should serve as a guide for the integration process.wharton. whether competitors will react aggressively. What to integrate 14 knowledge. there are two types of financial risk faced during an acquisition – the fall in the share price of the acquiring company from the time of announcement of the deal to its closing. the acquiring company assumes both the risks completely. 2000. movie and television production. where a fixed value of the acquiring company’s shares is offered to the acquired company. music. Now. This increased subscription and cable advertising revenues. cable was regarded as the ‘end of the line’. it prefers a cash deal as any fresh issue of shares would further erode the wealth of existing shareholders. but are not in the interests of the shareholders. The method of financing the deal is influenced by several factors. There should also be an operating strategy which addresses the issue of how the value chain performance can be improved. CEOs of poorly performing companies and of companies in industries which are rapidly consolidating. In general. The strategy of using different media platforms to distribute the same piece of content seems to have worked. and the possibility of synergies not being realised after the deal is closed. Behavioral issues also affect the way in which the premium is arrived at. Integration Many mergers fail at the integration stage. In a stock swap where a fixed number of shares is offered to the acquired company. The board has to ensure that senior management’s personal interests do not supersede the interests of shareholders. and if they do. 8). Investors’ perception of the merger improved rapidly. by minimising the pre-closing market risk for the acquirer. but the second risk is shared by the two companies. All acquisitions must begin with a strategic vision. are more concerned about retaining their position on the board rather than negotiating the best deal for their shareholders. TW could now bring movies to the cable network much faster. the first risk remains with the acquiring company. A study by Wharton professor. while fixing the premium. cable systems. . Some operations should be tightly integrated while others should be left alone.upenn. A fixed share offer.

Steve Case. movies. they agreed to report any complaints from competitors if they were denied AOL-TW content. In December programs could be featured on AOL. AOL’s stock had dropped by 48% to $37. By January 12. that could prove useful. Warner movies could be promoted on AOL-owned Moviefone. while AOL discs would be bundled with TW product shipments. The combined entity was valued at $350 billion. cell phone or any of the other wireless devices. It decided to move fast and make full use of its high market capitalisation. A year later. By early 2001. without in any way meddling with the day-to-day operations. Case has disengaged from day-to-day operations to concentrate on macro level issues. Interdivisional committees were set up to facilitate the integration. Quite clearly. Gerald Levin to discuss the merger. the deal was a reverse takeover by AOL. its large market cap made it the senior partner. A slowing US economy and a sharp cutback on ad spending by companies was hitting growth. CEO of AOL called TW CEO. Case also sweetened the deal for TW by inviting Levin to be the merged entity’s CEO. America Online (AOL) and Time Warner (TW) announced that they were merging.5 times that of TW. many analysts expressed concerns that the merger would slow down AOL and rob it of its entrepreneurial drive.9 and what to leave alone is a matter of judgement but there are some guidelines. Levin has been clearly in charge of both day-to-day operations and key strategic and personnel moves. After the merger was announced. remained confident that TW’s cable network and content would generate new growth opportunities. AOL however. AOL shareholders owned 55% and TW shareholders 45% of the new company. Efforts to generate cross selling opportunities in the areas of subscriptions. However. The merged entity could offer books. paper. An attempt to sell TIME’s magazines through AOL was very successful. AOL paid a premium of 71% over the market value of TW. 2001.5 shares for each of their existing shares. One positive feature of the merger is that the transition at the highest level of management has been smooth. However. Case said that the management set-up kept him informed about what was happening and allowed him to provide his perspective where required. The projected revenue growth of 12-15% and $1 billion in cost savings looked way off target. compared to $270 billion before the announcement. TW had been worth more than AOL. The AOL Time Warner Merger On January 10. In October 1999. advertising and promotions began. In an email to Fortune15. integration efforts began. AOL which had a strong brand and enjoyed a large customer base was clearly one of the pioneers in the new economy. the combined market capitalisation was actually lower at $260 billion. Levin sensed an opportunity as his company’s stock was not doing particularly well in the market.50. AOL realised it needed the ‘pipes’ of cable television to carry Internet content. AOL’s worth was 2. Though the two companies were confident of boosting revenues. . the merger was showing signs of trouble. 2000. TW shares traded at a multiple of 14 times EBITDA (Earnings Before Interest Tax depreciation and Amortisation ) while AOL shares traded at a multiple of 55. According to Merrill Lynch estimates. The immediate reaction to the deal was negative. growth would only be 11%. CNN. Moreover. AOL shareholders received one share in the merged entity while TW shareholders got 1. For all practical purposes. (See graph showing the stock price movement). We will cover this point later in the chapter. magazines and music to customers on TV. Case and Levin refused to accept a demand by FTC to regulate the placement of AOL-TW content. TW was on the decline. Before the announcement of the deal. While the icon of the internet world had just 20% of TW’s revenues and 15% of its workforce. the Federal Trade Commission (FTC) began to interrogate the senior executives of the two companies to determine whether the merger would come under the purview of anti trust legislation. Even as the FTC was in the process of approving the merger. But by December 1999. anticipating the rapid commoditisation of the Internet access business. The market value of AOL shares fell by 19% while that of TW shares went up by $22 billion. Effectively. “Low hanging fruit” synergies were quickly identified. AOL did not really have much content of its own. 15 July 23. PC. while losses would cross $5 billion due to merger write-offs.

Many of the top executive positions have gone to AOL. About 90% of shareholder value had been destroyed. AOL remains confident that its community can be persuaded to buy a range of entertainment products. TW has continued to struggle due to falling advertising revenues. . this has prompted for editorial quality. equipment orders were executed late and customers were frequently frustrated by delayed delivery. low margin business. the stock price of Unisys was only $3 per share. By November 1990.” AOL feels things are moving in the right direction. As the Economist16 recently reported: “There is a wide cultural gap between the restless 20 – somethings from AOL and New York institutions such as the 78 year old Time Inc… There is much grumbling among journalists (at Time Warner)… about a new tightness with money and the fears. The markets perceive the integration to be still incomplete. it cites a recent Madonna world tour arranged by Warner Brother Records. While AOL’s performance in the first quarter of 2001 was good. In response to the 2001 second quarter results. After the attempted integration. Most of its senior executives are still around. 18 months after the merger was announced. The integration of the distribution systems was however a disaster. the share price declined by 9% even though EDITDA jumped by 20% over the previous year. The 1986 acquisition of Republic Airlines by Northwest Airlines also ran into integration problems. Moreover. 2001. The two computer systems could not be synchronised. improve efficiencies and boost price competitiveness. in which AOL subscribers can buy advance tickets and see unreleased photos and videos. AOL Time Warner 100 90 80 70 Merger US $ 60 50 40 30 20 7/1/00 7/1/01 1/1/00 3/1/00 5/1/00 1/1/01 3/1/01 5/1/01 11/1/00 11/1/01 11/1/99 1/1/02 9/1/00 9/1/01 Date Closing Stock Price The 1986 merger of Borroughs and Sperry illustrates some of the difficulties involved in the integration of pre-merger entities. The companies had different order-entry and billing procedures. Cultural differences continue to be a formidable barrier to the integration process. Integration of 16 July 21. As an example of the synergies being generated. making Hollywood movies remains an unpredictable. felt that the merger would generate economies of scale. The two computer makers who came together to form Unisys.10 It is now clear that the fortunes of AOL-TW are closely tied to the erstwhile AOL group.

So. especially at the top. if two co-CEOs are named after the merger. Matters continued to worsen till 1989. if they join the discussions at an early stage and conduct a cultural audit. • Downsizing activities must be managed smoothly and sensitively. matters a lot during the integration of the pre-merger entities. not by a two-man team or a committee. things were in a state of flux and employees remained confused. • Hearing of employees tends be selective during the early days of a merger. In the Citicorp-Travellers Group merger. to deal with issues like compensation. In general. In both cases. entrepreneurial culture. a Northwest plane crashed after taking off from Detroit. drew lower salaries than those of Northwest. However. Cisco for example tells employees clearly what their new jobs will be after the merger and to whom they will report. it is advisable not to have two bosses. Superordinate goals can be set to motivate the two entities to work together. A related issue is finding the right roles for the people. the acquirer may become focussed on internal issues and lose sight of customers and competitors. If decisions and changes are not implemented fast. . Tatenbaum17 has argued that. when Northwest was bought out by a group of private investors. Personal chemistry. • The integration team should build organisational capability by retaining talented manpower. Low morale led to a deterioration in customer service. The team must manage cultural differences by collaborating with managers throughout the organisation. HR managers usually enter much later. Decisive leadership is best provided by a single individual. Jurgen Schrempp has gained ascendancy over Chrysler’s Bob Eaton. etc must be made within days of the deal being signed and communicated quickly to the employees. reporting relationships. potential trouble spots can be identified. on an average. For example. • Systems and procedures that are implemented must be in line with the strategic intent of the acquisition. there will ensue a period of uncertainty during which people wait to see who finally gains the upper hand. • The integration team must identify the cultural traits that are consistent with the business goals of the merged entity and take steps to spread them across the two entities. Autumn 1999. • Post merger drift tendencies should be minimised by managing the transition quickly. very early on. Republic’s employees. Tatenbaum’s research reveals that 47% of the senior managers in an acquired firm leave within the first year of the acquisition and 72% within the first three years. Sandy Weill of Travellers has taken control. care must be taken to ensure that people are treated with respect and sensitivity. Decisions about lay-offs. Besides internal 17 Organizational Dynamics. bureaucratic procedures can be highly counterproductive if the acquired company is known to have a flexible. until a clear leader emerged. Instead. In August 1987. restructuring. ousting Citicorp’s John Reed and in the Daimler Chrysler merger. Indeed. when anxiety levels are high. a top Human Resources (HR) executive must be involved in the negotiations before a merger deal is finalised. Otherwise. some messages may have to be repeated. they may fuel a large scale exodus of people. Tatenbaum provides seven guidelines for managing the integration process.11 crew and gate scheduling and human resources functions also ran into serious problems.

