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Exam 6: Postclosing Integration: Mergers, Acquisitions, and Business Alliances

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Question 31

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The management integration team's primary responsibilities should be monitoring the daily operations of the work-teams assigned to complete specific tasks during the integration.

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Steel Giants Mittal and Arcelor Adopt a Highly Disciplined Approach to Postclosing Integration Key Points Successful integration requires clearly defined objectives, a clear implementation schedule, ongoing and candid communication, and involvement by senior management. Cultural integration often is an ongoing activity. _____________________________________________________________________________________ The merger of Arcelor and Mittal into ArcelorMittal in June 2006 resulted in the creation of the world’s largest steel company. With 2007 revenues of $105 billion and its steel production accounting for about 10% of global output, the behemoth has 320,000 employees in 60 countries, and it is a global leader in all its target markets. Arcelor was a product of three European steel companies (Arbed, Aceralia, and Usinor). Similarly, Mittal resulted from a series of international acquisitions. The two firms’ downstream (raw material) and upstream (distribution) operations proved to be highly complementary, with Mittal owning much of its iron ore and coal reserves and Arcelor having extensive distribution and service center operations. Like most mergers, ArcelorMittal faced the challenge of integrating management teams; sales, marketing, and product functions; production facilities; and purchasing operations. Unlike many mergers involving direct competitors, a relatively small portion of cost savings would come from eliminating duplicate functions and operations. ArcelorMittal’s top management set three driving objectives before undertaking the postmerger integration effort: achieve rapid integration, manage daily operations effectively, and accelerate revenue and profit growth. The third objective was viewed as the primary motivation for the merger. The goal was to combine what were viewed as entities having highly complementary assets and skills. This goal was quite different from the way Mittal had grown historically, which was a result of acquisitions of turnaround targets focused on cost and productivity improvements. The formal phase of the integration effort was to be completed in six months. It was crucial to agree on the role of the management integration team (MIT); the key aspects of the integration process, such as how decisions would be made; and the roles and responsibilities of team members. Activities were undertaken in parallel rather than sequentially. Teams consisted of employees from the two firms. People leading task forces came from the business units. The teams were then asked to propose a draft organization to the MIT, including the profiles of the people who were to become senior managers. Once the senior managers were selected, they were to build their own teams to identify the synergies and create action plans for realizing the synergies. Teams were formed before the organization was announced, and implementation of certain actions began before detailed plans had been developed fully. Progress to plan was monitored on a weekly basis, enabling the MIT to identify obstacles facing the 25 decentralized task forces and, when necessary, resolve issues. Considerable effort was spent on getting line managers involved in the planning process and selling the merger to their respective operating teams. Initial communication efforts included the launch of a top-management “road show.” The new company also established a website and introduced Web TV. Senior executives reported two- to three-minute interviews on various topics, giving everyone with access to a personal computer the ability to watch the interviews onscreen. Owing to the employee duress resulting from the merger, uncertainty was high, as employees with both firms wondered how the merger would affect them. To address employee concerns, managers were given a well-structured message about the significance of the merger and the direction of the new company. Furthermore, the new brand, ArcelorMittal, was launched in a meeting attended by 500 of the firm’s top managers during the spring of 2007. External communication was conducted in several ways. Immediately following the closing, senior managers traveled to all the major cities and sites of operations, talking to local management and employees in these sites. Typically, media interviews were also conducted around these visits, providing an opportunity to convey the ArcelorMittal message to the communities through the press. In March 2007, the new firm held a media day in Brussels. Journalists were invited to go to the different businesses and review the progress themselves. Within the first three months following the closing, customers were informed about the advantages of the merger for them, such as enhanced R&D capabilities and wider global coverage. The sales forces of the two organizations were charged with the task of creating a single “face” to the market. ArcelorMittal’s management viewed the merger as an opportunity to conduct interviews and surveys with employees to gain an understanding of their views about the two companies. Employees were asked about the combined firm’s strengths and weaknesses and how the new firm should present itself to its various stakeholder groups. This process resulted in a complete rebranding of the combined firms. ArcelorMittal management set a target for annual cost savings of $1.6 billion, based on experience with earlier acquisitions. The role of the task forces was first to validate this number from the bottom up and then to tell the MIT how the synergies would be achieved. As the merger progressed, it was necessary to get the business units to assume ownership of the process to formulate the initiatives, timetables, and key performance indicators that could be used to track performance against objectives. In some cases, the synergy potential was larger than anticipated while smaller in other situations. The expectation was that the synergy could be realized by mid-2009. The integration objectives were included in the 2007 annual budget plan. As of the end of 2008, the combined firms had realized their goal of annualized cost savings of $1.6 billion, six months earlier than expected. The integration was deemed complete when the new organization, the brand, the “one face to the customer” requirement, and the synergies were finalized. This occurred within eight months of the closing. However, integration would continue for some time to achieve cultural integration. Cultural differences within the two firms are significant. In effect, neither company was homogeneous from a cultural perspective. ArcelorMittal management viewed this diversity as an advantage in that it provided an opportunity to learn new ideas. -The formal phase of the post-merger integration period was to be completed within 6 months. Why do you believe that ArcelorMittal's management was eager to integrate rapidly the two businesses? Be specific. What integration activities were to extend beyond the proposed 6 month integration period?

