Intercultural aspects of Mergers & Acquisitions in consideration of the Chinese market

Table of contents

List of Abbreviations

Table of Figures

1 Introduction
1.1 Problem Definition
1.2 Aim of this work
1.3 Outline research methods

2 Chosen aspects of Mergers & Acquisitions
2.1 Definition of M&A
2.2 Differentiation of the terms Merger and Acquisition
2.3 Reasons and drawbacks of M&A
2.4 The M&A process
2.4.1 The concept of phases
2.4.2 Analysis and conception phase
2.4.3 Transaction phase
2.4.4 Integration phase

3 Intercultural aspects of M&A
3.1 Definition of culture
3.2 National versus corporate culture
3.3 Cultural dimensions
3.3.1 Hofstede’s four cultural dimensions
3.3.2 Adding a fifth dimension
3.3.3 Criticism on Hofstede’s views
3.4 Layers of culture according to Trompenaars and Hampden-Turner
3.5 The meaningfulness of cultural influences on cross-border M&A
3.5.1 Acceptance of culture as the critical factor of success
3.5.2 Intercultural experience of the M&A management team
3.6 Cultural influences on the analysis and conception phase
3.6.1 Internal analysis
3.6.2 Extracting appropriate M&A targets
3.7 Cultural influences on the transaction phase
3.7.1 Cross-culture negotiations and communications
3.7.2 Cultural due diligence
3.8 Cultural influences on the post-merger integration phase

4 Intercultural aspects of M&A in China
4.1 China – latest figures and developments
4.2 M&A in China – Reasons and Drawbacks
4.3 The Chinese culture
4.3.1 Hofstede’s dimensions in consideration of the Chinese culture
4.3.2 Long-term orientation in China
4.3.3 The layers of culture in China
4.4 Guanxi and Business
4.5 The M&A process in consideration of the Chinese culture
4.5.1 Analysis and conception phase
4.5.2 Transaction phase
4.5.3 Integration phase

5 Summary and Conclusion

Bibliography

List of Abbreviations

illustration not visible in this excerpt

Table of Figures

Figure 1: Benefits of M&A

Figure 2: Growth-Share Matrix

Figure 3: Integration

Figure 4: Strategic interdependence versus autonomy in integration

Figure 5: Layers of culture according to Trompenaars and Hampden-Turner

Figure 6: Corporate leadership cultures

Figure 7: Corporate leadership and dimensions of culture

Figure 8: Large-Power-Distance Societies

Figure 9: Weak-Uncertainty-Avoidance Societies

Figure 10: Collectivist Societies

Figure 11: Masculine Societies

Figure 12: Long-Term Orientated Societies

1 Introduction

1.1 Problem Definition

For many years the number and value of cross-border Mergers and Acquisitions (M&A) has increased. The latest figures published by the UNCTAD show that the number of cross border transactions in 1987 counted 862 deals by having a total value of over USD 75 billions. In the following years, M&A had increased to 7,894 deals with a value of USD 1,144 billion in 2000. Even though, in the period of the global downswing between 2000 and 2004, the worldwide transaction value and number declined to 5,113 transactions amounting to USD 380 billion, the total transactions stepped up again to 6,974 deals with a value of USD 880 billion in 2006. These figures of cross-border transactions illustrate that M&A are a meaningful tool of Foreign Direct Investment (FDI)^[1].

Although cross-border M&A seem to be a very attractive mode of entering foreign markets by having the aim to increase market power, improve efficiency through synergy, size, risk diversification or financial motivations, most M&A waste shareholders’ value. Different statistics from several business publications point out that only twenty-three percent of all M&A earn their cost of capital, only thirty percent of projected synergies are achieved and the average financial performance of companies after merging is graded by their management as a C-minus^[2].

This high quota of failures after M&A deals are completed is the result of various factors. One factor is that most deals are made by people at the highest management levels and once the deal is closed they treat their job as well done^[3]. However, the creation of value by implementing strategies and conceptions that had been developed before the deal was closed must be followed up continuously to close the deal successfully. Thus, the post-merger phase has to be treated as the most time-consuming part of M&A and lots of efforts and resources have to be mobilised to let the deal become successful^[4].

The most critical factor of success, however, is intercultural diversity and the possible problems of a culture clash. The obstacle of cultural differences has to be treated as a mandatory key to a sustainable and successful pathway throughout the whole M&A process. This means that cultural diversity has to be considered from the pre-merger to the post-merger phase^[5].

