Excerpt
Table of Contents
LIST OF FIGURES
LIST OF TABLES
LIST OF
ABBREVIATIONS
1 INTRODUCTION
1.1 Background
1.2 Objectives
1.3 Methods and Structure
2 LITERATURE REVIEW
2.1 Fundamentals of M&As
2.1.1 M&A as a Form of Business Combinations
2.1.2 Definition and Differentiation of M&As
2.1.3 Stages in the M&A Process
2.2 Special Considerations of Cross-Border M&As
2.2.1 Characteristics of Cross-Border M&As
2.2.2 Common Risks of Cross-Border M&As
2.2.3 Culture as a Dual Challenge in Cross-Border M&A
2.2.4 National Culture
2.2.5 Corporate Culture
3 CULTURAL INTEGRATION IN CROSS-BORDER M&AS
3.1 Determining Factors of Post-Merger Integration
3.2 Managing Cultural Integration: Acculturation and Cultural Fit
3.3 Critical Influencing Factors on the Acculturation Process 2
4. METHOD AND EMPIRICAL STUDY: EXPERT INTERVIEWS
4.1 Description of the Method
4.2 Structure and Approach
4.3 Data Analysis
5. RESULTS
5.1 Evaluation of the Research Findings
5.2 Discussion of the Research Findings
5.3 Action Plan for Cultural Integration in Cross-Border M&A 4
6. FINAL CONSIDERATIONS
6.1 Summary
6.2 Contribution to the Scientific Discussion
6.3 Managerial Implications
6.4 Limitations
6.5 Recommendations for Future Research
APPENDICES
Appendix 1 - Expert Interview Guide
Appendix 2 - Interrelation of Categorized Interviews in MAXQDA 5
Appendix 3 - Categorical Summary of Expert Interviews 5
Appendix 4 - Comparison of Expert Interviews
Appendix 5 - Action Plan for Cultural Integration in Cross-Border M&A
LIST OF REFERENCES
Abstract
CBM&As have emerged as one of the leading approaches for companies to foster growth on a global scale. Despite the risen popularity of international business combinations, their successful implementation continues to be an underestimated challenge. A vast amount of studies blame culture for the alarmingly high failure rates in CBM&As. In fact, international business combinations encounter the dual challenge of dealing with national and organizational cultural differences. However, little progress has been made in literature on exploring how these issues can be resolved. Based on existing scientific approaches and a qualitative analysis conducted through four expert interviews, this thesis contributes to the establishment of a deeper understanding on how different cultures can be integrated more efficiently. When analyzing the research findings, it became clear that culture needs to be managed actively throughout the entire CBM&A process. Also, culture is largely affected by the human factor, which means that human integration is of utmost importance in CBM&As. This thesis summarizes the detailed findings in a concrete action plan which provides recommendations for management on how to approach cultural integration more efficiently. Ultimately, a clear shift of focus from synergies to cultures has to take place among top management in order to reduce the failure rates of future CBM&As.
List of Figures
Figure 1: Classification Framework of Business Combinations
Figure 2: Stages in the M&A Process
Figure 3: Types of Acquisition Integration Approaches
Figure 4: Modes of Acculturation 2
Figure 5: Steps of Qualitative Data Analysis
List of Tables
Table 1: List of Participants in Expert Interviews
List of Abbreviations
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1 Introduction
1.1 Background
In today’s business world, corporate restructuring has become a significant strategic instrument for companies to face the challenges of a fluctuating global economy (Tilly, 2015). As emerging markets have arisen as strong players in the business environment, organizations are challenged to expand into developing countries in order to reap the benefits of the growing demand and potential (Rothenbuecher and von Hoyningen-Huene, 2008). Expansion into new markets can be used as a strategic step to achieve lower costs, gain access to new technologies and skill sets, and thus to work more efficiently. In order to stay competitive, multinational enterprises are posed to the challenge of reassessing their corporate structures and strategies (Frederiksen, 2016). Over the last decades, mergers and acquisitions (M&As) have become a popular tool for corporate restructuring. Regardless of industry, companies are combining in order to gain access to new technologies and products, to exploit the benefits of scale effects, widen their global market presence and expand into new markets (Miller and Fernandes, 2009). By joining together, companies aim to achieve positive synergy effects, which lead to the creation of value, larger than the sum of the combining firms (Glaum and Hutzschenreuter, 2010, p. 53).
Since 1985, a significant growth in M&A activity has become evident (Mittermair and Knourek, 2006, p. 26). Especially global deals have gained importance, as in 2007 cross-border M&As (CBM&As) accounted for 45% of the total M&A volume, which displays an increase of 22% since 1998 (Erel et al., 2012, p. 1045). The survey “Culture Integration in M&A” by Aon Hewitt further supports this argument, as 69% of the surveyed companies plan to engage in CBM&As in recent years (Fealy et al. 2011, p. 1).
