Integration: Mergers,
Acquisitions, and
Business Alliances
What could be worse than being
without sight? Being born with sight
and no vision.
—Helen Keller
Course Layout: M&A & Other
Restructuring Activities
Part I: M&A
Environment
Part II: M&A
Process
Part III: M&A
Valuation &
Modeling
Part IV: Deal
Structuring &
Financing
Part V:
Alternative
Strategies
Motivations for
M&A
Business &
Acquisition
Plans
Public Company
Valuation
Payment &
Legal
Considerations
Business
Alliances
Regulatory
Considerations
Search through
Closing
Activities
Private
Company
Valuation
Accounting &
Tax
Considerations
Divestitures,
Spin-Offs &
Carve-Outs
Takeover Tactics
and Defenses
M&A Integration
Financial
Modeling
Techniques
Financing
Strategies
Bankruptcy &
Liquidation
Cross-Border
Transactions
Current Learning Objectives
• Primary learning objectives: To provide students with
knowledge of
– Factors critical to successfully integrating businesses,
– Post-merger integration planning, and
– Key activities that make-up the integration process
• Secondary learning objectives: To provide students with
knowledge of
– Post-merger integration organizations
– How to develop communication plans
– How to create a new organization
– How to develop staffing plans, and
– Integrating corporate cultures
Factors Affecting Successful Integration
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The pace of integration
Integration planning
Effective communication
Customer focus
Making the tough decisions early
Focusing on the highest leverage issues
Viewing Integration as a Process
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Integration planning
Developing communication plans
Creating a new organization
Developing staffing plans
Functional integration
Integrating corporate cultures
Integration Planning
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Use due diligence to determine post-closing sequencing of events
necessary to realize potential savings
Resolve contract-related transition issues in purchase agreement
– Employee payroll and benefits claims processing
– Seller reimbursement for products shipped before closing for which
payment not received
– Buyer reimbursement for vendor supplies/services received before
closing for which payment had not yet been made
Ensure contract closing conditions include those necessary to facilitate
integration (e.g., employee contracts, agreements not to compete)
Develop post-merger integration organization (management integration
team “MIT”) consisting of both target and acquirer managers to
– Build a master schedule of what should be done, by whom and by
what date
– Establish work teams to determine how each function and business
unit will be combined
– Establish post-closing communication strategy for all stakeholders
Albertson Acquires American Stores:
Underestimating Integration Costs
When Albertson’s acquired American Stores (owners of the Lucky supermarket
stores) for $12.5 billion, making it the nation’s second largest supermarket chain,
with more than 1000 stores, the corporate marriage stumbled almost immediately.
Escalating integration costs caused profits to tumble almost following closing. In the
first quarter of operation, combined operating profits fell 15% to $185 million,
despite an increase in sales of 1.6% to $8.98 billion. Albertson’s proceeded to
update the Lucky supermarket stores that it had acquired in California and to
combine the distribution operations of the two supermarket chains. It appears that
Albertson’s substantially underestimated the complexity of integrating an acquisition
of this magnitude. Albertson’s spent about $90 million before taxes to convert more
than 400 stores to its information and distribution systems as well as to change the
name to Albertson’s. By the end of the year following closing, Albertson’s stock had
lost more than one-half of its value.
Discussion Questions:
1. In your judgment, do you think acquirers’ commonly (albeit not deliberately)
understate integration costs? Why or why not?
2. Cite examples of expenses you believe are commonly incurred in integrating
target companies.
Developing Communication Plans
• Employees:
– Address the “me too” issues immediately
– Communicate frequently and honestly how the merger will
affect employees
• Customers:
– Under-commit and over-deliver
– Acquisition-related customer attrition
– Meet commitments to current customers
• Suppliers: Develop long-term vendor relationships
• Investors: Maintain shareholder loyalty by presenting a
compelling vision.
• Communities: Build strong, credible relationships
Discussion Questions
• Why is the pace with which businesses
are integrated important? Be specific.
• Why is it critical to make the tough
decisions about who to put in key
management positions early in the
integration effort?
• Why are firms likely to lose customers
during the integration period?
Creating a New Organization
• Learn from the past: Prior organization charts for both firms
provide insights into individual expectations concerning future
reporting relationships
• Business needs drive organizational structure:
– Structure facilitates decision making, provides internal
controls, and promotes desired behaviors
– Basic structures include functional, product, or divisional
– Decentralized versus centralized structures
• Integrate corporate culture: Balance need for control with need
for flexibility
– Merging corporate boards (outsiders improve effectiveness)
– Integrating senior management (select managers from both
companies best suited for implementing strategy)
– Once selected, senior managers should be given full
responsibility for selecting their direct reports
Developing Staffing Plans
• Personnel requirements:
– Determine what functions are needed by the combined
businesses
– Project personnel requirements by function
• Employee availability: Consider current employees as well as
those within communities in which new company has operations
• Plans and timetables: Match skills of current employees with
those needed by new firm to determine “gaps”
• Compensation: Consider base pay, incentive plans, and special
contractual arrangements.