2000. After the merger. Cisco. Boeing knew that if MD went ahead with other acquisitions. Phil Condit and MD CEO. In the wake of competition from Airbus. When MD realised its competitive position was deteriorating rapidly. Looking back. The merger was announced in December 1996 and received approvals from competition authorities in the US and Europe by August. a leading manufacturer of military aircraft. Hary Storecipher felt that the time had come to revive merger talks which had failed in 1995. So. In February 1999. By September 1998. which makes acquisitions at regular intervals. clearly defined integration plans can be helpful. These were rumours that GE had its eyes on Boeing. it rushed to close the deal. the much stronger Boeing realised that its excessive dependence on the cyclical market for civil aircraft was risky. it would be priced beyond its own reach. the task of implementing the merger had distracted the attention of the top management from operational issues. Due to a parts shortage. It had to take a charge of $4 billion. Source: This box item draws heavily from the article. The company should identify the team which will conduct the due diligence and the team which will plan and implement the merger.” The Economist. the R&D centre of MD became the focal point for new initiatives to improve manufacturing processes across the group. Boeing ran into problems on account of a factor it had totally failed to anticipate. “Building a new Boeing. Boeing was in big trouble. To address this concern. August 10. The Boeing – Mc Donnell Douglas Merger In 1993. much work had to be done outside the normal production system.12 • communication with employees. through both short-run and long-run programs. Boeing made some changes in senior management and put in place a new organisation structure with different businesses focussed on different customer needs. Boeing also realised the importance of sharing knowledge and leveraging its research capabilities across the organisation. satellite navigation for air traffic controllers and services such as running airforce bases. MD and Rockwell. it even considered acquiring the defence businesses of Hughes Electronics and Texas Instruments. Meanwhile. Core functional areas did not receive the attention they needed. Checklists must be prepared to indicate the tasks and suggested deadlines. When a company has decided to pursue a strategy of growth by acquisitions. The idea was to integrate the expertise of Boeing. it had aggressively booked orders by slashing prices. the US government announced that its military procurement budget was being cut by 50% and informed defence contractors that they must consolidate. management must also keep external stakeholders such as customers. Condit warned his top management that the company was a potential takeover target. but GE denied them. . a defence supplier. At this point. Boeing CEO. 1997. The integration process was faulty and consumed a lot of precious management time. vendors and the community informed. When demand rose sharply. Boeing’s share price reached a low. Phantom Works. One company which looked at the turn of events with concern was Mc Donnell Douglas (MD). An important lesson from the Boeing – MD merger seems to be that synergies often come in areas where they are least expected. it acquired a major stake in Rockwell International. Most of the synergies realised came by sheer chance than by any great planning. uses a standard business process for managing acquisitions. It decided to tap new businesses such as broad-band communications. it is quite evident that the Boeing-MD merger was not really well planned. Quite clearly. Boeing’s production system was thrown out of gear.

though it had at first announced that it would keep it as a separate unit. the certainty of misery is better than the misery of uncertainty.13 Boeing 73 68 63 58 53 US $ 48 43 38 33 28 23 5/3/00 1/3/01 5/3/01 1/3/02 1/3/00 1/3/97 5/3/97 5/3/98 1/3/99 5/3/99 9/3/00 9/3/01 1/3/98 9/3/97 9/3/98 9/3/99 Merger Date Closing Stock Price Understanding the role of communication Communication plays an important role during the integration of the pre-merger entities. Later. the proposed changes and the impact of these changes on the employees. Here. when employees have to adjust to the changes. Immediately after the acquisition. When Intel acquired Chips & Technologies in 1997. It minimises the negative reactions of employees in the acquired company. It is only through honest communication that their anxieties can be set at rest. the quality of communication is the over-riding factor. their colleagues and their company. Employees must be informed about the acquiring company. employees need to know what will happen to their job. Genuine communication increases the perceived benevolence of the management and consequently promotes trust. the role of communication is even more critical. A high level of transparency will send the right signals to the employees even if all the information cannot be shared with them. frequency of communication becomes important. Acquirers also need to demonstrate to the employees of the acquired company that there will be consistency and openness in the new environment. A good communication strategy is necessary to ensure that rumours are not allowed to fill the information gap. All efforts should be made to reassure the employees of the acquired firm and make them understand the intentions and philosophy of the acquiring company. Frequent communication however does not mean that all details must be communicated. Lack of communication increases uncertainty and weakens the confidence of employees in the management. Many key people left and the . As a popular saying goes. especially when the management itself is not clear about what will happen. In the case of cross-border acquisitions. it decided to integrate it with one of its divisions.

FT has purchased Orange. Similarly. Britain’s biggest internet service provider. pp. Under CEO Michel Bon.5 billion and Equant. has been strengthening its presence in faster growing segments such as mobile phones and internet services. Investors are worried about FT’s financial health and have driven down the share price by almost 60% during the period early 2000 to early 2001. France Telecom: Growth by acquisitions leads to huge debt burden With its traditional telecom business shrinking due to deregulation and intensifying competition. France Telecom 220 200 180 160 140 120 100 80 60 40 20 10/20/97 10/20/98 10/20/99 10/20/00 10/20/01 1/20/98 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 4/20/98 US $ Date Closing Stock Price . Free Serve. The takeover was not effective and IBM sold Rolm to Siemens. ‘It’s frightening. the data services provider. when IBM acquired telecommunication equipment maker Rolm in 1984. “France Telecom’s $53 billion burden. it made the mistake of dictating terms to the acquired company’s employees. the mobile phone services provider for $40 billion. Some key technical employees left. compared to only 2% five years back. for $2. The company faces a cash crunch at a time when it has to invest heavily in next generation wireless networks. It has joined T Online and Telefonica as one of the leading ISPs in Europe. which have long gestation periods. The government controlled FT is now Europe’s second largest cell phone company after Vodafone. FT generates (early 2001 figures) almost 20% of its revenues outside France.” Business Week. 22-23. January 8.14 benefits of the acquisition were sharply undermined.’ Only time will tell whether FT will be able to manage the risks arising out of its aggressive acquisition strategy. Acquisitions have bolstered FT’s market share. but resulted in a debt burden of some $53 billion. for $4 billion. Source: Carol Matlack and Stanley Reid. Bon himself has admitted. France Telecom (FT). 2001.

Ebenhard Martini. Schmidt announced that loan provisions of $2. It was quite clear that several issues had been left unresolved at the time of the merger. a Board of Management. the Chief of Hypobank decided to move on to the more ornamental Supervisory Board. was Schmidt’s assessment vindicated.15 The Bayerische Vereinsbank – Hypobank Merger In July 1997. Consider the following examples. wellthought-out strategy. Vereinsbank took nine of the 14 seats on the Board of Management and also gained control over many key departments. The merged entity’s reputation was damaged. These assets had resulted from Hypobank’s aggressive lending in East Germany during the construction boom following German unification. Later. the merger might not have gone ahead. vested with executive powers and a Supervisory Board which oversees the functioning of the Board of Management). This led to a serious clash with Martini. 500 overlapping branches were closed. August 5. It had approached Commerzbank for support in warding off this takeover attempt but later resigned itself to a deal with Hypobank. the two Bavarian banks. The two banks were long time rivals. Hypobank even though it was making decent profits was worried about being taken over by Dresdner Bank. Upjohn’s centralised and aggressive culture clashed with Swedish major Pharmacia’s decentralised laid back management style. from Hypobank resigned. took charge of the merged very scientific and academic and the other more commercially oriented. Meanwhile. Source: This box item is drawn heavily from the article. Understanding the importance of cultural differences More often than not. encouraged by the performance of HVB. The government offered a one-off tax waiver on the exchange of shares involved in the transaction. 2000. Bayerische Vereinsbank and Hypobank merged to form Hypo Vereinsbank (HVB). People felt that a backroom struggle was going on between the chief executives of the pre-merger entities. pp. Vereinsbank was on the verge of a hostile takeover by Deutsche Bank. Much of the systems integration was also completed in less than three years. Bavarian politicians actively supported the merger as they wanted to create a national champion. the merger was more a reaction to the prevailing circumstances than a proactive. the integration proceeded smoothly. With a similar branch network and a similar mix of businesses. The move seemed to make sense in the context of Germany’s inefficient and fragmented banking market. “A Bavarian botch-up. (Under German laws.” The Economist. Albrecht Schmidt. On its part. In October 1998. the biggest bank in Austria. 68-69. Schmidt announced he was acquiring Bank Austria. However. significant cultural differences exist between the pre-merger entities. the head of Vereinsbank.1 billion would have to be made. there was tension in the air due to rumours that Vereinsbank’s ultimate goal was a takeover of Hypobank. . He also hinted that these losses had been covered up by Hypobank. In May 2000. Only a year after the merger. did the seriousness of the bad loans problem become evident. Managing these cultural differences is the strategic challenge during integration. Only in October 1999. Schmidt signalled peace by putting ex-Hypobankers in charge of the property division and giving them many of the top jobs in accounting and controlling. located close to each other. after an auditor submitted his report. These moves were however. limited companies typically have two boards. Martini’s hands-off-approach could also have been due to Hypobank’s non performing assets (NPA) in the property business. HVB also hoped the merger would enable it to become a major player in the German mortgage banking market. well ahead of schedule. Martini and the four remaining members on the Board of Management. This was a part of their grandiose plan to convert Munich into a financial centre that could rival Frankfurt. • The merger of UK-based Beecham and the US based SmithKline involved not only two national cultures but also two business cultures . consistent with Martini’s delegating philosophy and Schmidt’s hands on management style. they identified several opportunities to cut costs. Without this concession. • The American pharmaceutical company. Moreover.