However, in contrast to the increasing importance of M&As and their aims to boost revenues and cut costs, Deutsch and West (2010) point out that most M&A activities do not create any additional shareholder value. Even more, they claim that between 66% and 75% of all M&A activities fail. A global research report by KMPG International also uncovered an enormous failure rate of 83% of M&As which did not achieve the set targets (Kelly and Cook, 1999, p. 2). Moreover, Mittermair and Knourek (2006, pp. 33-35) reveal that CBM&As entail larger risks than national M&As and destroy shareholder value. There are various drivers of deal failure, including legal and financial aspects, however one of the most cited reason for the failure of M&As is cultural integration (Summerfield, 2017; Appelbaum et al., 2009, p. 34). Various studies support this argument, as for example, the 2013 Mercer study “Culture in M&A” revealed that 85% of failed M&As mismanaged cultural integration in the transactions (Mercer, 2014, p. 2). Furthermore, Fealy et al. (2011, pp. 5-8) point out that the developments of M&As during the post-merger phase are of utmost importance, as they determine the success of the business combination. Delayed integration and implementation are the most critical aspects in M&A failure. Issues occurring are mostly related to human resources (HR) and culture. Hence, successful cultural integration is an integral requirement for a successful CBM&A and will be at the center of this thesis.
1.2 Objectives
Even though a rising number of companies engage in global M&A activity, the high failure rates of the deals create concerns among the involved parties and synergy potentials remain untapped (Deutsch and West, 2010). Multiple studies point out that more than half of the surveyed companies do not have a clear approach on how to assess and integrate culture in CBM&As and, thus, do not have an elaborate approach for post-merger integration (PMI) (Fealy et al., 2011, p.8; Kengelbach et al., 2015, pp. 1-2). The indicated lack of managerial guidelines for integration efforts results in the failure of achieving set objectives in CBM&As. This builds the basis of the problem addressed in this thesis. Delayed integration, implementation and in direct relation to that, cultural integration, represent the top reasons for the immense failure rates of global M&As. Given the significance of cultural integration as a critical success factor in M&A deals, this topic shall be investigated within the scope of this thesis. Elizabeth Fealy et al. (2011, p. 8) summarizes the identified problem as follows:
“The bottom-line is that while organizations understand cultural integration is critical to deal success, they continue to struggle to translate their assessment into actionable initiatives that drive cultural integration forward.” (Elizabeth Fealy et al. 2011, p. 8)
Therefore, the aim of this thesis is to examine the critical success factors in CBM&As and to investigate the obstacles and facilitators of cultural integration. Ultimately, managerial implications shall be developed to help implement a successful cultural integration in CBM&As. To approach the achievement of this aim, this thesis will first establish a theoretical framework by laying out the most important concepts of the topic. In order to add valuable practical perspectives from real business cases, a qualitative analysis of expert interviews will be conducted. By combining the findings from theory and empirical research, this thesis will create an action plan with guidelines for top management to implement cultural integration more efficiently in future CBM&As activities.
1.3 Methods and Structure
The nature of research of this thesis is exploratory, as it investigates a problem on which no current study exists (Saunders et al., 2009, p. 139). In fact, there are few approaches in literature which focus on concepts for cultural integration in CBM&As. However, they lack a concentration on both national and corporate cultural differences. Further, the indicated void of managerial guidelines to implement cultural integration in CBM&As still contributes to the high failure rates.
This thesis will begin with the creation of a theoretical framework in which the general challenges of CBM&As will be closely investigated, before outlining the specific scope of cultural integration as the leading challenge. The development of the theoretical basis is essential to this thesis, as it will establish a preliminary understanding to derive practical guidance for successful cultural integration from. The literature review section of this thesis will consist of relevant secondary literature concerning the topics M&As, culture and integration. As this research entails objectives directly related to the practice, it is suitable to use a qualitative research approach and to conduct a series of semi-structured expert interviews to capture practical experiences and perspectives on the topic (Gläser & Laudel, 2010, p. 11). In the case of this thesis, this means that experts who will be suitable for the interviews are senior managers or senior consultants who have been directly involved in a number of CBM&As and have gained deep insights into the processes, problems and successes related to the cases. Ultimately, this thesis will aim to answer the following three research questions (Q):
Q1: What are the critical success factors in CBM&A activities?
Q2: What are the obstacles to and facilitators of a successful cultural integration in CBM&A activities?
Q3: Which actions need to be taken to successfully manage cultural integration processes during CBM&A activities?
Consequently, the research conducted aims to create an elaborate understanding for one of the most cited reasons of CBM&A failure, cultural integration, and to answer the research questions by developing a concrete action plan. This shall be approached by firstly outlining a brief overview of M&A theory before addressing special aspects of CBM&As in chapter 2. The second chapter will be concluded by explaining the complexity of culture and establishing a selection of empirically proven approaches on assessing culture. Subsequently, chapter 3 will focus on the decision factors which determine integration approaches before cultural integration models will be more narrowly outlined. Chapter 3 will then highlight the critical factors influencing cultural integration in more detail and start elaborating on how the evolving problems related to cultural integration can be encountered. In chapter 4, the research approach and methods will be explained in detail before the fifth chapter will highlight the key findings of the empirical analysis. Chapter 5 will then discuss the research findings and develop an action plan to show managerial implications on how to successfully manage cultural integration. Lastly, chapter 6 will summarize the findings of this thesis and illustrate the limitations of the research, before outlining starting points for future research.
2 Literature Review
The following chapter shall provide a general overview of the concepts of M&As. Considering the scope of this thesis, only the most relevant concepts shall be reviewed in order to establish a prerequisite understanding for the subsequent chapters. The chapter will more narrowly focus on the challenges in CBM&As and emphasize the critical aspect of culture, which displays a dual challenge in this context.