Especially in China, the cultural patterns are still fundamentally different to the Western culture, which complicates M&A in China and problems can occur during the whole process, from its beginning to the final integration of the acquired company into the international operations of the acquirer. As it is complicated for foreigners to look behind Chinese faces, it involves a lot of effort to successfully merge with or acquire a Chinese company^[6].

1.2 Aim of this work

This Bachelor Thesis pays attention to the importance of the soft factor of M&A. Many companies only concentrate on the hard facts of the due diligence process, by taking the given figures into account, running discounted cash flow analyses and value the assets. However, they do not pay much attention in consideration of cultural diversities and thus, most M&A fail to achieve the desired success^[7]. Therefore, this work mainly concentrates on explaining and describing the possible problems but also chances of cultural diversity for the M&A process with special consideration on the Chinese market.

1.3 Outline research methods

This work is divided into 5 chapters and comprises 65 pages. The first chapter briefly states the problem definition and purpose of the work. In the second chapter, chosen aspects of M&A are illustrated. After defining and differentiating the terms M&A, reasons and drawbacks of M&A are mentioned. Furthermore, this chapter will introduce the three phases of an M&A deal, starting with the analyses and conception phase followed by the transaction phase and finally the integration phase.

In chapter three, the link between intercultural aspects and M&A is analysed. At first, this chapter defines the term culture and names possible influences on M&A due to cultural diversities. In order to explain and analyse the cultural dimensions and the way of acting and thinking of people with a different cultural background, Hofstede’s and Trompenaars and Hampden-Turner’s models are consulted. Afterwards, cultural influences on each of the three M&A phases are scrutinised.

The fourth chapter concentrates on M&A activities and the intercultural aspects and influences on M&A in China. At the beginning, this chapter provides facts and figures of the current market situation in China. Thereafter, the Chinese culture is analysed by using the models of Hofstede and Trompenaars and Hampden-Turner. By examining the influences of Confucius’s teachings, the long-term orientation of the today’s Chinese society is analysed. Furthermore, the influence of the Chinese Guanxi networks on business is explained. After analysing the Chinese culture, the cultural influences on the three M&A phases are reviewed. The last chapter of this Bachelor Thesis contains a summary and conclusion of the work.

2 Chosen aspects of Mergers & Acquisitions

2.1 Definition of M&A

Mergers and Acquisitions are instruments to achieve certain strategic and business objectives by combining two companies. Thus, corporations use M&A to implement external growth strategies by merging with or acquiring existing companies or certain business units. Through external growth, companies can achieve fast improvements in their potential. Therefore, they can realise huge time savings in the process of development^[8]. M&A are transactions with a significant effect on the companies themselves, but also on many other stakeholders such as workers, managers, competitors and the economy^[9].

Cross-border M&A are a principal means, by which companies can grow and internationalise in foreign markets. Thus, they represent a useful tool, through which national corporations can become multinational acting corporations by FDI^[10]. “Foreign direct Investment (FDI) is an investment that results in control of a firm by the investor”^[11].

In his work, Gerhard Picot defines M&A in view of their manifold forms of appearance as follows, and this Bachelor Thesis will use the term M&A accordingly:^[12]

- Acquisitions and Sales of Corporations
- Mergers
- Co-operations, alliances and Joint Ventures
- Management Buy-Out and Buy-In
- Initial public offerings

2.2 Differentiation of the terms Merger and Acquisition

The term Merger is defined as the legal consolidation of two equal companies, in which one company, or both are losing their entity^[13]. Mergers can be seen like a marriage between two companies forming one economic unit from two or more previous ones. Regularly, before the companies decide to merge there is a period of courtship leading to combining the two entities into one company^[14]. Furthermore, mergers usually require the approval of the acquiring and target company’s shareholders^[15].

Acquisition on the other hand means that one firm purchases 100% of the shares and thus, takes over the ownership of the acquired asset. The transactions can be through share deals by acquiring the shares of the target or by asset deals meaning purchase of property holdings. The aim of the acquirer is to achieve the control of the target’s resources. Usually, the acquiring company is bigger than the acquired company^[16].

While mergers tend to be like a marriage, acquisitions can either be friendly or hostile. A hostile bid can be defined as a bid that has been rejected by the target’s management. Afterwards, the shareholders of the target company can decide, whether they sell their shares to the bidder or not. Hostile acquirers tend to seek underperforming targets, replace their management and improve the profitability of the assets under their control.

