Case study of a failed merger

Earlier discussion identifies the quest for economies of scale as one of the motivating forces for a firm to look for growth through merger activity. However, not all mergers are able to deliver the expected benefits. This case study examines one episode in which a merger did not turn out in a way the two firms involved anticipated.

In 2001 negotiations began between two forms in the telecoms equipment business – the French firm Alcatel and the American Lucent Technologies. At the time, negotiations came to nothing, as the firms could not come to an agreement about who would control the merged firm. However, 5 years later in April 2006 an agreement was reached that the two firms would merge.

On the face of  it, there seemed to be good commerical reasons for coming together. Alcatel, the bigger of the two firms, would gain entry in the lucrative American market, and the merger would make the combined firm one of the largest in the world in the telecoms market. The combined revenue of the two firms would be slightly higher than Cisco Systems, the existing market leader at the time.

It was expected that the merger would not only give the firm a higher profile in the two key markets of America and Europe, but would also enable the exploitation of economies of scale. By combining the companies, it was expected that around 10% of the workforce would be cut, saving $1.7 billion. This would be achieved by eliminating overlapping administrative, procurement and marketing costs, as well as reducing the workforce. This demonstrates one of the benefits of a larger firm that arise due to economies of scale.

However, not all commentators at the time were convinced that this was the best way forward in the industry. Other firms had been growing more slowly, acquiring smaller firms that had complementary products that had expanded the firm’s product range. A problem with the merger of the two large firms was anticipated to be the difficulty of killing off duplicate products, as consumers of one of the firms products would be unwilling to switch to the other, even if it fitted a similar specification. This would therefore restrict the degree to which the larger firm would be able to rationalise its activity.

In the event, the merged company did indeed run into problems. The firm found costs savings difficult to realise, in spite of 16,500 job losses from a workforce of 88,000 – nearly a 20% cut. It also found that market prices were falling, squeezing profitability. The firm faced competition from new entrants, in particular two Chinese firms, and found difficulty in keeping up with the pace of technological change. It was also reported that the form was suffering from a clash of cultures between the French and American parts of the firm.

The result of all this was that in July 2008 it was announced that the French chairman, who was formerly the boss of Alcatel, and the American CEO, formerly the boss of Lucent, were leaving the company to be replaced by a new executive team with the tas of taking the comapany forward. The new chairman was Dutch.

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