2.1 Fundamentals of M&As
2.1.1 M&A as a Form of Business Combinations
The term “merger and acquisition” as a form of business combinations has not been consistently defined in management literature and no regular application has been adopted in practice. In fact, business combinations include activities ranging from loose cooperations between companies to inherent corporate acquisitions (Hackmann, 2011, p. 9). Gerpott (1993, p. 39) established a comprehensive classification framework outlining the numerous options of firms to join together, as shown in Figure 1.
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Figure 1: Classification Framework of Business Combinations Own elaboration based on Gerpott (1993, p. 39)
The essential distinctive aspects to differentiate the simple cooperation of firms from M&A are the degree of remaining autonomy ensuing a business combination and the level of commitment (Gerpott, 1993, p. 39). As presented in Figure 1, firms which are joining together in the form of cooperations maintain their legal autonomy. Merely in the areas of collaboration the companies act interdependently and lose parts of their economic autonomy. As this type of business combinations places low relevance on integration, they shall not be at the center of this thesis. Contrastingly, if a business combination occurs in which at least one entity loses its economic autonomy, it is referred to as merger or acquisition (Glaum and Hutzschenreuter, 2010, pp. 15-16). As the term M&A will be of major importance throughout this thesis, it shall be investigated in depth in the next section.
2.1.2 Definition and Differentiation of M&As
Although the term “merger and acquisition” is often used coequally, the types of business combinations are certainly distinguishable.
A merger can be defined as a business combination in which two or more legal independent businesses join together to build a single legal entity. It displays the most profound type of a business combination and can be differentiated in two types: absorption and consolidation (Wirtz, 2012, p. 10). If the target
company gives up its legal independence and is incorporated into the acquiring company, a merger through absorption can be observed (Gerds, 2000, pp. 10-11). In this case, the business which incorporates the other remains, and absorbs all of the target’s assets, whereas the target loses its identity and discontinues to exist. Such a merger through absorption is displayed in the case of the merging companies Wiesenkamp Fertighäuser OHG and Wiesenkamp GmbH (Wirtz, 2012, p. 17). If, on the other hand, the involved businesses give up their legal autonomy and join together into a newly founded company, a merger through consolidation has occurred (Gerds, 2000, pp. 10-11). One of the most popular known cases of merger through consolidation is the deal between Daimler Benz AG and Chrysler Corporation who joined together to form DaimlerChrysler AG (Wirtz, 2012, p. 17). Mergers usually take place between equally powerful companies, which indicates that they receive equal bargaining power in negotiations and establish a dual leadership after the transaction. This type of merger is referred to as a “merger of equals”. However, mergers are often only labeled as such to disguise the unsymmetrical allocation of power and to persuade the weaker company to agree to the transaction (Glaum and Hutzschenreuter, 2010, p. 18-19).
On the contrary, an acquisition is referred to as the purchasing of an entire business or parts of a business on the basis of an inclusion into the company group without legal conflation. Consequently, the target company experiences a change in ownership and partially or fully gives up its economic independence (Wirtz, 2012, p. 16-17). Acquisitions are generally performed to aid the external growth of the acquiring company and display a transfer of control (Glaum and Hutzschenreuter, 2010, p. 17). Two different ways of transfer of control can be differentiated in acquisitions: asset deals and share deals. An asset deal can be understood as the acquisition and separate transfer of all assets and liabilities from the target company to the acquirer. Contrasting, a share deal can be described as the acquisition of the majority of the target company’s shares. Thus, the acquirer claims ownership over the acquired company (Picot, 2012, pp. 300-304).
Even though distinctive characteristics of the terms “merger” and “acquisition” exist, the undeniable similarities are prevailing in academic literature and the business environment, encouraging a combined application of the term. Therefore, within the scope of this thesis, the term M&A shall describe profoundly intertwined business combinations, characterized by economic reliance and high degrees of commitment, which require a significant integration effort.
2.1.3 Stages in the M&A Process
In order to fully understand the complexity of a M&A process, all stages of the transaction and their respective actions shall be explained briefly in the following. According to a wide span of literature, the M&A process can be subdivided into three stages, as shown in Figure 2. Regardless, it is difficult to distinguish the different stages in practice, as they are interdependent (Hackmann, 2011, pp. 17-18; Jansen, 2016, pp. 292-294).
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Figure 2: Stages in the M&A Process Adapted from Hackmann (2011, p. 18)
The pre-merger phase builds the underlying basis of every M&A and is mainly shaped by the planning efforts, strategic analyses and preparation of the acquiring firm. If an external growth strategy is chosen, explicit goals of the business combination and criteria for a suitable target are developed in accordance with the acquirer’s corporate strategy. The acquirer screens its business surroundings and evaluates potential targets (Hackmann, 2011, pp. 18-19; Jansen, 2016, pp. 292-306).
In the following transaction phase, the potential targets are contacted, and negotiations are initiated. An immense fraction of this stage is allocated to actions related to Due Diligence, which implies the extensive analysis of all collectable information about the target’s economic situation and the respective financial planning of the transaction (Borowicz, 2006, p. 169). Blöcher (2004, pp. 24-25) emphasizes the importance of the development of a pre-closing-integration-plan in order to prepare the integration in the next phase. Already in the first two stages of the M&A process, factors for the following integration need to be determined, and a respective strategy, speed, degree and climate need to be chosen (Blöcher, 2004, pp. 24-25). These factors will be elaborated on in detail in chapter 3.1. Widespread literature has assigned utmost significance to the last stage of the M&A process, which is called the post-merger phase, also referred to as integration phase (Jansen, 2016, pp. 361-362). The main component of this phase is integration, which deals with the bringing together of the joined companies on a cultural, personnel, organizational and legal level. Only in this last phase of the business combination the previously set targets can be realized through a sophisticated integration plan in accordance with the chosen acquisition strategy (Blöcher, 2004, pp. 25-26). Respective actions carried out in the post-merger phase are referred to as integration management. The phase ends with a post-merger audit, which measures the success of the transaction based on profitability calculations and synergy realizations (Hackmann, 2011, pp. 19-20). If integration is mismanaged or overlooked, there is a huge risk of deal failure, as formerly pointed out by multiple studies (Jansen, 2016, pp. 361-362).