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Rapid integration is important to earn b...

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Why did Citibank and Travelers resort to a co-CEO arrangement when they merged in 1998? What are the advantages and disadvantages of such an arrangement?

In building a new organization for the combined firms, it is important to start with a clean sheet of paper and ignore the organizational structures that existed prior to the merger or acquisition.

Exxon-Mobil: A Study in Cost Cutting Having obtained access to more detailed information following consummation of the merger, Exxon-Mobil announced dramatic revisions in its estimates of cost savings. The world’s largest publicly owned oil company would cut almost 16,000 jobs by the end of 2002. This was an increase from the 9000 cuts estimated when the merger was first announced in December 1998. Of the total, 6000 would come from early retirement. Estimated annual savings reached $3.8 billion by 2003, up by more than $1 billion from when the merger originally was announced. As time passed, the companies seemed to have become a highly focused, smooth-running machine remarkably efficient at discovering, refining, and marketing oil and gas. An indication of this is the fact that the firm spent less per barrel to find oil and gas in 2003 than at almost any time in history. With revenues of $210 billion, Exxon-Mobil surged to the top of the Fortune 500 in 2004. -In your judgment, are acquirers more likely to under- or overestimate anticipated cost savings?

Which of the following represent important decisions that must be made early in the integration process?

Developing staffing plans requires which of the following?

So-called contract related transition issues often involve how the new employees will be paid and what benefits they should receive.

Higt employee turnover is rarely a problem during the integration of the target firm into the acquirer.

The extent to which compensation plans for the acquiring and acquired firms are integrated depends on whether the two companies are going to be managed separately or fully integrated.

The newly integrated firm must be able to communicate a compelling vision to investors.

An acquiring firm that focuses heavily on integrating a target firm, which represents a sizeable portion of its total operations, frequently sees deterioration in its own current operating performance.

The integration process if done effectively can help to mitigate the potential loss of employees.

Employees or so-called "human capital" are often the most valuable asset of the target firm.

Customers of newly acquired firms are usually slow to switch to other suppliers even if product quality deteriorates due to inertia.