Volpi’s team consults Cisco’s business units and customers to know more about their technological needs. aggressive and entrepreneurial Health Maintenance Organisation (HMO). Immediately after an acquisition is announced. Cisco assesses the merits and downsides. In spite of the recent slowdown of the US economy. Cisco completed four acquisitions. Exxon’s slow decision-making processes focus on cutting costs. its long-term strategy. its success with customers. Cultural clashes can be significant in industries such as the media. The Exxon-Mobil merger has also seen the coming together of two contrasting cultures. ahead of many other oil companies. Cisco has a separate integration team. a tradition-bound. which tailors the integration process to suit the specific needs of each new acquisition. examines the depth of talent of the target company. It examines the target company’s vision. . while the finance executives scrutinize the company’s books. Mobil on the other hand. Cisco’s CEO announced that the company would buy eight to 12 small companies in the near future. at the instance of US West. For example.16 • • • • • • After the merger between Daimler Benz and Chrysler. its compatibility with its own culture and its geographic proximity to Cisco. Cisco’s human resource and business development teams travel to the acquired company’s headquarters and meet people in small groups to set expectations and clarify doubts. Cultural differences became an important issue when Aetna. an important customer. In October 2001. is more accessible. deal making. It moved into central Asia in the aftermath of the break-up of the Soviet Union. generally considered to be a brash. One pressing issue in this merger has been the overbearing attitude of investment bankers who are typically paid much higher salaries than their counterparts in commercial banking. while Mobil has been known to take big risks. senior vice president. customers influence Cisco’s acquisition strategy. In 2001. investment banking culture. stodgy and slow-moving organization merged with US Healthcare. Daimler’s bureaucratic engineering culture in which different departments work separately has clashed with Chrysler’s free-wheeling. mergers and acquisitions (M&A) give quick access to new skills. (See case at the end of the chapter). Sometimes. This was so in the case of the 1989 merger between Time and Warner. Since September 1993. Cultural problems have been an important issue in the AOL-Time Warner (See Box item the end of the chapter) and Norwest/Wells Fargo deals as well. . Cisco has acquired 73 companies. Citicorp’s staid buttoned-down world of traditional commercial banking has had to take on Traveller group’s free wheeling. (Business Development and Alliances). the Germans and Americans have struggled to understand each other and their ways of working. A team headed by Mike Volpi (Volpi). primarily in the fibre optics business. the quality of the management and venture funding. in March 1998. Exxon is generally considered to be independent and not particularly good at managing the media. John Chambers. The team assembles a customized packet of information that includes a description of Cisco’s organizational structure and employee benefits and the strategic importance of the newly acquired company. competencies and people. accepts new ideas and is good at public relations. Before making a new acquisition. Cisco: Growth through Acquisitions In technology-driven businesses. Cisco acquired Netspeed. cross-functional product development approach. (See case at the end of the chapter). The engineering team examines the technology. which made high-speed Internet access products for home users. the company has not given up acquisitions. where egos tend to be big. (till October).

However. Cerent’s technology integrated voice and data traffic and zipped into optical fibres efficiently. for which Cisco paid $220 million in stock. a two year old start-up. product engineering and marketing groups remain as independent business units. the company will presumably use more of its $18. Cisco has traditionally used the pooling method of accounting in which no goodwill is created. All deals have to be classified as purchases. Our engineers could see we really had the potential to go from 5% market share to 25%”. Cisco’s share declined from a peak of $80. the tax implications and finally liquidity.48 in early 2001. while sales and manufacturing groups are merged into Cisco’s existing departments. the difference between the purchase price and the value of assets. The integration team puts the employees of the acquired company through a tailor-made orientation program. Cisco dropped the Monterrey wavelength router from its product line. Cisco viewed Cerent’s technology as critical for linking the Internet and telephone systems and for taking on rivals like Nortel Networks. CEO of Grand Junction Networks at the time it was acquired by Cisco 18. Cisco announced that it was paying $6.1999. with cumulative sales of only $10 million. analysts feel the company was acquired too early in its life. This means goodwill. According to Howard Charney. rather than its stock to make acquisitions in the immediate future. Crescendo Communications. (whose product range includes integrated voice. its products and development projects. Though Cisco obtained two seats on the board and worked closely with Ardent’s engineers. acquired for $95 million in 1993.9 billion (in a stock deal) to acquire Cerent. Some of Cisco’s acquisitions have made a significant contribution to its growth. at least 90% of the purchase must be conducted in stock. Another acquisition which has run into trouble is Monterrey (1991). Monterrey was two years old and a year away from a marketable product. In general. Many of Cisco’s acquisitions have been funded with its highly valuable stock. if impaired. must be written off. In pooling. “Even though at moments. A recent change in the method of accounting in the US will have a significant impact on Cisco’s future acquisition plans. 18 Leading the Revolution. . Using its well oiled distribution channels.06 in March 2000 to $11. One of the reasons for the relative success of Cisco in managing acquisitions has been the clear value proposition it has brought to the table. On August 26. Looking back. Volpi later acknowledged that Cisco had interfered too much in the acquired company’s operations and that results had not been satisfactory. The company has targeted small start-ups on the verge of takeoff. video and data equipment that can connect a company’s branches with its headquarters) has also not been very successful. Cisco’s investment in Ardent Communications. it has been able to increase sales of the acquired company’s products significantly. Cisco’s broad product line has strengthened its relationship with customers who like one company to take care of their networking requirements. However. what saved it was that they wanted us to become bigger by two orders of magnitude. Cisco has written off $108 million from the $517 million acquisition. When it was acquired. a good example being Granite Systems. it has also used cash or a combination of both stock and cash to fund acquisitions. Recently. that introduces them to Cisco’s hiring practices. So. The way in which the purchase is funded depends on the objectives of Cisco and the target company. it was painful. Chambers won over Cerent CEO Carl Russo by assuring him that all personnel decisions concerning the employees of the acquired company would be made jointly.17 Cisco’s integration team collaborates with the acquired company’s management in “mapping” employees based on their experience. in most cases.5 billion cash pile. not all the deals have been successful. generated revenues of $7 billion in 2000.

01. If a company is being acquired for its resources.05.09. The Innovator’s Dilemma.97 03. We referred to this book in chapter III. If the acquired company’s processes and values have been the main reason for its success. and systems. Such a consolidation. however. Clayton Christensen20 makes an interesting observation on integration. As the icebergs approach one another. 1985.09. He points out that an organisation has three broad types of capabilities – resources. The parent company can pump resources into the acquired company.00 03.99 03. et al. In general. The company’s acquisitions are typically start-ups.01.01.09. When the cultural differences are too sharp. To a great extent. the company should be left well and truly alone. the degree of integration depends on cultural factors.05. tight integration may make sense.01 03. Cisco typically transfers the acquired company’s resources into the parent company’s processes and systems.05.98 03. the culture clashes which often take place during integration: “Picture two icebergs in the ocean.01. the respective cultures that collide.02 US $ Date Closing Stock Price Kilman19.00 03. management of cultural differences is a critical issue while integrating the basic work processes. .01.05.98 03.98 03.” It was mentioned earlier that a decision regarding the degree to which the premerger entities should be integrated is a matter of judgement. Resources can be easily transferred.99 03.01. there is a culture clash.01 03.97 03. Read his book.09. can never take place. processes and values.01 03. Instead of synergy. where the tip of each represents the top management groups – primarily financial people – deciding the fate of the two companies and how the merger will work. the two icebergs begin moving towards one another until the tips meet and mesh as one. while processes and values are deeply entrenched and are difficult to change. Jossey-Bass. 19 20 Gaining control of the corporate culture. As these top management groups set the merger in process. it may make more sense to keep the acquiring and acquired entities separate.05. Many of Cisco’s acquisitions have been aimed at acquiring resources in the form of products and people.09. have vividly described.00 03.97 03.18 Cisco 90 80 70 60 50 40 30 20 10 0 03. which do not have deeply entrenched values. rather it is the much larger mass below the surface of the water.99 03. it is not the tops that meet.

Advanced Micro Devices (AMD) conducted a thorough check on Nex Gen before acquiring it in 1996. Once trust is breached. By keeping people with complementary capabilities in one place. NCR’s PC capabilities were also weaker than what AT&T expected. So. companies acquired for their skill in developing breakthrough technologies. The acquiring company needs to make sure that the capabilities of the firm being acquired are both unique and valuable. 236-237. Acquisitions not only allow a firm to make use of a new technology faster. But he decided to stay on rather than retire or form a new company. All acquisitions have to be managed with a high degree of sensitivity to people. Mario Mazzola became a rich man. hoping that telecommunications and desktop computing technologies would converge. it makes sense to keep the new people together in a separate division and make the owner of the purchased company a key member of the integration team. the head of the acquired company. due diligence is very important when high tech companies are involved. “Chambers (Cisco’s CEO) treated me like a peer. Despite differences in size. retaining talented people is virtually impossible.” Dilemmas/paradoxes in mergers and acquisitions 21 Leading the Revolution. Cisco delivered on its promise. AT&T acquired NCR in 1991. Like in other acquisitions. Very often. synergies were very difficult to achieve. Consequently. it is important to examine whether employees of the company being acquired have enough incentive to stay. but also bring talented manpower into the organisation. AT&T discovered that substantial differences existed between its competencies in switching and NCR’s Personal Computer (PC) technology. it is a good idea not to disturb the key technical teams of the acquired company. Whenever a high tech acquisition is planned. Cisco gave him plenty of responsibilities and made him the head of the company’s line of enterprise products. He asked me what I thought and never talked down to me. pp. hostile takeovers are almost always bad in high tech businesses. Often. their productivity can be significantly enhanced. After the acquisition. Cisco treats every acquisition like a merger of equals. may decide to quit. another Cisco acquisition21. CEO of Grand Junction Networks. They create suspicion in the minds of the employees of the acquired company. Employees whose stock options are already vested. In particular. But this is even more so in the case of high tech acquisitions. How the purchased company fits in and the role of the employees of the acquired company need to be clearly communicated. Nex Gen’s unique chip design capabilities enabled AMD to develop new products and take on the mighty Intel.19 Managing high tech acquisitions Acquisition is an important growth strategy in high tech businesses. It takes quite a bit of time to develop new technology in-house. if they sense that their importance will diminish or their creativity will be stifled after the merger. must generally be allowed to continue as separate entities. . According to Howard Charney. When Cisco acquired Crescendo.