Hackmann (2011, pp. 19-20) emphasizes the need for firms to view integration as a holistic process. Researchers base this argument on the fact that all actions executed in the post-merger phase are strongly correlated to previously made strategic decisions and set goals (Hackmann, 2011, pp. 1920; Blöcher, 2004, pp. 25-26). Thus, integration should be considered and planned from the beginning of the process and necessary integration efforts should be evaluated in a timely manner.
Concluding, the success of an M&A is highly dependent on a sustainable and well-coordinated integration management. As PMI is identified as a critical success factor in M&As, integration will play a significant role throughout this thesis and shall be dealt with in more depth in chapter 3.1.
2.2 Special Considerations of Cross-Border M&As
2.2.1 Characteristics of Cross-Border M&As
As cultural integration is at the focus of this thesis, CBM&As display a key example to elaborate on the unique difficulties related to it. To create an understanding of the particular framework in which cultural integration issues occur, important characteristics of CMB&As shall be addressed in the following.
Within the fifth M&A wave, which began in the mid 1990s, CBM&As as a major part of global foreign direct investment (FDI) activities gained vast popularity premised on globalization (Mittermair and Knourek 2006, p. 23).
CBM&As are generally seen as a form of internationalization. They describe M&A activities between firms which are located in different countries and comply to different governmental regulations (OECD, 2001). The proportion of cross-border activities experienced a huge rise in total merger volume worldwide, as their percentage grew from 23% in 1998 to 45% in 2007 (Erel et al., 2012, p. 1045). According to Balakrishnan et al. (2017, p. 3), this positive trend is still ongoing, as in 2015 the highest number of cross-border deals was measured hitherto. This immense increase in CBM&As is due to companies’ appeal to reap the benefits related to internationalization. The motives to expand globally are versatile: CBM&As are perceived to enable companies to cement their competitive position and widen their market presence, improve their sustainability, expand their client base and achieve cost savings. Furthermore, they empower companies to foster technological innovation, enrich their intellectual capital, increase overall revenue and gain access to a variety of products and channels (Mittermair and Knourek, 2006, pp. 28-29; Balakrishnan et al., 2017, pp. 3-7).
Even though international mergers generally follow the aim to create more value combined than separately, they do not only promote the mentioned benefits, but also implicate further challenging considerations. In fact, Mittermair and Knourek (2006, pp. 33-35) reveal that CBM&As entail larger risks than national M&As and even destroy shareholder value. These risks can be traced back to the major differences in culture, language barriers and contrasting leadership styles, as well as to country-specific factors, such as politics, economics and laws (Glaum and Hutzschenreuter, 2010, p. 315). Often underestimated, dissimilarities in culture can negatively affect the outcomes of CBM&As to the degree of causing the business combination to fail (Erel et al., 2012, pp. 1048-1050; Dixon 2005, p. 1). In the context of CBM&As, culture implies a dual challenge in dealing with both country-specific as well as company-specific cultural differences (Glaum and Hutzschenreuter, 2010, p. 315). These characteristics display numerous obstacles in the integration phase. Thus, CBM&As display a key example within the scope of this thesis to elaborate on cultural integration as a reason for failure of international business combinations. Subsequently, the definition and measures of success in CBM&As shall be given, and the major risks putting the business combinations at risk of failure shall be investigated.
2.2.2 Common Risks of Cross-Border M&As
As previously pointed out in chapter 1.1, between 66% and 75% of all M&A activities fail and CBM&As entail even larger risks than national M&As. To understand the implications of failure in CBM&As, it is crucial to firstly uncover the definition of success of these transactions. According to multiple researchers, the success of an M&A can be understood by the extent to which predetermined goals have been achieved, whether set objectives have been fulfilled and if value has been created after the transaction has occurred (Glaum and Hutzschenreuter 2010, pp. 92-93; Frensch, 2007, p. 20). Empirical studies usually refer to the owner’s perspective to measure success in terms of financial indicators and to determine the creation of shareholder value. Thus, if a M&A does not add to shareholder value, it can be seen as a failure from the owner’s perspective (Glaum and Hutzschenreuter, 2010, pp. 92-93). However, other interest groups also need to be considered to fully understand how high failure rates evolve. Lenhard (2009, pp. 42-44) points to the perspective of employees, as they play a crucial role in assessing the success or failure of M&A. Generally, the success of M&As from an employee’s point of view can be measured by the transformation of the employee’s work situation after the transaction. For example, M&As can be seen as a failure if the employee’s risk to become unemployed has increased after the transaction (Lenhard, 2009, pp. 42-44). In the following, some of the major challenges for CBM&As which can negatively influence its success shall be outlined.