M&A Gets Out of Hand at Cisco Cisco Systems, the internet infrastructure behemoth, provides the hardware and software to support efficient traffic flow over the internet. Between 1993 and 2000, Cisco completed 70 acquisitions using its highflying stock as its acquisition currency. With engineering talent in short supply and a dramatic compression in product life cycles, Cisco turned to acquisitions to expand existing product lines and to enter new businesses. The firm’s track record during this period in acquiring and absorbing these acquisitions was impressive. In fiscal year 1999, Cisco acquired 10 companies. During the same period, its sales and operating profits soared by 44% and 55%, respectively. In view of its pledge not to layoff any employees of the target companies, its turnover rate among employees acquired through acquisition was 2.1%, versus an average of 20% for other software and hardware companies. Cisco’s strategy for acquiring companies was to evaluate its targets’ technologies, financial performance, and management talent with a focus on ease of integrating the target into Cisco’s operations. Cisco’s strategy was sometimes referred to as an R&D strategy in that it sought to acquire firms with leading edge technologies that could be easily adapted to Cisco’s current product lines or used to expand it product offering. In this manner, its acquisition strategy augmented internal R&D spending. Cisco attempted to use its operating cash flow to fund development of current technologies and its lofty stock price to acquire future technologies. Cisco targeted small companies having a viable commercial product or technology. Cisco believed that larger, more mature companies tended to be difficult to integrate, due to their entrenched beliefs about technologies, hardware and software solutions. The frequency with which Cisco was making acquisitions during the last half of the 1990s caused the firm to “institutionalize” the way in which it integrated acquired companies. The integration process was tailored for each acquired company and was implemented by an integration team of 12 professionals. Newly acquired employees received an information packet including descriptions of Cisco’s business strategy, organizational structure, benefits, a contact sheet if further information was required, and an explanation of the strategic importance of the acquired firm to Cisco. On the day the acquisition was announced, teams of Cisco human resources people would travel to the acquired firm’s headquarters and meet with small groups of employees to answer questions. Working with the acquired firm’s management, integration team members would help place new employees within Cisco’s workforce. Generally, product, engineering, and marketing groups were kept independent, whereas sales and manufacturing functions were merged into existing Cisco departments. Cisco payroll and benefits systems were updated to reflect information about the new employees, who were quickly given access to Cisco’s online employee information systems. Cisco also offered customized orientation programs intended to educate managers about Cisco’s hiring practices, sales people about Cisco’s products, and engineers about the firm’s development process. The entire integration process generally was completed in 4–6 weeks. This lightning-fast pace was largely the result of Cisco’s tendency to purchase small, highly complementary companies; to leave much of the acquired firm’s infrastructure in place; and to dedicate a staff of human resource and business development people to facilitate the process (Cisco Systems, 1999; Goldblatt, 1999). Cisco was unable to avoid the devastating effects of the explosion of the dot.com bubble and the 2001–2002 recession in the United States. Corporate technology buyers, who used Cisco’s high-end equipment, stopped making purchases because of economic uncertainty. Consequently, Cisco was forced to repudiate its no-layoff pledge and announced a workforce reduction of 8500, about 20% of its total employees, in early 2001. Despite its concerted effort to retain key employees from previous acquisitions, Cisco’s turnover began to soar. Companies that had been acquired at highly inflated premiums during the late 1990s lost much of their value as the loss of key talent delayed new product launches. By mid-2001, the firm had announced inventory and acquisition-related write-downs of more than $2.5 billion. A precipitous drop in its share price made growth through acquisition much less attractive than during the late 1990s, when its stock traded at lofty price-to-earnings ratios. Thus, Cisco was forced to abandon its previous strategy of growth through acquisition to one emphasizing improvement in its internal operations. Acquisitions tumbled from 23 in 2000 to 2 in 2001. Whereas in the past, Cisco’s acquisitions appeared to have been haphazard, in mid-2003 Cisco set up an investment review board that analyzes investment proposals, including acquisitions, before they can be implemented. Besides making sure the proposed deal makes sense for the overall company and determining the ease with which it can be integrated, the board creates detailed financial projections and the deal’s sponsor must be willing to commit to sales and earnings targets. -Describe how Cisco "institutionalized" the integration process. What are the advantages and disadvantages to the approach adopted by Cisco?