competition authorities tend to watch it very closely. It takes time: Mergers and acquisitions result in severe disruptions and impose a tremendous strain on those involved. However. Expectations on both sides must be adjusted accordingly. If they feel that the merger will limit competition. in which the different partners retain their individual identities even if they exchange equity stakes. When a company is big and enjoys an overwhelmingly large market share.20 Slow Vs quick change: Some advocate rapid change within the first 100 days of the merger. Long-term and short-term focus: Sometimes. Strategic alliances are much more flexible than acquisitions. This creates antagonism among various employee groups and prevents a more iterative. the greater the likelihood that the acquiring company will step in and take control of the situation. 1998. it must be kept in mind that people caught in the process of integration will still tend to perceive that they are not being kept fully informed. World Com’s planned $115 billion takeover of Sprint in June 2000. compassion and goal congruence are the more important factors . Where uncertainties about the market size and technology are large. and along with it may come undesirable parts. The global software giant has by and large concentrated on acquiring small companies or has taken minority stakes in large companies. they may impose several restrictions on the new company. evolutionary process that seems to characterise many successful mergers. competition authorities view it with suspicion. Others suggest a slower process that carries people along. The image of the company makes a difference here. In an acquisition. (Daimler Benz certainly seems to be doing that to Chrysler). integration efforts tend to have an overly long-term focus. More than speed however. Managing risks in strategic alliances Acquisitions are different from strategic alliances. with a very positive. but also to keep in mind that all factors may not be fully within the control of managers. the target is to the acquirer. it is often the handling of short-term people-related issues that tend to have the biggest impact on the integration process. (See Box item on the GE-Honeywell deal in Chapter VII). Strategic alliances offer more flexibility than acquisitions. Managing Vs coping: It is important to have a plan. a strategic alliance is a more flexible and open-ended arrangement. Whenever a big merger deal is announced. friendly image will be viewed more positively by the anti-trust authorities than Microsoft. While an acquisition involves gaining control of another corporate entity. Information sharing: Though all efforts should be made to share as much information as possible. which is perceived to be a tough no-non-sense competitor. especially when progress is below expectations. Edition 3. an unduly high premium may be paid. and the recently announced deal between GE & Honeywell were blocked by the European Union’s competition authorities. Strategic significance: Studies indicate that the more significant. It may take up to five years for the change process to be fully completed. . People’s fears and tensions will always disrupt organisational processes to some extent. Take the case of Microsoft. acquisitions can be very risky. A company like Cisco. Another problem with acquisitions is that only a part of the acquired business may be valuable. because they generate more options. Source: AON Risk Services. A more detailed discussion on anti-trust issues is included in Chapter VII. Anti-trust issues An important risk in the case of mergers and acquisitions is anti-trust action.

the acquired company must be allowed to operate with a great degree of independence. January – February. strategic alliances are also more difficult to manage. since it needed additional capacity to meet the soaring demand. p 119. Schwinn had gone bankrupt. Don’t give autonomy without a clear logic: In some cases. January – February. who may start controlling the tasks and competencies most critical to the success of the alliance. one needs to understand the pros and cons before going ahead with a strategic alliance. Schwinn. an alliance is nothing but competition in a different form. As a result. Apply what has worked in the past: Core practices that have contributed to past success. Don’t be carried away by favourable short-term results: In many cases. Giant went from strength to strength. cut losses and withdraw. These executives may be upset at having been overlooked for the top job. But.” Alliances often create new strategic options for the partners. Specify roles clearly: Arrive at an agreement over the degree of integration and define clearly the roles of top leaders. The New York Times. From thereon. must be applied to the new business. 1989. “You cannot own a successful partner any more than you can own a husband or a wife. if the core values of the merging entities clash. one of the partners opts out. According to Gary Hamel. and could at best be transitional. Don’t compromise on values: No matter how good the numbers look. instead of throwing good money after bad. It is often the attempt made by one partner to dominate the other that leads to the break-up of an alliance. Design the integration process carefully: Combine the pre-merger entities in ways that preserve the anticipated sources of strategic leverage. reconciling goals and sharing profits. Thus. Much time and effort have to be invested in managing alliances to make them succeed. If one deal does not click. Since the partner might take unfair advantage of the situation. Source: David A Wadler. The Borderless World. the merger is heading for big trouble. not just because the acquired company demands it. Joel Bleeke and David Ernst 22. Yves L Doz and CK Prahalad23. Don’t escalate commitment carelessly: Avoid making additional acquisitions to justify the deal. The bicycles made by Giant turned out to be cheaper and better than those made in the US. 1998. Porter argued that strategic alliances involve significant costs in terms of coordinating. America’s largest bicycle manufacturer tied up with Giant of Taiwan. Don’t give key jobs to top executives who missed out on promotions earlier: Such a move often creates problems. . A McKinsey study of 49 multinational alliances conducted in the early 1990s revealed that two thirds of these had run into serious problems in the first two years. alliances involve a delicate balancing act between control and autonomy. Harvard Business Review. By 1992. In other cases. while Giant emerged as one of the leading bicycle manufacturers in the world. trust may become a problem over time. Typically. As Kenichi Ohmae24 puts it. 1995. Autonomy should be given based on the merits of the situation. the strategic objectives should be clearly defined and the company must understand how these objectives may be influenced by the hidden agenda of the partners. it makes sense to grant autonomy to the acquired company’s managers only after a period of sustained excellence. this should not be so. In the late 1980s. McKinsey consultants. have mentioned that in many alliances.21 Guide to a happy merger Question the logic: Ask how exactly the combination will generate synergies. In 1990. As a 22 23 24 Harvard Business Review.

top management commitment holds the key to the success or failure of an alliance. employees take the message seriously. Before going ahead with an alliance. the problems they have faced in the past while managing alliances. occasional complaints from the partner that lower level employees are not providing the necessary information should be viewed as a positive indication.22 result. People who will be actively involved in the negotiation should be carefully selected. When two partners view an alliance differently. the sharing of benefits may become lopsided. When top management sends out clear signals that learning is very important. Employees can be trained and encouraged to ask probing questions such as: Why is their design better? Why are they investing in a technology when we are not doing so? Companies can also learn more about the competitive behaviour of their partners . Managers who are familiar with the cultural differences and command respect in their respective organizations will come off as more credible when they interact with their counterparts in the partner company. These records can be referred they respond to price changes. Indeed. The company which systematically monitors the type of information the partner is requesting and the extent to which these requests are being met. For example. Crisis situations should be anticipated and a code of behaviour prescribed for dealing with them. companies should carefully analyse the value chain to determine which activities should be retained internally and which can be shared with partners. the chances of success multiply. Like in many other business activities. It is precisely because of such difficulties that strategic alliances have to be conceived and structured carefully. as and when disputes arise. The top management should also properly brief the lower level employees on what can be learnt from the partner and how this knowledge will strengthen the company’s competitive position. may well turn out to be the ultimate winner. The executives involved in the negotiation should be allowed sufficient time to get to know each other and to develop personal equations. how they launch a new product. At the same time the differences between the past experiences and the new situation should be appreciated. It may also be useful to maintain written records of informal and oral commitments and agreements. . Free and frank discussions and realistic targets will help the firm avoid future disappointments. Unintended leakage of knowledge is a big risk in strategic alliances. The partners could also share with each other. etc. they may have different expectations. When senior executives of the companies involved are willing to invest time and effort in building strong personal relationships with each other. One way of bridging this gap is for each partner to put itself in the other’s shoes. Management of expectations is a crucial issue in strategic alliances. information leakage must be discouraged by putting in place proper controls and firewalls. one may treat it as an acquisition while the other may believe it to be an equal partnership. A related issue is whether to choose one partner for many activities or different partners for different activities. A systematic and pragmatic approach right from the negotiation stage can minimize risks in strategic alliances. It is also important to examine carefully whether the scope of the alliance should be limited to start with and expanded over time. The partners should painstakingly identify potential problems and devise ways to solve them. The success of a strategic alliance depends critically on the partners’ commitment to learning. While friendly relations between the partners are desirable.

It is quite possible that the two partners have ‘given up’ or one partner is dominating the other. while the other may have expertise which can be more easily picked up. The actions of competitors can turn a potentially attractive alliance into a weak arrangement.23 Alliances can run into rough weather for various reasons. A dispassionate analysis of the potential benefits and pitfalls involved is important before going ahead with a merger or a strategic alliance. manufacturing skills are more intricate. For all these reasons. Regulatory changes. The difficulties in planning and executing acquisitions and alliances make them very risky. absence of conflicts may not necessarily imply that the alliance is succeeding. Managers should never underestimate these risks when they strike such deals. stand-alone technology. the value of the alliance for each partner may change dramatically over time. acquisitions and strategic alliances. in industries which governments view as strategic. If technology is changing rapidly. The trick obviously lies in managing these conflicts tactfully. In their anxiety to close the deal or in their enthusiasm to grow. Occasional conflicts may reflect a more normal situation. if the partners are alert. companies often strike deals of questionable merit. The right approach to deal with these potential problems is to think and act flexibly. The size of the market may have been overestimated at the time the alliance was formed. In the final analysis. unforeseen opportunities for knowledge generation and sharing can be tapped. we have tried to understand the risks associated with mergers. People being largely risk averse. Concluding Notes In this chapter. partners may switch loyalties. especially the external directors. it is the efficiency with which the integration process is managed that decides whether the projected synergies materialise. may totally upset the initial calculations of alliance partners.” Alliance partners must appreciate that their objectives are bound to change with time and not cling to the initially set objectives. Japanese companies often tend to learn more from their American partners because their manufacturing skills are less transferable than the design skills of western companies. One common reason for conflicts is that one partner may have skills that are not easily transferable. Once the decision to go ahead with the merger is announced. Contrary to popular notions. The design of a component or a product can normally be learnt through a manual or an engineering drawing. can be more easily transferred than a process competence. Board members have an important role to play here. . A discrete. This is a task which is underestimated by most companies. On the other hand. Indeed. will always be tempted to hedge commitments and keep their options open in the face of uncertainty. the focus shifts to integration. According to Hamel and Doz25: “Calls for commitment make good rhetoric but are a poor basis for action. typically developed over a period of time and combine several competencies. 25 In their book. Commitment increases only over time and an uncritical belief in commitment is naive and misleading. CEOs must be thoroughly grilled and asked to explain the benefits of the merger. Alliance Advantage. such as the design of a semi conductor chip.