Erel et al. (2012, pp. 1048-1050) point out that geographic distance, differences in governance, as well as financial and legal aspects can pose challenges for the merging firms in cross-border deals. The most commonly cited unique risks of CBM&As are “liability of foreignness” (Zaheer, 1995, p. 4) and “doublelayered acculturation” (Barkema et al., 1996, p. 154). The “liability of foreignness“ describes the additional costs a company faces when operating internationally, due to unknown conditions in the market, whereby “doublelayered acculturation” explains the difficulty in integrating both national and corporate culture in a foreign country (Denison et al., 2011, p. 96). Shimizu et al. (2004, p. 310) explain that in the case of CBM&As, screening and analyzing only the acquisition target is not sufficient. Furthermore, it is indispensable to consider the circumstances of the country where the target is located, with specific regards to political, economic and legal characteristics.
Political instability bears a great risk for CBM&As, as sudden changes in the political system can negatively influence the freedom of action of the acquirer (Strüven et al., 2010, pp. 2-4). Balakrishnan et al. (2017, p. 9) identify political instability as the second most cited risk factor for CBM&As. Further, economic issues, such as variations in exchange rates, inflation or economic downturns can trigger political instability, supporting the importance to conduct a thorough analysis of the target country’s economic situation. Also, legal issues can have a negative impact on synergy realization and, thus, deal success.
During the transaction phase, firms face the risk to unintentionally violate legal regulations due to a lack of information (Glaum and Hutzschenreuter, 2010, pp. 312-313).
Concluding, Fealy at al. (2011, p. 5) observed that 26% of respondents in Aon Hewitt’s global survey said the deal failed because they did not adequately classify risks and liabilities during due diligence. This underlines the indispensability of a thorough analysis of the host country and the target company. Strüven et al. (2010, pp. 1-2) explains that the challenge laying at the bottom of these risks is the difficulty of gathering reliable information of the target and its country in a cross-border deal during due diligence. This explains the breadth of “liability of foreignness” and shows the multiple risks of a cross-border transaction. Frensch (2007, p. 101) concludes that planning and information gathering display critical success factors in CBM&As, as there is a huge danger of making flawed decisions based on fragmented information. According to Weber et al. (2014), one of the most common financial reasons for deal failure is the occurrence of an overpayment of the target. In this case, the acquirer purchases the target at a too high price, which is often also due to a lack of available information to estimate the value of the target. Frensch (2007, p. 101) explains that overpayments often go along with unrealistic synergy expectations which cannot be achieved in the post-merger phase. Thus, this pricing mistake often leads to a destruction of shareholder value (Weber et al., 2014). Fealy et al. (2011, p. 5) support this statement, as 20% of respondents say the acquisition price paid was too high, placing it among the top ten drivers of deal failure.
As previously mentioned in chapter 2.1.3, the success of CBM&As greatly depends on the post-merger phase of the transaction. Especially cross-border deals require a significant effort in integration planning, as the integration involves all areas of the organizations allocated across borders and their respective resources, operations and workforce. Overcoming geographic distance and implementing a distinctive organizational system in a foreign country makes integration a difficult and costly undertaking (Firstbrook, 2008, p. 2). The complexity of planning is much higher and costlier than in national business combinations (Picot, 2012, p. 11). An integral challenge of CBM&As, which is rarely encountered as such, is displayed in the interdependency of realizing synergies and bringing together the firms to a company with a new identity and culture. Multiple researchers state that firms which only formally merge into a new company but remain independent in their existence, pander the danger of failure, as the non-execution of integration favors frictions in performance and prevents synergies from being realized. Therefore, unsuccessful or insufficient integration of merging companies bears a great risk of failure (Miller and Fernandes, 2009, p. 3; Körfer, 2006, pp. 281-282). Culture has a great impact on the integration of two companies, as it complicates the amalgamation of multiple layers of the company, both on an organizational as well as on an individual level (Miller and Fernandes, 2009, p. 2). Shimizu et al. (2004, p. 332) uncovered that national cultural differences add major challenges to the integration process. Further, their research found that the success of a business combination is based on the integration process. According to Dixon (2005, p. 1), culture is cited to be the main reason for the failure of 30% of M&A activity, pointing to the inevitability of installing organizational structures and procedures which harmonically integrate both cultures. In CBM&As, culture is understood as especially challenging due to the “double-layered acculturation”, as differences in corporate culture are aggravated by differences in national culture (Firstbrook, 2008, p. 2).
Concluding, while CBM&As display great opportunities for businesses in a globalized business environment, they also involve numerous challenges and risks, firstly related to country-specific circumstances and secondly to integration complexities, which are aggravated by differences in culture. In order to understand the heavy influence of culture in CBM&As, a brief theoretical overview on culture shall be given, before analyzing the different perspectives of cultural differences and their respective challenges.