The Challenges of Integrating United and Continental Airlines Among the critical early decisions that must be made before implementing integration is the selection of the manager overseeing the process. Integration teams commonly consist of managers from both the acquirer firm and the target firm. Senior management must remain involved in the postmerger integration process. Realizing anticipated synergies often is elusive. ______________________________________________________________________________________ On June 29, 2011, integration executive Lori Gobillot was selected by United Continental Holdings, the parent of both United and Continental airlines, to stitch together United and Continental airlines into the world’s largest airline. Having completed the merger in October 2010, United and Continental airlines immediately began the gargantuan task of creating the largest airline in the world. In the area of information technology alone, the two firms had to integrate more than 1,400 separate systems, programs, and protocols. Workers from the two airlines were represented by two different unions and were subject to different work rules. Even the airplanes were laid out differently, with United’s fleet having first-class cabins and Continental’s planes having business and coach only. The combined carriers have routes connecting 373 airports in 63 countries. The combined firms have more than 1,300 airplanes. Jeffry Smisek, CEO of United Continental Holdings, had set expectations high, telling Wall Street analysts that the combined firms expected to generate at least $1.2 billion in cost savings annually within three years. This was to be achieved by rationalizing operations and eliminating redundancies. Smisek selected Lori Gobillot as the executive in charge of the integration effort because she had coordinated the carrier’s due diligence with United during the period prior to the two firm’s failed attempt to combine in 2008. Her accumulated knowledge of the two airlines, interpersonal skills, self-discipline, and drive made her a natural choice. She directed 33 interdisciplinary integration teams that collectively made thousands of decisions, ranging from the fastest way to clean 1,260 airplanes and board passengers to which perks to offer in the frequent flyer program. The teams consisted of personnel from both airlines. Members included managers from such functional departments as technology, human resources, fleet management, and network planning and were structured around such activities as operations and a credit card partnership with JPMorgan Chase. In most cases, the teams agreed to retain at least one of the myriad programs already in place for the passengers of one of the airlines so that at least some of the employees would be familiar with the programs. If she was unable to resolve disagreements within teams, Gobillot invited senior managers to join the deliberations. In order to stay on a tight time schedule, Gobillot emphasized to employees at both firms that the integration effort was not “us versus them” but, rather, that they were all in it together. All had to stay focused on the need to achieve integration on a timely basis while minimizing disruption to daily operations if planned synergies were to be realized. Nevertheless, despite the hard work and commitment of those involved in the process, history shows that the challenges associated with any postclosing integration often are daunting. The integration of Continental and United was no exception. United pilots have resisted the training they were offered to learn Continental’s flight procedures. They even unsuccessfully sued their employer due to the slow pace of negotiations to reach new, unified labor contracts. Customers have been confused by the inability of Continental agents to answer questions about United’s flights. Additional confusion was created on March 3, 2012, when the two airlines merged their reservation systems, websites, and frequent flyer programs, a feat that had often been accomplished in stages in prior airline mergers. As a result of alienation of some frequent flyer customers, reservation snafus, and flight delays, revenue has failed thus far to meet expectations. Moreover, by the end of 2012, one-time merger-related expenses totaled almost $1.5 billion. Many airline mergers in the past have hit rough spots that reduced anticipated ongoing savings and revenue increases. Pilots and flight attendants at US Airways Group, a combination of US Airways and America West, were still operating under separate contracts with different pay rates, schedules, and work rules six years after the merger. Delta Airlines remains ensnared in a labor dispute that has kept it from equalizing pay and work rules for flight attendants and ramp workers at Delta and Northwest Airlines, which Delta acquired in 2008. The longer these disputes continue, the greater the cultural divide in integrating these businesses. Alcatel Merges with Lucent, Highlighting Cross-Cultural Issues Alcatel SA and Lucent Technologies signed a merger pact on April 3, 2006, to form a Paris-based telecommunications equipment giant. The combined firms would be led by Lucent's chief executive officer Patricia Russo. Her