Both appeared confident that the merger would generate various synergies and growth opportunities. 26 27 Press release. Starting as a weak number three in a murderously competitive business facing competitors with far greater resources. In the new company. both have a reputation for innovation and quality……. Daimler-Benz and Chrysler. Chrysler’s position had significantly improved.1 . agreed to combine their businesses to form the third largest automobile company in the world in terms of revenues..7 billion in 1994 and $2 billion in 1995. This is a historic merger that will change the face of the automotive industry. In 1997. Forbes which selected Chrysler as the ‘Company of the Year’.. $3. two of the world’s leading car manufacturers. “Both companies have product ranges with world class brands that complement each other perfectly. mentioned27: “No company in recent years has faced greater odds than Chrysler.Eaton the CEOs of Daimler and Chrysler respectively were named co-CEOs. “Company of the year Chrysler. “The two companies are a perfect fit of two leaders in their respective markets. we will have a pre-eminent strategic position in the global marketplace for the benefit of the customers. pp. Both companies have dedicated and skilled workforces and successful products. Schrempp remarked26.” Forbes. the Chrysler board had appointed Robert Eaton. What is more important for success is our companies share a common culture and mission……. 1997. 1998. He emphasised quality and efficiency. 83-87. By combining and utilizing each other’s strengths. called DaimlerChrysler (DCX) Juergen E Schrempp and Robert J. as the new chairman and CEO. Eaton divested unrelated businesses to concentrate on car and truck making activities. both clearly focussed on serving the customer……. but in different markets and different parts of the world. We will continue to maintain the current brands and their distinct identities.4 billion in 1993. Fling Jerry. January 13.” According to Eaton. Chrysler reported net earnings of $2. Chrysler management devised a disciplined strategy out of chaos and rose to the top of the American car industry in profitability. and we will improve return and value for our shareholders. 1998. We will be able to exploit new markets.24 Case 4. market capitalization and earnings (fifth in terms of the number of units of passenger-cars and commercial vehicles sold). strengthened the balance sheet by reducing debt and increased Chrysler’s commitment to new product development. then a senior General Motors (GM) executive. By 1995. . Chrysler In 1993.” Eaton received praise from analysts for making Chrysler a customer oriented company and for developing a close knit team of talented managers driven by a clear vision. May 7.The Daimler Chrysler Merger Introduction On May 6. following the legendary Lee Iaccoca’s retirement. By realizing synergies……… we will be ideally positioned in tomorrow’s market place”.

10.99 26. which had employed 180.98 26. Even the Mercedes division.07.99 26.07. saw its manpower strength fall to 140. unfavorable exchange rates and global recession had resulted in massive losses.01. Daimler generated revenues of DM 124 billion and net profits of nearly DM 6 billion.99 26.01. the company was facing a crisis. he had supported the acquisition of Fokker. helped in reducing headcount and sharpened the business focus. Each of Daimler’s 23 business units had to earn a return of at least 12% on the capital employed (ROCE).10. The merger In the early 1990s. price wars. The price of the vaunted Mercedes marque was beyond the reach of most customers in emerging markets.99 26. If matters were allowed to drift. Mercedes would remain a niche player and lose its competitive strength.04.10.01 26.25 Daimler Chrysler 120 100 US $ 80 60 40 20 26. So Daimler began to look for a partner to broaden its appeal and give it the scale it needed to retain its technological strengths.01 Merger Date Closing Stock Price Daimler Benz When Juergen Schrempp had taken over as Daimler’s CEO in May 1995.000 people through layoffs. Schrempp set about revitalizing the culture and promoted what he called “value driven management”.04. Daimler showed a remarkable improvement with ROCE of 9%.000 people in 1991. He announced that Daimler would return to its roots as a car maker and began divesting unprofitable businesses. Fokker slid into bankruptcy less than three years later. The Aerospace division alone lost around 40.07. Schrempp himself was responsible for this state of affairs. Schrempp however.01 26.00 26. After restructuring Daimler.01. These divestitures. the Dutch airplane manufacturer. After considering various car manufacturers .01 26. During the first half of 1997.000 by 1995.07. made up for these mistakes through ruthless restructuring.04. attrition and divestiture. To cite an example.00 26.00 26. In 1997. To some extent. Daimler executives noticed that their traditional markets were becoming saturated and started looking for new growth opportunities.00 26.98 26. However.10.

The talks however ran into a stalemate over issues of responsibility and money -. the European and American competition authorities gave their nod. In 1995.26 in the world. and establish dealer networks in new markets. Switzerland. The London meeting was successful. In April. The ground realities they faced. were building competitively priced premium cars such as Lexus and Audi. the Daimler supervisory board agreed to the merger. due to smaller volumes. . to discuss issues like governance and organization structure for the merged entity. On May 14. However. In July. its R&D cost per vehicle was higher than that of its formidable rivals. But doubts about the deal again arose when Ford chairman Alex Trotman approached Schrempp in Detroit in January 1998 for a joint venture. 1998. jointly owned project codenamed Q Star that would operate outside the US and Europe to develop vehicles. Meanwhile. was cancelled at the last minute after Trotman informed Schrempp that the Ford family did not want to lose management control. working teams went into details and reached agreements on big issues (Computer operations would be centralized the Chrysler way. Top executives from Ford and Daimler held two days of discussions in London in March. On March 2. The German manufacturer had to spend about $180 million in 1997 to retrofit an innovative small car called A-class. adopted US GAAP accounting principles and listed Daimler on the New York Stock Exchange. to a lesser extent. Schrempp met Eaton at Chrysler headquarters during the Detroit Auto Show. They proposed to set up a new. the negotiations between Daimler and Chrysler proceeded smoothly. Daimler and Chrysler signed the merger agreement which was announced worldwide the following day.who would manage which projects and how the costs would be allocated. plastic-bodied city car called Smart. After building a plant in Alabama to assemble the M-class sport-utility vehicle. Chrysler. 28 A leading Swiss watch manufacturer. Moreover. Meanwhile. Chrysler and Daimler shareholders approved the merger. It made sense to have a partner. however. On May 6. and discussed ways of dealing with their weaknesses in the rapidly growing Asian markets and. After the talks with Ford broke down. Chrysler was too small to take on its bigger rivals. Daimler executives decided that Chrysler topped the list because its product line and geographical reach were both complementary. Clearly. build factories. motivated Daimler and Chrysler to get back to the negotiating table. with a Chrysler executive in charge) to small issues (Business cards would be wider and longer. South American markets. larger manufacturers like Toyota and Volkswagen. In January 1997. On September 18. This would greatly facilitate any transatlantic deal. Daimler and Chrysler began exploratory talks. realized very soon that it was too thinly staffed to boost overseas sales by deploying managers around the world. European style). The company formed a partnership agreement in 1997 with Swatch28 to develop a two-seater. Daimler had never viewed Ford as a possible partner since it was big enough to survive on its own. many defects/problems appeared during its first year of production. GM and Ford. But the co-venture dissolved in acrimony. because it lost balance when turning around corners at high speeds. On the positive side. Eaton and Schrempp met in Lausanne. Daimler was having its own problems. making it the most defect-ridden vehicle in its class. Schrempp had restructured Daimler’s non-auto businesses. a second meeting.

it had turned around under CEO Iacocca. The geographic region responsibilities were divided among Holden (North America). Integration Once the deal was finalized. Lauk and Zetsche.5 billion in 1999 and around $3. The merger was projected to generate synergies of nearly $1. but weak in Western Europe. to become one of the most efficient car companies in the world. In the pre-merger phase. during integration. The individual brands were managed by specific brand managers. while Daimler’s engineering and technological capabilities were well established. However. Africa. Dieter Zetsche.3 billion in 1998. where Daimler was strong. In markets where DCX had a weak presence. warehousing. Daimler made Mercedes luxury cars and heavy trucks. Having almost gone bankrupt before its celebrated 1979 bailout. Holden. In Europe and North America. consisting of Cunnigham. Sterling and Setra). The Council became responsible for establishing central marketing services. Schrempp would share the title of co-chairman with Eaton for three years (2001) or until Eaton retired. as well as sales of Freightliner and Sterling products.27 Chrysler stockholders received 0. a highly regarded Daimler manager was made in charge of the global brand management of Mercedes-Benz and Smart cars. M class. Theodor Cunningham was asked to coordinate the worldwide integration of common systems and processes.547 share of DCX for each share they held. James Holden. they decided to integrate the distribution channels and cut costs by combining different functions like logistics. DCX had revenues of $155. Zetsche (Europe. Asia.Mercedes-Benz. Schrempp named a management team for the new company. Dodge. and then Eaton. CLK convertible. management control of DCX seemed to be in the hands of former Daimler executives. a senior Chrysler executive became responsible for brand management and marketing for the Chrysler. Much of the costsavings would come through rationalisation of purchasing and technology sharing activities. DCX also announced plans to establish a Marketing Integration Council. the two companies decided to maintain separate showrooms. aimed to generate sales growth while protecting the identity of the company’s six brands in the passenger car business (A class. Kurt Lauk became head of global brand management of the commercial vehicle brands -. Freightliner. However. technical training and after sales service. cultural differences became the most critical issue. Sterling and Setra (buses). Chrysler was strong in North America. Plymouth and Jeep brands worldwide. Chrysler made moderately priced cars and light trucks. with a presence across several market segments. Daimler was characterized by methodical decision-making while Chrysler encouraged creativity and represented American adaptability and resilience. Dodge Interpret and Eagle Vision). Daimler had assumed that the cross border nature of the transaction would not create any special problems. Freightliner. The new organization structure for worldwide marketing operations. Daimler felt agreeing on the broad terms of the merger was more important and attached greater importance to efficiency and planning. . and setting volume and profit targets. Australia) and Cunningham (Latin America). and unit sales of 4 million cars and trucks. such as Asia. Daimler shareholders held a 57 % stake in the new company.0 billion in 2000. Chrysler’s strengths lay in product development. Daimler. Chrysler Concorde. and four brands in the commercial vehicle business (Mercedes-Benz.