Friendly acquisitions on the other hand, require the cooperation of the target in order to utilize synergistic gains^[17]. This Bachelor Thesis equates the terms Mergers and Acquisitions as the exact differentiation is not essential for the theme of this work.

2.3 Reasons and drawbacks of M&A Reasons

There are several reasons why corporations are looking for external growth by merging or acquiring other companies. Generally, factors motivating M&A include cost savings through economies of scale and scope and the realisation of synergies in order to increase the value of companies^[18]. Some of the most important reasons why companies consider M&A are named in the following figure, whereas the benefits are separated into the different forms of M&A, meaning horizontal (firms selling the same products), vertical (firms from the same value chain from raw material to the final product), and conglomerate (firms from different industries)^[19].

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Figure 1: Benefits of M&A

In the course of globalisation, M&A has become a useful tool for corporations to expand their business activities to foreign countries. Through cross-border M&A, companies can utilise the advantages of internationalisation. A benefit of going international, by merging with or acquiring foreign enterprises, could be to overcome barriers to trade by serving foreign markets within certain trade blocs. Examples for trade blocs are the EU or NAFTA region. In these blocs firms can distribute their products without paying tariffs^[20]. A further benefit of cross-border and simultaneously cross-culture M&A are cultural synergies. To develop cultural synergies in newly- merged companies, global business leaders must be well trained and skilled at understanding and resolving cross-cultural conflicts. At the same time they have to enforce a cooperative, cross-culture organisational behaviour in a multicultural environment^[21].

Another reason is economies of scale through cheap labour in countries of lower wage as well as lower energy costs or overhead savings^[22]. As mentioned before, diversification through conglomerate M&A can be seen as a useful strategy to spread risks. By acquiring foreign assets, the diversification potential cannot only be seen in diversification of the product range, but in expanding into different geographical markets. Thus, in times of economic downswing in the home market, companies can still benefit from their foreign activities, as different countries and regions do not have the same business cycle and the same stage of development. Therefore, the risk potential of weak national markets becomes less^[23]. As illustrated in Figure 2, every country can be positioned in a matrix, resulting in various strategies that can be followed by cross border M&A^[24].

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Figure 2: Growth-Share Matrix

Star countries are high growth markets and require large amounts of cash to sustain growth. Corporations that search for cross-border acquisition targets should invest and expand into these markets, as the relative market share and the growth potential are high. Question mark countries are countries with relatively low market share in growing markets. As question mark countries require large cash inflows, corporations have to decide strategically whether M&A in these markets should be done. Cash cow countries have a high market share, however with low growth potential. M&A in these countries will produce healthy cash flows. Dog countries should not be considered for M&A as they do not have growth potential and the relative market share is small^[25].

Drawbacks

Although there are many reasons for M&A, the major drawback can certainly be seen in the high rate of failures after deals have been closed. As mentioned in the first chapter, most transactions fail to deliver the expected positive results and the significant costs, related to failure, are a major concern to companies’ stakeholders^[26]. But why do Mergers and Acquisitions really fail? Most literature consults the so-called cultural clash to be the primary causal factor for the failure of cross-border M&A. As there are different values, beliefs, practices and attitudes between the cultures, the new management must find a way to integrate culture into the strategy of the corporation^[27]. Thus, top management has to set goals and lead employees in line with cultural beliefs and attitudes^[28].

Other risks of cross-border M&A can be seen in general risks of diversifying business activities to foreign markets. Examples are political risks like civil strife, revolutions and wars disrupting the activities in foreign countries^[29]. Another example could be fluctuations in the exchange rates between different currencies. Due to several examples of transferring funds across national boundaries, like making or receiving payments in different currencies, conducting intra-company transfers or remitting profits, firms could face losses. Thus, fluctuation in exchange rates has great transaction exposure for companies after having merged with foreign-based firms^[30]. As the risks of cross-border M&A are very complex, this Bachelor Thesis will mainly concentrate on the risk exposure due to cultural diversities.

2.4 The M&A process

2.4.1 The concept of phases

The concept of phases during the M&A process is widely-used in literature on M&A. In his work, Gerhard Picot defines the phases of M&A as analysis and conception phase, transaction phase and integration phase. The exact definition of each phase is defined exactly within the next chapters. During each of these three phases, the following main aspects of M&A management have to be considered^[31]:

- Wholistic examination of the phases during the whole process
- Exact definition and communication of strategic objectives
- Decision-making and vision whether the cultures and parameters of the enterprises fit together
- Share a common language during the process
- Realistic evaluation of synergy potential as well as integration costs
- Analysis of necessary steps to cope with employees’ interests to secure economic success
- Accurate definition of the M&A structure and organisation

Although, M&A are split into three phases, the process cannot be divided totally. This means that there are no clear boundaries, but an overlapping between each phase can be noticed^[32].