charge would be to meld two cultures during a period of dynamic industry change. Lucent and Alcatel were considered natural merger partners because they had overlapping product lines and different strengths. More than two-thirds of Alcatel’s business came from Europe, Latin America, the Middle East, and Africa. The French firm was particularly strong in equipment that enabled regular telephone lines to carry high-speed Internet and digital television traffic. Nearly two-thirds of Lucent's business was in the United States. The new company was expected to eliminate 10 percent of its workforce of 88,000 and save $1.7 billion annually within three years by eliminating overlapping functions. While billed as a merger of equals, Alcatel of France, the larger of the two, would take the lead in shaping the future of the new firm, whose shares would be listed in Paris, not in the United States. The board would have six members from the current Alcatel board and six from the current Lucent board, as well as two independent directors that must be European nationals. Alcatel CEO Serge Tehuruk would serve as the chairman of the board. Much of Ms. Russo's senior management team, including the chief operating officer, chief financial officer, the head of the key emerging markets unit, and the director of human resources, would come from Alcatel. To allay U.S. national security concerns, the new company would form an independent U.S. subsidiary to administer American government contracts. This subsidiary would be managed separately by a board composed of three U.S. citizens acceptable to the U.S. government. International combinations involving U.S. companies have had a spotty history in the telecommunications industry. For example, British Telecommunications PLC and AT&T Corp. saw their joint venture, Concert, formed in the late 1990s, collapse after only a few years. Even outside the telecom industry, transatlantic mergers have been fraught with problems. For example, Daimler Benz's 1998 deal with Chrysler, which was also billed as a merger of equals, was heavily weighted toward the German company from the outset. In integrating Lucent and Alcatel, Russo faced a number of practical obstacles, including who would work out of Alcatel's Paris headquarters. Russo, who became Lucent's chief executive in 2000 and does not speak French, had to navigate the challenges of doing business in France. The French government has a big influence on French companies and remains a large shareholder in the telecom and defense sectors. Russo's first big fight would be dealing with the job cuts that were anticipated in the merger plan. French unions tend to be strong, and employees enjoy more legal protections than elsewhere. Hundreds of thousands took to the streets in mid-2006 to protest a new law that would make it easier for firms to hire and fire younger workers. Russo has extensive experience with big layoffs. At Lucent, she helped orchestrate spin-offs, layoffs, and buyouts involving nearly four-fifths of the firm's workforce. Making choices about cuts in a combined company would likely be even more difficult, with Russo facing a level of resistance in France unheard of in the United States, where it is generally accepted that most workers are subject to layoffs and dismissals. Alcatel has been able to make many of its job cuts in recent years outside France, thereby avoiding the greater difficulty of shedding French workers. Lucent workers feared that they would be dismissed first simply because it is easier than dismissing their French counterparts. After the 2006 merger, the company posted six quarterly losses and took more than $4.5 billion in write-offs, while its stock plummeted more than 60 percent. An economic slowdown and tight credit limited spending by phone companies. Moreover, the market was getting more competitive, with China's Huawei aggressively pricing its products. However, other telecommunications equipment manufacturers facing the same conditions have not fared nearly as badly as Alcatel-Lucent. Melding two fundamentally different cultures (Alcatel's entrepreneurial and Lucent's centrally controlled cultures) has proven daunting. Customers who were uncertain about the new firm's products migrated to competitors, forcing Alcatel-Lucent to slash prices even more. Despite the aggressive job cuts, a substantial portion of the projected $3.1 billion in savings from the layoffs were lost to discounts the company made to customers in an effort to rebuild market share. Frustrated by the lack of progress in turning around the business, the Alcatel-Lucent board announced in July 2008 that Patricia Russo, the American chief executive, and Serge Tchuruk, the French chairman, would leave the company by the end of the year. The board also announced that, as part of the shake-up, the size of the board would be reduced, with Henry Schacht, a former chief executive at Lucent, stepping down. Perhaps hamstrung by its dual personality, the French-American company seemed poised to take on a new personality of its own by jettisoning previous leadership. -What are the major challenges the management of the combined companies are likely to face? How would you recommend resolving these issues?