In November 1999. In general. resigned. Americans were asked to make more specific plans. many Americans began taking lessons in German. While it minimised ego clashes. while the Germans were urged to experiment more freely. On the other hand. CEOs were rewarded handsomely. To reciprocate. Thomas Stallkamp. But. the Germans resisted because they were not sure whether they would have enough parts to spare after taking into account their own consumption. While Chrysler executives were used to higher pay. Eaton. Many Chrysler executives were upset by Stallkamp’s resignation as he was considered to be the only senior executive prepared to stick his neck out to protect the Americans’ turf from the Germans. Around this time. Schrempp felt it made sense to let Chrysler and Mercedes operate as separate business units. But. the president of the US operations. With Eaton expected to leave by early 2000. Stallkamp’s successor announced a reorganisation that would enable the company to get bogged down by the integration processes and concentrate on competing with main rivals. Situations such as an American manager being posted to Stuttgart. Problems begin Despite all these initiatives to bridge the cultural differences. The Americans were impressed by their German counterparts’ skill in English. following criticism that Chrysler was being tightly controlled by the Germans. James Holden. GM and Ford. Stallkamp had apparently argued that the merger must go ahead slowly. The restructuring aimed at centralising product planning functions and enhancing control over product development activities. Schrempp mooted the idea of overcoming the problem through a low basic salary and high performance-based bonus. Chrysler had begun to share Mercedes’ rear-wheel-drive technology. There were major disparities in pay structures between the two pre-merger entities. and implemented them methodically. who had played an important role in Chrysler’s comeback in the early 1990s. with more variables such as stock options. the Americans performed little paperwork and liked to keep their meetings short. realisation of projected synergies became more difficult in areas such as sharing of components. the Germans perceived the Americans to be totally chaotic while the Americans felt the Germans were stubborn . Germans were encouraged to try out casual dress and also attend classes on cultural awareness. whereas the Germans laid painstaking plans. significantly higher than what Schrempp did. . In the US. problems in implementing the merger began to be noticed from the middle of 1999. DCX took several initiatives to address the cultural dissimilarities. had long represented the epitome of German industrial might and was one of the best examples of German quality and engineering. They liked to travel first class and stay at top class hotels over the weekends. Chrysler could cut pay only at the risk of losing its talented managers. the Americans felt threatened. reporting to a German manager who was earning half his salary became ticklish. earned a total compensation of $10. The Germans were also used to lengthy reports and extended discussions.9 million in 1997. The Americans favored fast-paced trial-and-error experimentation. the Germans seemed to relish their perks. when it wanted to use some of these components in the Dodge Intrepid and the Chrysler Concorde. Daimler had a very egalitarian pay structure.28 meanwhile. In September 1999. Basic pay would be lower than what Germans were used to.

When it introduced its new model. DCX decided to form new strategic alliances to expand its presence in the region. The German side is acting as if it is still alone. The point is. its price was perceived to be too high in relation to the old vans which had flooded the market.” Meanwhile. 2000. Mercedes-Benz and Chrysler. had put paid to any plans to generate synergies. Chrysler’s fundamentals had probably been much weaker at the time of the merger. But that’s not the point. would later remark. September 17. Daimler-Benz and Chrysler said that together they would create tremendous synergies. Competition from Japanese and European manufacturers had resulted in shrinking margins for Chrysler’s mini vans and sports utility vehicles. Many Chrysler executives had left the company. 2000. they won’t achieve the same kind of global reach as Ford. it spent $428 million to acquire a 10% stake in Hyundai of South Korea. Towards the middle of 2000. DCX announced that sales had risen 12% driven by strong demand for Mercedes-Benz’s S-Class luxury cars and Chrysler’s Jeep Cherokee. we are a solid company… We are now one company. Vehicle sales in both North America and Europe were strong. DCX’s market capitalisation was less than that of Daimler-Benz before the merger. But keeping in mind its weak presence in Asia. October 12. the markets were increasingly coming around to the opinion that the integration process had run into problems. DCX forged a strategic alliance with Mitsubishi of Japan. But insiders say this strategy has been taken to extremes. As 2000 progressed. That these have not materialised is partly because of the decision to keep the European and American operations. “At present. working separately. The two proud management teams resisted working together. Schrempp remained optimistic though slightly defensive about the prospects for the merger29. Chrysler had to offer big incentives for vehicles sold in 2000. dissatisfied with the 29 30 31 32 Business Week. As the Economist30 put it: “When they merged. In hindsight. such as finance and public relations… Mercedes executives worried their buyers might feel cheated if they shared parts with the American auto maker. the merger is judged on the basis of the stock which I appreciate is not where it should be. it became evident that Schrempp’s decision to allow Daimler and Chrysler to operate separately. were wary of change and weren’t willing to compromise.” According to an expert quoted in Business Week31 : “They’re erring too much on the side of caution… If they continue to operate as separate companies. Chrysler lost $1. 2000. During the second half of 2000. DCX faced some serious problems in the key North American market. Chrysler had miscalculated the demand for their aging minivans. So. 2000. In June. By late 2000. “Both the Germans and the Americans have been out of synch(ronisation) from the start. arm’s length operations might have made sense. Daimler and Chrysler have combined nothing beyond some administrative departments.8 billion.29 In December 1999. Chrysler resented the implication that its technology was inferior”. which shares some parts among its upscale brands with the lower-cost Ford brand. after full integration plans became bogged down. Schrempp expressed satisfaction that the merged entity had consolidated and strengthened its competitive position in many markets. partly for fear of sullying the imperious Mercedes brand with the rugged Chrysler image. August 7. . At one level.” Business Week32. August 7. On March 27. than widely perceived. It’s working well. 2001.

2 billion. Schrempp hoped the move would speed up decision making on many issues including sharing of technology among Chrysler. Zetsche also started attempts to strengthen relations with the dealers. This committee was empowered to make all key strategic decisions and coordinate production and marketing activities across the group’s divisions. Zetsche’s plans to move towards an everyday low pricing strategy have not materialised. Chrysler’s US market share has been shrinking (13. Zetsche himself admitted the need for insights from the Americans in the efforts to turn around Chrysler33: “I would be the first to say that I’m not smarter than the people who are here. 3 position in the US to Toyota.” Future Outlook The German-American team faced stiff challenges In 1998. Cost cutting initiatives were renewed and suppliers asked to reduce prices by 5% immediately. it is expected to lose at least $2 billion. Schrempp also fired Jim Holden and replaced him with Dieter Zetsche as CEO of the Chrysler division. Gary C Valade (Global procurement & supply chief). understood that the Americans still had an important role to play in managing the US operations.30 way the merger was progressing while some had been fired. Chrysler spent an average of $2.2% in 1998) and is in danger of losing the No.389 per vehicle in customer incentives. 2001. Partly by design and partly by circumstances. So. more than that of GM or Ford. In 2001. from 16. Initiatives to share platforms and parts among Chrysler. Chrysler had made more profits per vehicle than other major car manufacturers. Daimler however. “For all the talk about the Germans invading the executive ranks of Chrysler. January 15.5% in September 2001. it did not come as a surprise when Schrempp announced plans to scrap the automotive and sales councils the two companies had set up after the merger and replace them by a tightly knit executive committee. he is relying on Chrysler veterans who have been plucked from relative obscurity following a rash of high-ranking defections… The presence of so many Americans points to something else: a tacit acknowledgement by the Germans that they have a lot to learn about the workings of a mass-market giant like Chrysler. 2001. Quality improvements. particularly for trucks were introduced at a furious pace. a German – American Management team began to evolve. Mercedes.” As Business Week 34 reported. first GM and then Ford started offering free financing on their cars. Chrysler had to follow suit. Schrempp has sent only a pair of workout guys to handle the biggest workout in the automotive world. Following the September 11 attack on the WTC. Schrempp. consisting only of Germans. Hyundai and Mitsubishi gathered momentum. . Daimler & Mitsubishi and Hyundai. Chrysler’s operating profit declined sharply by 90% to $500 million on a sales turnover of $64. The Germans seemed to be gaining the upper hand with Schrempp even admitting that the marriage of equals was only a sales pitch to make the deal palatable to the Americans. In August. Key members of the management team. 2001. In 2000. Thomas Sidlic (Procurement and supply chief of Chrysler) and Richard Schaum (Head of Product Development and Quality) were also given important roles. Marketing programs were rationalised and coordinated efforts initiated to emphasise that Chrysler’s cars were “cool”. Zetsche and Wolfgang Bernhard were Germans but Americans like James Donlon (Corporate Controller). 33 34 Business Week. For the rest of the team. January 15.