• Integrating compensation plans: Extent of integration depends
on whether target to be managed separately or wholly
integrated.
• Personnel information systems: Integrate to achieve operating
efficiencies unless plan to divest units at a later date.
Functional Integration
• Due diligence data revalidation: Verify assumptions
• Performance benchmarking: Compare actual performance with
industry “best practices”
• Functions
– Manufacturing and operations (facility consolidation)
– Information technology (90% of acquirers combine
operations)
– Finance (implement internal controls and financial reporting)
– Sales (implementing cross-selling frequently a challenge)
– Marketing (avoid brand confusion)
– Purchasing (potential 10-15% reduction in purchasing costs)
– Research and development (set priorities consistent with
strategy)
– Human resources (decentralizing hiring & training; centralize
benefits administration, management systems and planning)
Integrating Corporate Cultures
• Cultural issues: Differ by
– Size and maturity of company (start-ups versus mature)
– Industry (high tech versus finance and retailing)
– Geographic location (domestic versus foreign)
• Cultural profiling: Using employee surveys and interviews, identify
– How the target and acquirer cultures are alike and how differ
– Characteristics of both cultures that are to be encouraged
• Techniques for integrating corporate cultures: Establish shared
– Goals to foster desired behavior
– Standards based on “best practices”
– Services such as accounting, legal, public relations, internal
audit, benefits planning, R&D, and information technology
– Space by co-locating employees
Overcoming Culture Clash:
Allianz AG Buys Pimco Advisors
Allianz AG, the leading German insurance conglomerate, acquired Pimco Advisors LP for $3.3 billion,
boosting assets under management from $400 billion to $650 billion and making it the sixth largest money
manager in the world. The cultural divide separating the two firms represented a potentially daunting
challenge. Allianz’s management was well aware that firms distracted by culture clashes and the morale
problems and mistrust they breed are less likely to realize the synergies and savings that caused them to
acquire the company in the first place. A major motivation for the acquisition was to obtain the well-known
skills of the elite Pimco money managers to broaden Allianz’s financial services product offering. Although
retention bonuses can buy loyalty in the short run, employees of the acquired firm generally need much
more than money in the long term. Pimco’s money managers stated publicly that they wanted Allianz to let
them operate independently, the way Pimco existed under their former parent, Pacific Mutual Life Insurance
Company. Allianz had decided not only to run Pimco as an independent subsidiary but also to move $100
billion of Allianz’s assets to Pimco. Bill Gross, Pimco’s Legendary bond trader, and other top Pimco money
managers, now collect about one-fourth of their compensation in the form of Allianz stock. Moreover, most of
the top managers have been asked to sign long-term employment contracts and have received retention
bonuses. Joachim Faber, chief of money management at Allianz, played an essential role in smoothing over
cultural differences. Led by Faber, top Allianz executives had been visiting Pimco for months and having
quiet dinners with top Pimco fixed income investment officials and their families. The intent of these intimate
meetings was to reassure these officials that their operation would remain independent under Allianz’s
ownership.
Discussion Questions:
1. How did Allianz attempt to retain key employees? In the short run? In the long run?
2. How did the potential for culture clash affect the way Alliance acquired Pimco?
3. What else could Allianz have done to minimize the culture clash?
Mechanisms for Integrating
Business Alliances
• Leadership: Establish a shared vision.
• Teamwork and role clarification: Establish teams with clearly
identified roles and responsibilities
• Coordination: Exert control through coordination rather than
mandate.
• Policies and values:
– Ensure employees understand how decisions are made.
– Communicate who will be held accountable and how
rewards are determined.
• Consensus decision making: Give all participants opportunity for
ample input, but make decisions within a reasonable time frame.
• Resource commitments: Partners should live up to
commitments to contribute high quality resources.
Discussion Questions
• Identify the main challenges of developing
a new organization for the combined
businesses. How would you attempt to
resolve these challenges? Be specific.
• What are the common methods for
integrating corporate cultures? Of these,
which do you believe would be the most
important? Explain your answer.
Things to remember...
• Post-closing integration is a critical phase of the M&A process
• Integration can be viewed as a process consisting of six
activities
• Except in highly complex situations, combining companies
should be done quickly to
– Minimize key employee, customer, and supplier turnover
– Eliminate redundant assets, and
– Achieve returns expected by shareholders
• Successfully integrated M&As are those whose management
candidly and continuously communicate a clear vision, set of
values, and unambiguous priorities to all stakeholders
• Unlike M&As, integrating business alliances is usually a lengthy
process because of shared control and the overarching need to
gain consensus on key decisions