2.2.3 Culture as a Dual Challenge in Cross-Border M&A
Culture, as one of the most frequently named reasons for CBM&A failure, depicts a particular challenge in the post-merger phase. In order to understand culture within the context of CBM&As, it is important to mention that even though culture has existed in research for centuries, its significance in management literature was left out of consideration for a long period of time. Principles of national culture became a subject of interest in management literature in the 1960s. Two decades later, researchers addressed the core of corporate culture. Only in the 1990s, national and corporate culture were studied in conjunction and a direct relationship between the success of CBM&As and cultural differences was ascertained (Blöcher, 2004, pp. 51-53). Researchers explain the disregard of culture and its incompatibility in relation with difficulties in the integration phase as reasons for failure in CBM&As (El-
Aridi, 2007, p. 54). The relatively new occurrence of culture in management literature further explains the research gap this thesis addresses. Additionally, it depicts a possible reason for the problematic finding of a coping strategy with these issues. According to the 1999 Global Research Report by KMPG International, the likelihood of success of international business combinations is clearly dependent on culture, as deals are 26% more prone to succeed if cultural differences are dealt with (Kelly and Cook, 1999, p. 17). This identifies culture as an essential success factor in CBM&As. Despite the rising awareness towards culture in business, zu Knyphausen- Aufseß and Schweizer (2006, pp. 261-262) point out that managers do still not pay enough attention to cultural integration. El-Aridi (2007, pp. 56-57) explains the difficulty of tangibility of culture. Managers are prone to neglect cultural integration in CBM&As partially because culture is not tangible to them and therefore hard to encounter. However, the disregard of culture results in low performance, culture clashes, difficult acculturation processes and dissatisfaction among employees. Culture influences various aspects of a company’s everyday business routine (El-Aridi 2007, pp. 56-57). Cultural integration is directly fueling drivers of deal failure on a HR perspective, such as the loss of key workers, a decrease in productivity and low employee commitment. CBM&As are said to entail an even more challenging PMI, as they need to integrate both national and corporate cultures (Fealy et al., 2011, pp. 5-6). Barkema et al. (1996, p. 154) refer to this problem as “double-layered acculturation”. In order to create an understanding of the complexity of cultural challenges, prevalent concepts to grasp national and corporate culture and their implications on CBM&As shall be reviewed in the next chapter.
2.2.4 National Culture
In the context of CBM&As, different nations with unique cultural traits come together in a globalized work environment. National culture is not uniformly defined. Management literature has adapted the definition from anthropology, which describes national culture by distinctive behaviors which are not inherited but learned over time (zu Knyphausen-Aufseß and Schweizer, 2006, pp. 262-263). National culture is seen as an approximation for a society’s conduct, mindset and expression, resulting in homogeneous values (Zhu and Huang, 2007, p. 41). The variety that goes along with these definitions explains the difficulty in analyzing and understanding the multifaceted nature of culture of a nation which depicts a challenge in CBM&As (Blöcher, 2004, p. 56). Culture can hardly be noticed from within a society, as it is implicit to its participants and influences their actions automatically. The long-established elements of their own culture are solid, historically derived and deeply rooted in the people which makes them tremendously delicate to change and therefore extremely challenging in the post-merger phase (Miller and Fernandes (2009, p. 1). Shimizu et al. (2004, p. 332) explain, that national cultural differences are likely to negatively influence the success of a merger when a deeper integration is needed. Multiple researchers have therefore aimed to establish approaches which enable a better understanding of a nation’s cultural differences. Hofstede’s dimensions of national culture display one of the most popular approaches of analyzing different cultural attributes of nations (Blöcher, 2004, p. 66). Within his extensive quantitative research, Hofstede (2001, p. 41) collected 116.000 questionnaires from IBM employees and initially identified four dimensions in the first edition of his publication in 1980, which determine the cultures of 40 countries. The first dimension, Power Distance (PDI), is described as to which extent a less powerful individual expects and accepts unequally distributed power and authority. Societies with a high PDI accept strict hierarchies, whereas in countries with a low PDI everyone enjoys equal rights (Hofstede, 2001, pp. 7984). In CBM&As, differences in PDI can create frictions in interaction, as leadership and authority will be accepted differently. Cultures with low PDI can act defensive in negotiations and power distribution will be a difficult encounter (Cartwright and Cooper, 2000, pp. 102-103). The second dimension, Uncertainty Avoidance (UAI), measures the degree to which members of a society feel anxious about uncertainty. Societies with a high UAI try to implement rules and laws to make the future as certain as possible, whereas countries with a low UAI are more venturesome and willing to improvise (Hofstede, 2001, pp. 145-148). As business combinations imply change and ambiguities, the different approaches of UAI of societies display challenges on integration, as risk-averse countries will be more resistant to change (Cartwright and Cooper, 2000, p. 103). The third dimension is Individualism/Collectivism (IDV) and explains that in individualistic societies, everyone is responsible for themselves and relationships among members are rather loose. In collectivistic countries, group solidarity plays an important role and group performance is more valuable than individual performance (Hofstede, 2001, pp. 209-214). Analyzing this dimension, the implications can display challenges in CBM&As on decision making styles, as they vary tremendously in the speed of making decisions respective of IDV (Cartwright and Cooper, 2000, p. 103). Furthermore, competition between employees and their views on relationships can be very contrasting (Cartwright and Cooper, 2000, p. 103). In the fourth dimension Masculinity/Femininity (MAS), masculinity refers to the appreciation of a society which values ambition, assertion and recognition. Contrasting, femininity describes a country’s valuation of relationships with others, modesty and the quality of life (Hofstede, 2001, pp. 279-284). In CBM&As this depicts a challenge, as feministic cultures value the quality of life of employees, whereas masculine cultures prioritize the individual’s reputation in the company, resulting in contrasting working styles (Cartwright and Cooper, 2000, p. 103). In a subsequent study of student samples in 23 countries in 1985, a fifth dimension was added: Long-Term Orientation (LTO). In countries with LTO, the focus is set on the future, perseverance and thrift. Contrastingly, Short-Term Orientation describes special respect for traditions and stability, and the need to fulfil social responsibilities (Hofstede, 2001, pp. 351-355). Cartwright and Cooper (2000, p. 103) suggest, that when merging with a short-term oriented society, history, traditions and symbols need to be explicitly considered. Despite the extensive recognition of Hofstede’s research, critics point to the limitation of the study only being conducted with employees of IBM, a company with a very strong corporate culture (Schmid, 2002, pp. 260-262). This could have biased the completion of the survey. Further, critics express, that Hofstede divided countries in national groups, disregarding the different cultural circles (Schmid, 2002, pp. 260-262). Nonetheless, Hofstede’s work remains the most elaborate model in cross-cultural research and is widely used when assessing national cultural differences. Due to the scope of this thesis, it is therefore used as a representative approach, when assessing national cultures in CBM&As, as the dimensions show the complexity of different aspects of national cultures and the versatile challenges which can evolve from them in CBM&As.