5 billion. Jurgen Hubbert. In the first three quarters of 2001.” Indeed. Chrysler lost an estimated $1. Schrempp remains confident that the implementation of the merger.31 On February 26. in effect. The choice of a German like Zetsche to manage Chrysler seems to have brightened the prospects for the American partner. making it the weakest among the Big three. The stately product-development process that suffices for a luxury brand has to be speeded up for the more competitive markets that Mercedes. Meanwhile. Business Week. But the strong performance of the Mercedes-Benz luxury car business is expected to generate the targeted operating profit of $1. though incomplete will proceed smoothly. On October 31. DCX just cannot afford to do anything that will hurt the image of its Mercedes cars. to the top rank of German business.” Problems remain to be addressed in critical areas such as component sharing. 2001.6 billion. According to Hubbert37. Zetsche has indicated plans to install a wide array of Mercedes parts in Chrysler cars by 2004.7 billion.1 billion during the year. he needs to get to grips with the nuts and bolts of what is. Chrysler and Mitsubishi now find themselves in.5 – 9. who heads the Mercedes-Benz car division also by two years. 2001. “One million Mercedes customers a year are willing to pay a premium for something that is better than what the competition is delivering. We have to be very careful to make sure they feel that what they’re getting for their money is unique. March 1. DCX announced it would make a loss in the range of Euro 2. November 12. 2001. the company would be making profits in the range Euro 8. a threeway merger. 2001. a two-seat roadster to be launched in 2003. The DCX share after peaking at $108 in January 1999 traded at about $35 as on October 31. fixing lorry engines. this will be a tricky issue as the premium Mercedes charges is crucial to the well being of the group. Now belatedly. Zetsche’s good relationship with Stuttgart may result in faster access to German technology for Chrysler cars. . Many formidable challenges still remain for DCX. The first Chrysler vehicle to use Mercedes parts extensively will be the Crossfire. 2001. has summed up: “Daimler has to integrate two struggling companies and in the process reform itself. As a recent report in the Economist36. Standard and Poor downgraded DCX’s credit rating. 2001. DCX’s supervisory board has passed a vote of confidence in Schrempp’s leadership by extending his contract35 by two years and that of his close ally. 35 36 37 The announcement was made on September 27. Mr Schrempp is a tough boss who clawed his way up from garage mechanic. Schremp however remained optimistic that by 2003.2 – 2.

Its subsidiaries included Salomon Barney (brokerage services. on the other hand. this became Travelers. Citi had become the leading consumer bank in the world by the 1990s. consumer finance. casualty and life insurance. using niche marketing techniques had been steadily eroding Citi’s market share in the 1990s. Primerica Financial Services. less affluent customer base. Over a period of time. These competitors. Citi could sell its CitiGold and Private Banking Services more efficiently to Travelers’ 20 million U. Weill believed in moving fast after an acquisition. But gradually. were named co-CEOs of Citigroup. Weill. John Reed. Also. While Citi had a younger. the Citicorp CEO realised that the two companies were in complementary businesses with little overlaps. It would operate in diverse businesses such as traditional banking.2 . home equity lenders and mutual fund companies. Citi had struggled with the few acquisitions it had made. The merged entity looked better placed to compete with specialist credit card issuers. 1998. the financial services giants. Citi and Travelers were confident that the merger would facilitate “cross-selling” of each other’s products. Alan Greenspan and Robert Rubin to get their support. Citicorp and Travelers before the merger Citicorp (Citi) and Travelers had come to the merger table with different backgrounds. an insurance and brokerage conglomerate. 166 in Latin America and 93 in Asia. the Travels Group CEO. Reed and Weill agreed to go ahead with the merger. more affluent individuals. while Travelers had an insignificant presence overseas. Weill bought Commercial Credit. corporates and governments across the world. Synergies When Weill and Reed met on February 25. customers after the merger. through a series of mergers. investment banking. The two companies also complemented each other’s customer segments. securities brokerage and asset management. the securities data firm.The Citicorp Travelers Group Merger Introduction In April 1998. Citi on the other hand had an impressive network outside the US. In 1986. Travelers had grown through acquisitions. the Citicorp CEO and Sandy Weill. a notable example being Qeutron.S. Travelers targeted older. Citicorp and Travelers Group announced they would merge to form Citigroup with a market capitalisation of $160 billion and assets of $700 billion.32 Case 4. They met leading luminaries in Washington including President Clinton. and property. investment banking and underwriting). could also benefit from Traveler’s expertise in mutual funds. it had one of the strongest distribution systems in the US. It had largely depended on organic growth. select a management team carefully and drive under managed businesses to their full potential. Reed was surprised by Weill’s merger proposal. after quitting American Express. It had 464 branch offices in Europe. Citigroup would sell a range of products to individuals. Travelers Bank Credit cards and Travelers Life and Annuity. Commercial Credit (consumer loans). . a small consumer lending firm. The two companies indicated that this would be a merger of equals. was a seasoned expert in implementing acquisitions. credit cards. In the third week of March. Citi.

there was little danger of the pre merger entities losing any of their momentum.33 Citigroup 60 50 Merger US $ 40 30 20 10 21.Jan.Nov. Its sales force however paled before Travelers which had 10. implying a modest premium over Citi’s ongoing market price.98 Date Closing Stock Price Citi had expertise in mail and telephone distribution of cards and branch banking.00 30. But it did not exert pressure on them to retain their holding.99 06. (If the existing laws were not amended. an important business for Travelers.98 07.Jun.01 15.01 01.Jan.00 16.Nov.01 26.5 shares of Travelers for each Citi share they held.00 14. and comply with the law within a prescribed period. The compensation policies were very different in the two companies.98 26.01 03. it seemed the two companies had little to lose.Apr.99 31.Apr. The main hurdle in the implementation of the merger was the Bank Holding Company Act.Jun. So.000 part time Primerica Financial Services insurance agents and 100. there was a good chance of generating higher earnings after the merger.300 Salomon Smith Barney brokers. Another positive feature of the deal was that no huge premium was being paid by the acquiring company. Citi and Travelers hoped that banking laws would be suitably amended by then.000 agents selling Travelers’ insurance.Sep.Aug.Jun. Even though cross selling remained a challenge. Citicorp shareholders would get 2.00 26.Apr. which prohibited banking companies from engaging in insurance underwriting.99 12.99 26.00 07.Sep.Apr. 80. become a bank holding company.Jan. the Fed would possibly insist on divestment of the insurance underwriting business within two years). However the regulation made it possible for a non banking company to buy a bank.Jun.Aug. The law allowed two years for this to happen and also provided for three one-year extensions at the discretion of the Federal Reserve.Nov.97 11. .Nov.Jan. There was very little duplication of activities.Nov.98 22.01 07.99 18. So.98 01. Citi offered stock options to talented managers it wished to retain. Integration Important hurdles stood in the way of integrating Citi and Travelers.

major changes in the top management were made. Dimon had developed sharp differences with Weill. Jamie Dimon. Citi is known for a go-it-alone attitude bordering on outright arrogance”. These stakes had been built by Travelers’ convention of “blood oath” that prevented the top management team and the directors from selling shares. had resigned from the Travelers Board just to cash his shares. outgoing man who loves nothing more than talking about his latest victory. Travelers encouraged teamwork. smart and ambitious executives were more aggressive and individualistic. August 26. The Economist41 described it as a Noah’s Ark approach.. 1998. Weill himself owned 1. Animosity developed between the investment bankers of Salomon Smith Barney (a part of Travelers) and Citicorp. Wall Street loves Weill for his relentless focus on the bottomline and the stock price.5% of the company’s stock. 1998.. all the officers and directors at Citi put together owned less than 0. after being denied permission to be relieved of the oath. In contrast.. November 5. quit in November 1998. One director. Inter-divisional support in selling products was quite common. He (Weill) is a street-smart personable. Reed. Citi’s talented.” After the merger. Some analysts were worried that the arrangement of co-CEOs would not work out. Transferring Traveler’s good practices to Citi however remained a major challenge. a loner disliked talking to the press. Immediately thereafter.45%. I think there is an intensity and a sales capability in Travelers that we don’t have as well developed. The committee system of decision making however led to delays. As Fortune39. In contrast. 1999. But. Apparently. The Economist42 felt that Dimon’s resignation was a clear indication that turf wars were gaining in intensity: “Mr 38 39 40 41 42 Fortune. the differences in the management styles of Reed and Weil began to be noticed. 1998. 2000. Reed is probably the most visionary banker of his generation. Much of his time is spent alone. . As the integration advanced. Reed was more of an intellectual while Weil relied on gut instinct rather than briefing papers. keeping in view the big egos of Weill and Reed. Another important difference lay in the degree of teamwork. many Citigroup executives began to complain that the merger was not proceeding smoothly. May 11. worth about $950 million. Problems begin In October 1998.. long considered Weill’s heir apparent. Travellers’ officers and directors together owned 2. Weill was more outgoing and communicative. mentioned.34 As a consequence. As Business Week40 put it: “Weill and Reed have little in common. May 11. This is going to improve our management DNA”. Half of the new board’s members came from Citibank and half from Travelers. “The problem is going to be getting the cells transferred into a Citi biochemical makeup that has traditionally been resistant to teamwork. The investment bankers were much better paid but Citi’s corporate bankers resented this as they felt they were handling far more sophisticated clients.3% of Travelers’ stock. They felt that it was better for both to work individually. Reed admitted38: “I’ve been struggling for years to try to improve the management and energy levels within Citi. June 7. most of the positions were divided among the Citicorp and Travelers managers. reading and thinking.