2.4.2 Analysis and conception phase

During the first phase of M&A the fundamentals for the whole process and the abilities for post-merger integration success are created. This phase can also be described as the all-important process of picking your target. During this initial stage a company that strives for M&A should first analyse and understand its own business core and corporate culture, before being able to locate a suitable target company. In many cases, however, corporate mergers and acquisitions follow an ad hoc, unsystematic, non- strategic process by spending insufficient efforts in closely screening the deal. As a result, many deals are conducted with limited upside, but high downside risks^[33].

Gerhard Picot points out that a company has to raise the questions, if, when, and why it should choose the strategy for inorganic growth through M&A, rather than internal organic growth^[34]. In order to answer the first question, the corporation’s management has to conduct a business analysis by studying the business objectives and potentials of the firm. While conducting this analysis the corporation must determine, whether external growth through M&A fits better to the business objectives than internal growth^[35]. Also the financial aspects, in consideration of increasing the competitiveness of the value-added chain, have to be considered critically. The answer to the question “when” is depended on the necessity to strengthen the core business, for example the increasing external pressure caused by mergers of direct competitors^[36].

After the company has evaluated the first and second question and took the decision to follow the external growth strategy, the last answer “how” must be analysed and answered. By answering this question, the given forms of appearance of M&A have to be verified. Thus, it has to be checked if business objectives can be achieved by co- operations or alliances only, or whether the company has to strive for an acquisition^[37].

2.4.3 Transaction phase

In the transaction phase the first contacts and negotiations between the corporations take place. The next step during this phase is the agreement to start negotiations. At this stage top management of both parties as well as an appropriate M&A service provider enter into negotiations by keeping high discretion. The purpose of the following negotiations is to clarify and determine the purchase price. Therefore, this phase holds the highest divergence in interest between the buyer and seller^[38].

In order to fix the intermediate data, both parties sign a Letter of Intent. This letter includes the principle agreement of the companies and regulates further proceedings. Before the final closing process begins, the acquiring company starts to analyse the target by conducting a due diligence. The purchaser’s aim of this precise analysis is to discover risks, weak points but also chances from the acquisition target by studying financial data, operational assets or legal issues^[39].

However, the greatest shortcomings and the greatest potential impact on post-merger integration are cultural diversities. By concentrating only on hard data during the due diligence process, many acquirers fail to attend the soft factor of culture^[40]. As the potential for culture clashes is very high after the deal has been closed, a cultural due diligence should be part of the due diligence process, before M&A deals are closed. A cultural due diligence is a diagnostic process, conducted to discover the compatibility or incompatibility of the target in comparison to the acquiring company. Thus, cultural due diligence should be treated as a mandatory step to maximise the effectiveness of post merger-integration^[41]. How a cultural due diligence can be executed and what has to be considered will be illustrated in this Bachelor Thesis at a later stage.

The next step of the transaction phase includes singing the Memorandum of Understanding. This memorandum includes the main financial, conceptual, legal and fiscal points in short form to summarise the negotiations. After this memorandum has been signed and the antitrust agency has given its approval, the transaction phase can be closed by signing the contract^[42].

2.4.4 Integration phase

After the deal has been closed and the contracts have been signed, the integration phase can start. During this last step of M&A, the strategic and value-creating objectives have to be realised by the integration of the acquired company. In various literatures, the integration phase is considered to be the toughest step of M&A^[43]. Potential integration problems could occur in the form of hard factors and in the form of soft factors as illustrated in figure 3.

illustration not visible in this excerpt

Figure 3: Integration

The decision on the integration mode of the hard and soft factors should have already been taken before the target company has been acquired. To integrate the strategy and the organisation / administration is one aim of the integration phase, whereas it has to be decided if the two companies should fuse completely or only affiliate the acquired target^[44].