2.2.5 Corporate Culture
While national cultures partially influence corporate cultures, companies develop their own cultural particularities. Various definitions exist in management literature on the term “corporate culture”. Strohmer (2001, p. 109) describes corporate culture as a collection of values, norms and ways of thinking and interacting, which influence the respective decisions of corporate members and their work environment. Every corporate culture is unique in the way it connects employees and sets standards for working. However, not all corporate cultures are developed equipollent. Zu Knyphausen-Aufseß and Schweizer (2006, pp. 263-264) highlight the differences between the opposites of strong and weak corporate cultures. Strong corporate cultures have a high impact in the case of CBM&As, as the behavior of the members is characterized by common views. The higher the degree of shared common views, the more difficult it becomes to change them, leading to considerable resistance during PMI (zu Knyphausen-Aufseß and Schweizer 2006, pp. 263-264).
In general, corporate culture is differentiated in two ways. Subjectivism, on one hand, understands the company as a culture itself. Characteristics of corporate culture are influenced by ways of expression and human consciousness of the employees. Culture, in this sense, is seen as a foundation of management (Unterreitmeier, 2004, pp. 36-37; Schawel, 2002, pp. 48-49). Functionalism, on the other hand, views corporate culture as a dependent variable, which is adaptable and observable and can be used as a means to achieve increases in success as a strategic management tool. Therefore, every company has a culture which can be changed (Schawel, 2002, p. 49). Concluding, these contrasting perspectives complicate the clarification and ascertainment of corporate culture. Sackmann (1990, pp. 163-163) established a dynamic approach, which unites the two perspectives. This means that companies are cultures, in the sense that they can solve problems and fulfill tasks, however they have cultural traits at the same time which can be used to contribute to the success of a company. For this thesis, the dynamic approach is most suitable, as it implies that corporate culture can affect the success of a company in both a negative and positive way depending on how it is managed in a transaction (Sackmann 1990, pp. 163-163).
In order to create a more vivid approach on assessing corporate culture, Schein (1985) developed one of the most cited models on corporate culture, which has been widely empirically proven. He understands corporate culture as an element and variable of a cultural system and combines the two above explained management perspectives in his model on the basis of the dynamic approach. In Schein’s point of view, corporate culture is a success factor in strategic management and its underlying causes and effects need to be analyzed in order to utilize it optimally (Unterreitmeier, 2004, pp. 38-39). Schein (1985, p. 14) explains that corporate cultures are comprised of three levels which are related reciprocally: artifacts, values and basic assumptions. He understands artifacts, for example in language and behavioral patterns, as the most observable level of culture, however they are not easily interpretable for non-members (Schein, 1985, p. 14). Corporate culture is shaped by the values of its members, which are related to the consciousness of right and wrong and influence their actions. Values are understood to drive visions and strategies of the company (Schein, 1985, pp. 15-16). Lastly, basic assumptions are seen as the foundation of corporate culture and are implicit to its members, as they form the corporate members’ social interactions and relationships (Schein, 1985, p. 18). Schein describes the decryption of basic assumptions as complicated, as they are taken for granted and are therefore not consciously discerned by the members of corporate culture. They can only be understood from an outsider when the data on basic assumptions of culture is collected, analyzed and interpreted together with the respective culture’s corporate members (Schein, 1985, pp. 113-114).
With respect to the implications on CBM&As, Schein outlines the enormous difficulty in understanding the complexity of foreign corporate cultural characteristics and suggests a deep cooperation with the members of a company when analyzing their culture. Therefore, the model shall be seen as a tool to simplify the complexity of corporate culture, however it cannot enable a full understanding of cultural characteristics of a company. Rather, the different levels of Schein’s model can help to find respective measures on how the individual levels of corporate culture can be critically analyzed. Denison et al. (2011, p. 111) support the implied challenges of corporate culture in CBM&As and even state that the culture of a business can be more difficult to determine than the culture of a nation.
Summarizing, it can be outlined that culture can only be understood when observed as a whole. In the context of CBM&As, national culture and corporate culture are interdependent and display dynamic challenges, especially in the post-merger phase. Cultural standards of a nation influence the behavior of corporate members, and corporate cultural characteristics also impact national cultures (Blöcher, 2004, pp. 121-122; Zhu and Huang, 2007, pp. 4243). As these findings have proven to create great defiance in CBM&As, they are especially crucial to be considered when integrating the involved companies.