Just ask Jamie Dimon. As The Economist44 put it. marking a final victory for Weill in the power struggle. success has been limited.35 Dimon’s departure may have strengthened clan loyalties. saying Sandy wouldn’t want to do this. Weill took charge of day-to-day operations while Reed became responsible for internet strategy. The greatest success has been achieved in an unlikely business – corporate and investment banking. 2000. Citi’s biggest shareholder. Many wealthy Salomon Smith Barney customers have been given 100% mortgages by Citi. Reed himself started expressing doubts about the success of the merger. at 73 and points out that he is a sprightly 66. Travelers’ annuities are also being sold through the Citi branch network. success in integration looked doubtful. Many analysts remained cynical. . And in April 2000.” Moreover. And if anybody is named heir-apparent. was abruptly sacked some 15 months ago. include selling of Travelers’ insurance products to Citi credit card holders with an attractive risk profile. “Its hard to imagine Weill retiring. the responsibilities of Reed and Weill were clearly delineated. Salomon Smith Barney mutual funds have been sold to Citi customers. former Treasury Secretary. He even remarked that while the wisdom of the merger was unquestionable. Weill announced that a committee would be appointed to nominate his successor to take over in 2002. Saudi Prince Alwaleed bin Talal expressed his concern about the deteriorating relationship between Reed and Weill. Around this time. When asked about succession. In consumer finance. August 26. Victor Menezes and Weill loyalist. from the old Citibank were Cock-a-hoop at the news.” Senior Citi executive. Travelers seems to have introduced an aggressive sales culture in Citigroup branches. 2000. Michael Carpenter were made responsible for selecting a new top management team and quickly sort out pressing problems. He explained the peculiar problems which the merger had created43: “Sandy and I both have the problem that our children look up to us as they never did before and reject the other parent with equal vigour. who though widely tipped as Mr Weill’s successor. In July 1999. 43 44 The Economist. In October 1999. John Reed over Mr Weill. Costs have been cut and asset utilisation has improved. Consequently. still going strong at the Federal Reserve. so what do I care about what John wants. employees. he often mentions Alan Greenspan. March 2. He received a standing ovation from disappointed workers on the trading floor at Salomon.” Concluding Notes At the time of the merger. Weill’s trusted lieutenants were increasingly handling most of the important jobs while Reed’s favourites were leaving. By contrast. where it was envisaged that Travelers’ products could be sold through Citi’s global network. many cross–selling opportunities had been identified. secured against their brokerage accounts. Some of the opportunities which have been tapped after the merger. they should watch their back. Robert Rubin joined the senior management team apparently to act as a bridge between Reed and Weill. the Travelers man who had until then been thought to be in the driver’s seat. They saw it as a victory for their hero. Citi’s global network has also helped Travelers to enter emerging markets. Reed resigned. Difficulties in integrating technology platforms and clashes at business unit level over what products to cross-sell have slowed down the retail cross-selling efforts.

Many senior executives have left after the merger. . Quite clearly. Weill has a good record in turning around and expanding under-managed companies but his skills at managing a large global corporation are still untested. Weill faces the challenge of convincing analysts that Citigroup is not a one man show. Many blame Weill’s inability to draw up a succession plan as the main reason for this exodus. the top management’s experience in penetrating overseas markets is limited.36 A major challenge ahead is that with the Travelers management seemingly in charge.

1999. Lawrence J DeMonaco and Suzanne C Francis. 1999.” The Free Press. “Mercedes goes to Motown. Barnett Seaman and Ron Stodghill II. 29-39. Gary Hamel. 1999. “Three’s company.” The Economist. 136-146. “Here comes the road test. . 12. 133-139. M J Saxton and R Serpa. 25. 14. July 29. Kersten L Lanes and Thomas C Wilson.” The Wall Street Journal. 1998. “Gaining control of the corporate culture. Jeffrey Ball. 1999. November 1. Clayton Christensen. November-December.” The Wall Street Journal. “The Daimler Chrysler emulsion. 1998. 16. 2000.” The Economist.wharton. p. 34-37. 7. January-February 1989. 1997. 2000.” Time. 1999. “Holden says after a rough year. “Stallkamp to leave Daimler Chrysler. 19. Mark L Sirower. March 2.” The Wall Street Journal. Autumn 1999.” The Washington Post. 1999. 18.” The Economist. Justin Hyde. 65-66. 1998. “Deal Frenzy. pp.” Harvard Business Review. May 9. “Chrysler announces shake up to show its autonomy within Daimler Chrysler. 17.” knowledge. Julie Wulf.” The Economist. pp. pp.” The Economist. R H Kilman. 22-36. September 24. Daniel Okrent. January – February. “Company of the year Chrysler. 84. pp. “Alliance Advantage. 15. December 17. 82. “Beating the odds of Merger & Acquisition failure: Seven key practices that improve the change for expected integration and synergies. November 5. Toby J Tetenbaum.” Associated Press News Wires. 1985. pp. Jeffrey Ball. Joel Bleeke and David Ernst. 13. 1998. 20. Robert G Eccles. 65-66. p. January-February 1995. “Fall guy. “The Synergy Trap. 9. Alfred Rappaport and Mark L Sirower. “Is your Strategic Alliance Really a Sale?” Harvard Business Review. 5. 22. 23. Yves L Doz and C K Prahalad. Yves L Doz and Gary Hamel. pp. 3.upenn. 2000. “Watch out for the egos. “US Chief out as Daimler reshuffles. New York. pp.” Harvard Business Review. December 18.37 References: 1.” Forbes. pp. Ronald A Ashkenas.” Business World. April 11. “The Innovator’s Dilemma.” The Economist. 10. May 18. September 22.” Harvard Business School Press. “Making the Deal Real. 1998. Fling Jerry.” Organizational Dynamics. “Happily ever after?” Time. 1997. 147-158. 6. 11. 1998. “CEOs serve themselves first in mergers of equals. p. Warren Brown. “Collaborate with your Competitors and Win. Brian Carvalho. 26. December 20. 15. “Are You Paying Too Much for That Acquisition?” Harvard Business Review. Daimler Chrysler is a better company. July-August. October 28. January 24. “Wily Weill wins again. January 13. 1999. 8.” Harvard Business School Press. “Stock or Cash. 20-27. 1997.” Harvard Business Review. 24. 2. 4. pp. pp. pp. 2000.” Jossey-Bass. 1999. 83-87. 21. 165-175. 97-105. “Daimler Chrysler set to overhaul board. Scott Miller and Jeffrey Ball. January 4. 1999.

pp. September 17. “Schrempp’s repair job. 28. 50. 2001. pp. 2001. 145-154.” The Economist. 43..” Harvard Business Review. Denis Carey. “Chrysler’s rescue team. “Schrempp’s trap. 2001. 2001. pp. “Write-downs heighten losses of telecom firms.” The Economist. 2001. 2000. January 2001. 2001. September 26. October 11. 57-58. 26. January 25. November-December. 18-21. November-December. 2000. pp. 46. David A Light. “Lessons from Master Acquirers. 63-64. “Daimler Chrysler may be forced to review Chrysler projections.” Financial Times. pp. et al. 2001.” The Economist. 47. “Schrempp survives shares slump but unions shown the door. “First among equals. “Gaining employee trust after acquisition: Implications for managerial action. pp. 24-29. 33. pp. 51. August 17. 35. David R Baker. 41. “Score one for AOL TW. July 20. May 13. 52. December 25. “Cisco says it still seeks to buy small companies. 2000. “The Fine Art of Friendly Acquisition. 2001. “The great merger wave breaks. pp.” Harvard Business Review. pp. 2001. “One house many windows. “Schrempp is asked to extend tenure at Daimler Chrysler. 52-56. August 17.” Time. 34. September 28. pp. August 24. 38. August 26. Joann Muller and Christine Tierney. Scott Miller. 56-57. “Cisco to expand Fiber-optic Business.” The San Francisco Chronicle. 31. 53. 2001. “How mergers go wrong. 44. 100-107. p. “A Model Comeback?” The Washington Post. pp. 40.” Business Week. Jeff Green. July 23. 37. 2001.” Fortune. Christine Tierney and Katharine Schmialt.” The Economist. Jennifer Files. p. 2000.” The Wall Street Journal Europe. Alex Taylor III. Frank Gibrey Jr. 32. 48. 2000. pp. 29. 36. 45. March 3. 334-355. pp. April 30. “Who Goes. “Defiant Daimler. Joann Muller.” The Wall Street Journal Europe. 2001. October 3. 2001. May-June 2000.38 27. 108-116.” Harvard Business Review. November 23. October 3. Christine Tierney. p. 2000. “Integration Managers. growth and more growth. 30. Scott Miller. J Aiello and Michael D Watkins. 59-60. pp. Christine Tierney.” The Economist. “Daimler Chrysler turnaround seems to be going in reverse. 48-54.” Business Week. pp. Frank Swoboda. . 15. 2001. 78-80.” San Jose Mercury News. 91-97. 42. the survivor?” Business Week. Acquisitions are less valuable.” The Dallas Morning News.” The Economist. 49. June 21. “What does AOL want? Growth. 39.” Employee Relations. Robert. 2000. 2001. March 5.” The Economist. August 26. Who Stays?” Harvard Business Review. 2000. Marc Gunther. 2000. pp. 35-44. “Schrempp. “Can the Germans rescue Chrysler?” Fortune. 70-71. Vikas Bajaj. “Can this man save Chrysler?” Business Week. 24. January 15. 2000. September 28. “Managing alliances. Ronald N Ashkenas and Suzanne C Francis. Jeffrey Ball.” The Wall Street Journal.

” Journal of European Industrial Training 2001. pp. 2001. “Daimler Chrysler’s credit rating is cut by S&P due to doubt on profit targets. Christine Tierney. “Daimler Chrysler net declines 70% as losses continue at US units. Jeffrey Ball. November 12. 55.39 54. 56. 28-29.” Business Week. . “On managing cultural integration and cultural change processes in mergers and acquisitions.” The Wall Street Journal. 192-207. October 24. 57. 2001. Issue 213/4. Jeffrey Ball. Katinka Bijlsma – Frankema. November 1. 2001. pp. “Downshifting ambitions at Daimler Chrysler.” The Wall Street Journal.

Sign up to vote on this title
UsefulNot useful