Promises to PeopleSoft's Customers Complicate Oracle's Integration Efforts When Oracle first announced its bid for PeopleSoft in mid-2003, the firm indicated that it planned to stop selling PeopleSoft's existing software programs and halt any additions to its product lines. This would result in the termination of much of PeopleSoft's engineering, sales, and support staff. Oracle indicated that it was more interested in PeopleSoft's customer list than its technology. PeopleSoft earned sizeable profit margins on its software maintenance contracts, under which customers pay for product updates, fixing software errors, and other forms of product support. Maintenance fees represented an annuity stream that could improve profitability even when new product sales are listless. However, PeopleSoft's customers worried that they would have to go through the costly and time-consuming process of switching software. To win customer support for the merger and to avoid triggering $2 billion in guarantees PeopleSoft had offered its customers in the event Oracle failed to support its products, Oracle had to change dramatically its position over the next 18 months. One day after reaching agreement with the PeopleSoft board, Oracle announced it would release a new version of PeopleSoft's products and would develop another version of J.D. Edwards's software, which PeopleSoft had acquired in 2003. Oracle committed itself to support the acquired products even longer than PeopleSoft's guarantees would have required. Consequently, Oracle had to maintain programs that run with database software sold by rivals such as IBM. Oracle also had to retain the bulk of PeopleSoft's engineering staff and sales and customer support teams. Among the biggest beneficiaries of the protracted takeover battle was German software giant SAP. SAP was successful in winning customers uncomfortable about dealing with either Oracle or PeopleSoft. SAP claimed that its worldwide market share had grown from 51 percent in mid-2003 to 56 percent by late 2004. SAP took advantage of the highly public hostile takeover by using sales representatives, email, and an international print advertising campaign to target PeopleSoft customers. The firm touted its reputation for maintaining the highest quality of support and service for its products. -How did the commitments Oracle made to PeopleSoft's customers have affected its ability to realize anticipated synergies? Be specific.