To conclude the second chapter of this thesis, it can be stated that CBM&As display versatile challenges which are aggravated when integrating due to differences in culture. The approaches to assess corporate and national culture depict their complex nature and imply intangibility, which partially explains the difficulty in addressing culturally related issues in PMI. Further, the explained models cannot be used to fully understand cultural differences.
Rather, they build a basis for a critical analysis of cultural differences and can help to derive measures to foster cultural change. Multiple researchers emphasize the great need to manage culture efficiently in order to make crossborder transactions more successful. The following chapter shall display approaches on how this can be encountered.
3 Cultural Integration in Cross-Border M&As
In order to understand the far-reaching implications of a mismanaged cultural integration, the following chapter will focus on the influential areas of management when planning PMI and their possible outcomes. Further, models of cultural fit and acculturation shall be closely investigated in order to establish exemplary approaches on how to manage cultural integration. With respect to the overall research questions of this thesis, this chapter shall end with an examination of factors which hinder and foster cultural integration.
3.1 Determining Factors of Post-Merger Integration
According to a study by A.T. Kerney, 53% of the questioned managers said that the biggest risk of failure for M&As lays in the post-merger phase (Knyphausen-Aufseß and Schweizer 2006, pp. 261-262). Despite the proven significance, few companies pay sufficient attention to this phase (Jansen, 2016, pp. 361-362). Various definitions exist on the term “integration”. Hackmann (2011, pp. 28-29) describes integration as the process of combining multiple entities after a business combination with the goal to form a new, single entity. Particularly, with regard to CBM&As, integration describes the coordinated implementation of actions to amalgamate the involved businesses and its implied challenges for management (Wirtz, 2012, pp. 297-305). Integration actions are derived from the respective goals agreed on in the contract negotiations of the transaction phase. Therefore, these goals and their related success factors need to be assigned to specific areas in the integration phase and an explicit integration process needs to be outlined in the beginning of the CBM&A (Wirtz 2012, pp. 297-305). Voigt (1996, pp. 57-59) correlates the interdependence of culture, strategy and success in CBM&As, and explains that culture is influencing the translation of strategies into actions to achieve success. Therefore, strategy, culture and success are directly reconciled.
As previously pointed out, integration is the main component of the postmerger phase and displays a complex task, which has to take place on different levels simultaneously, including strategy, organization, personnel, culture and operation (Hackmann, 2011, pp. 30-31). Depending on the type of business combination occurring, management has to decide upon a range of factors regarding the scope of the integration (Wirtz, 2012, pp. 297-305). Subsequently, these factors determining integration and their implied outcomes shall be investigated closer.
In CBM&As, two types of takeover strategies can be differentiated, which have a crucial impact on the climate of the transaction (Frensch, 2007, pp. 25-26). In a hostile takeover, the acquirer contacts the owners of the company and acquires a considerable number of shares. This takeover strategy can result in a conflict of interest between the owners and management. An obtrusion of the acquirer’s culture onto the target can cause employee resistance in the target company. In a friendly takeover, the acquirer discusses the ensuing process and the integration intentions with the target’s managers and they give consent to the transaction, which can positively influence the success of CBM&As (Frensch, 2007, pp. 25-26).
The degree of integration displays a dimension which builds the basis to determine the complexity of actions to facilitate integration. According to Haspeslagh and Jemison (1992, p. 174), it is contingent on the strategic interdependence and organizational autonomy of the merging firms and can be distinguished into four types, as shown in Figure 3.
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Figure 3: Types of Acquisition Integration Approaches Adapted from Haspeslagh and Jemison (1992, p. 174)
In Preservation, few strategic interdependencies are established, requiring a low degree of integration. The target is seen as a resource for the acquirer and continues to function independently and largely unaffected by the acquisition (Jansen, 2016, pp. 368-369). The approach Holding does not entitle integration at all. Rather, an optimization of management capabilities, financing and resources takes place and requires the inclusion of control, information and planning (Haspeslagh and Jemison 1992, pp. 176-177). Symbiosis describes a partial integration approach which requires both high degrees of strategic interdependencies and organizational autonomy. While profoundly compatible functional areas of the target are integrated to realize economies of scale effects, duplicating areas are eliminated. Thus, this approach requires the preservation of boundaries and the permeability of functions at the same time (Jansen, 2016, p. 369). Lastly, Absorption describes the most timeconsuming and complex process of a total integration. All processes need to be standardized, coordinated and harmonized (Haspeslagh and Jemison 1992, pp. 175-176).
Another factor management has to decide upon is the speed of integration. This factor describes the respective time frame in which the companies are integrated based on the chosen type of integration shown in Figure 3 (Gerpott, 1993, pp. 161-162). In fact, this factor is especially controversial, as some researchers understand a high speed of integration as a critical success factor in CBM&As, and state that the most important integration activities have to be implemented within 100 days past the transaction (Buono and Bowditch, 1989, p. 15). This argument is based on the fact that employees are more willing to change immediately after the transaction has occurred (Strohmer, 2001, p. 71). Other researchers argue that a slow speed of integration can curb resistance among employees, which is often a risk of fast integration (Gerds, 2000, p. 188). Further, if integration is implemented with a slow speed, more detailed information about the involved companies can lead to a higher decision efficiency (Strohmer, 2001, p. 72). Concluding, there is no consensus about which speed of integration is optimal, rather, this factor needs to be decided on in the explicit case and on the basis of considering a cost-benefit-ratio (Gerpott, 1993, p. 163).
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