Assessing Procter & Gamble’s Acquisition of Gillette: What Worked and What Didn’t Realizing synergies depends on how quickly and seamlessly integration is implemented. Cost-related synergies often are more readily realized since the firms involved in the integration tend to have more direct control over cost-reduction activities. Realizing revenue-related synergies is more elusive due to the difficulty in assessing customer response to new brands as well as marketing and pricing strategies. ____________________________________________________________________________________ The potential seemed limitless as Procter & Gamble Company (P&G) announced that it had completed its purchase of Gillette Company (Gillette) in late 2005. P&G’s chairman and CEO, A.G. Lafley, predicted that the acquisition of Gillette would add one percentage point to the firm’s annual revenue growth rate and cost savings would exceed $1 billion annually, while Gillette’s chairman and CEO, Jim Kilts, opined that the successful integration of the two best companies in consumer products would be studied in business schools for years to come. Six years later, things have not turned out as expected. While cost-savings targets were achieved, operating margins faltered. Gillette’s businesses, such as its pricey razors, were buffeted by the 2008–2009 recession and have been a drag on P&G’s top line. Most of Gillette’s top managers have left. P&G’s stock price at the end of 2011 stood about 20% above its level on the acquisition announcement date, less than one-half the share price appreciation of such competitors as Unilever and Colgate-Palmolive Company during the same period. The euphoria was palpable on January 28, 2005, when P&G enthusiastically announced that it had reached an agreement to buy Gillette in a share-for-share exchange valued at $55.6 billion. The combined firms would retain the P&G name and have annual 2005 revenue of more than $60 billion. Half of the new firm’s product portfolio would consist of personal care, healthcare, and beauty products, with the remainder consisting of razors and blades and batteries. P&G had long been viewed as a premier marketing and product innovator of products targeted largely to women. Consequently, P&G assumed that its R&D and marketing skills in developing and promoting women’s personal care products could be used to enhance and promote Gillette’s women’s razors. In contrast, Gillette’s marketing strengths centered on developing and promoting products targeted at men. Gillette was best known for its ability to sell an inexpensive product (e.g., razors) and hook customers to a lifetime of refills (e.g., razor blades). Although Gillette was the number 1 and number 2 supplier in the lucrative toothbrush and men’s deodorant markets, respectively, it was less successful in improving the profitability of its Duracell battery brand. It had been beset by intense price competition from Energizer and Rayovac Corp., which generally sell for less than Duracell batteries. Suppliers such as P&G and Gillette had been under considerable pressure from the continuing consolidation in the retail industry due to the ongoing growth of Wal-Mart and industry mergers at that time, such as Sears with Kmart. About 17% of P&G’s $51 billion in 2005 revenues and 13% of Gillette’s $9 billion annual revenue came from sales to Wal-Mart. The new company, P&G believed, would have more negotiating leverage with retailers for shelf space and in determining selling prices as well as with its own suppliers, such as advertisers and media companies. The broad geographic presence of P&G was expected to facilitate the marketing of such products as razors and batteries in huge developing markets, such as China and India. Cumulative cost cutting was expected to reach $16 billion, including layoffs of about 4% of the new company’s workforce of 140,000. Such cost reductions were to be realized by integrating Gillette’s deodorant products into P&G’s structure as quickly as possible. Other Gillette product lines, such as the razor and battery businesses, were to remain intact. P&G’s corporate culture was often described as conservative, with a “promote-from-within” philosophy. P&G also had a reputation for being resistant to ideas that were not generated within the company. While Gillette’s CEO was to become vice chairman of the new company, the role of other senior Gillette managers was less clear in view of the perception that P&G is laden with highly talented top management. Gillette managers were perceived as more disciplined and aggressive cost cutters than their P&G counterparts. With this as a backdrop, what worked and what didn’t? The biggest successes appear to have been the integration of the two firms’ enormously complex supply chains and cost reduction; the biggest failures may be the inability to retain most senior Gillette managers and to realize revenue growth projections made at the time the deal was announced. . Supply chains describe the activities required to get the manufactured product to the store shelf from the time the orders are placed until the firm collects payment. Together the firms had supply chains stretching across 180 countries. Merging the two supply chains was a high priority from the outset because senior management believed that it could contribute, if done properly, $1 billion in cost savings annually and an additional $750 million in annual revenue. Each firm had been analyzing the strengths and weaknesses of each other’s supply chain operations for years in an attempt to benchmark industry “best practices.” The monumental challenge was to determine how to handle the addition to P&G’s supply chain of 100,000 Gillette customers, 50,000 stock-keeping units (SKUs), and $9 billion in revenue. The two firms also needed to develop a single order entry system for both firms’ SKUs as well as an integrated distribution system to eliminate redundancies. P&G wanted to complete this process quickly and seamlessly to avoid disrupting its customers’ businesses. The integration process began with the assembly of teams of experienced senior managers from both P&G and Gillette. Reporting directly to the P&G CEO, one senior manager from each firm was appointed as co-leaders of the project. The world was divided into seven regions, and co-leaders from both firms were selected to manage the regional integration. Throughout the process, more than 1,000 full-time employees from the existing staffs of both firms worked from late 2005 to completion in late 2007. Implementation was done in phases. Latin America was selected first because the integration challenges there were similar to those in other regions and the countries were small. This presented a relatively low-risk learning opportunity. In just six months after receiving government approval to complete the transaction, the integration of supply chains in five countries in Latin America was completed. In 2006, P&G merged the two supply chains in North America, China, half of Western Europe, and several smaller countries in Eastern Europe. The remaining Western and Eastern European countries were converted in early 2007. Supply chain integration in Japan and the rest of Asia were completed by the end of 2007. Creating a common information technology (IT) platform for data communication also was critical to integrating the supply chains. As part of the regional projects, Gillette’s production and distribution data were transferred to P&G’s SAP software system, thereby creating a single IT platform worldwide for all order shipping, billing, and distribution center operations. While some of the activities were broad in scope, others were very narrow. The addition of 50,000 Gillette SKUs to P&G’s IT system required the creation of a common, consistent, and accurate data set such that products made in the United States could be exported successfully to another country. An example of a more specific task involved changing the identification codes printed on the cartons of all Gillette products to reflect the new ownership. Manufacturing was less of a concern, since the two firms’ product lines did not overlap; however, their distribution and warehousing centers did. As a result of the acquisition, P&G owned more than 500 distribution centers and warehouses worldwide. P&G sought to reduce that number by 50% while retaining the best in the right locations to meet local customer requirements. While the supply chain integration appears to have reaped significant rewards, revenue growth fell short of expectations. This has been true of most of P&G’s acquisitions historically. However, in time, revenue growth in line with earlier expectations may be realized. Sales of Olay and Pantene products did not take off until years after their acquisition as part of P&G’s takeover of Richardson-Vicks in 1985. Pantene’s revenue did not grow substantially until the early 1990s and Pantene’s revenues did not grow until the early 2000s. The Gillette acquisition illustrates the difficulty in evaluating the success or failure of mergers and acquisitions for acquiring company shareholders. Assessing the true impact of the Gillette acquisition remains elusive. Though the acquisition represented a substantial expansion of P&G’s product offering and geographic presence, the ability to isolate the specific impact of a single event (i.e., an acquisition) becomes clouded by the introduction of other major and often-uncontrollable events (e.g., the 2008–2009 recession) and their lingering effects. While revenue and margin improvement have been below expectations, Gillette has bolstered P&G’s competitive position in the fast-growing Brazilian and Indian markets, thereby boosting the firm’s longer-term growth potential, and has strengthened its operations in Europe and the United States. Thus, in this ever-changing world, it will become increasingly difficult with each passing year to identify the portion of revenue growth and margin improvement attributable to the Gillette acquisition and that due to other factors. -Why do you believe P&G was unable to retain most of Gillette's top managers following the acquisition?

The speed with which two firms are merged is an important factor determining the long-term success of the merger.