Human capital integration is characterised to be the most difficult area of all pieces of the M&A puzzle. To have clear organisational goals and measures, rewards and recognitions as well as ongoing communications, an excellent leadership style of the management is essential to succeed in this area^[45]. However, in many M&A the importance of human resources is neglected, as the decision for M&A is mainly influenced by gaining market shares, product strategy, and financial aspects. The fact that personnel issues are neglected during the pre-merger and transaction phase is often the reason why M&A deals fail. Gerhard Picot points out, that about 85% of the United States-based top-managers are convinced that problems of human resources integration management have larger influences on the success of M&A than financial aspects. The main problems that can occur are resignations from employees, changing of key- personnel to competitors, frustration, fear of change and uncertainty of the future^[46].

In his work, Sudi Sudarsanam distinguishes between four integration approaches. These approaches vary in their need for integration from strategic interdependence to organisational autonomy as illustrated in figure 4^[47].

illustration not visible in this excerpt

Figure 4: Strategic interdependence versus autonomy in integration Absorption

The absorption approach has a high level of strategic interdependence and a low level of organisational autonomy. As the whole operational resources and cultures have to be pooled, absorption is considered to be the most complicated and time-consuming integration mode. The aim of this approach is to eliminate all boundaries during the integration process and form one corporate unit. Absorption is mostly used as a strategy to complement company’s activities^[48].

[...]

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^[1]http://www.unctad.org/Templates/Search.asp?intItemID=1584&lang=1&frmSearchStr=M%26A&frmCa

tegory=all&section=whole, as of March 2, 2008

^[2] cp. Galpin, J. G., Herndon, M. (2000), p. 1-3.

^[3] cp. Schaffer, R.H., Ashkenas, R.N. (2005), p. 134.

^[4] cp. Berens, W., Brauner, H.U. (1998), p. 58-59.

^[5] cp. Carleton, J. R., Lineberry, C. S. (2004), p. 13.

^[6] cp. Brückner, T. (2006), p. 7.

^[7] cp. Carleton, J. R., Lineberry, C. S. (2004), p. 13.

^[8] cp. Wirtz, B. W. (2006), p. 5.

^[9] cp. Sudarsanam, S. (2003), p. 1.

^[10] cp. Peck, S., Temple, P. (2002), p. 1.

^[11] Ashegian, P., Ebrahimi, B. (1990), p. 12.

^[12] cp. Picot, G. (2002), p. 19.

^[13] cp. Müller-Stewens, G., Spickers, J., Deiss, C. (1999), p. 1.

^[14] cp. Weston, J. F., Chung, K. S., Hoag, S. E. (1990), p. 3-4.

^[15] cp. Brückner, T. (2006), p. 3.

^[16] cp. Jansen, S. A. (2001), p. 43-46.

^[17] cp. Wirtz, B. W. (2006), p. 268.

^[18] cp. Haspeslagh, P. C., Jemison, D. B. (1992), p. 36-38.

^[19] cp. Sudarsanam, S. (2003), p. 97,139,164.

^[20] cp. Rugman, A.M., Collinson, S. (2006), p. 45.

^[21] cp. Moran, R. T., Harris, P. R., Moran, S. V. (2007), p. 232.

^[22] cp. Kotabe, M., Helsen, K. (2008), p. 297.

^[23] cp. Albaum, G., Duerr, E., Strandskov, J. (2005), p. 65-67.

^[24] cp. Porter, M. E. (2004), p. 362.

^[25] cp. Porter, M. E. (2004), p. 363.

^[26] cp. Carleton, J. R., Lineberry, C. S. (2004), p. 1.

^[27] cp. Carleton, J. R., Lineberry, C. S. (2004), p. 13.

^[28] cp. Asheghian, P., Ebrahimi, B. (1990), p. 6-7.

^[29] cp. Hollensen, S. (2004), p. 43.

^[30] cp. Asheghian, P., Ebrahimi, B. (1990), p. 546-548.

^[31] cp. Picot, G. (2002), p. 17.

^[32] cp. Wirtz, B. W. (2006), p. 409.

^[33] cp. Harding, D., Rovit, S. (2004), p. 35-36.

^[34] cp. Picot, G. (2002), p. 21.

^[35] cp. Jansen, S. A. (2001), p. 165.

^[36] cp. Picot, G. (2002), p. 21.

^[37] cp. Picot, G. (2002), p. 22.

^[38] cp. Jansen, S. A. (2001), p. 179-181.

^[39] cp. Picot, G. (2002), p. 122-123.

^[40] cp. Galpin, J. G., Herndon, M. (2000), p. 20.

^[41] cp. Carleton, J. R., Lineberry, C. S. (2004), p. 53.

^[42] cp. Jansen, S. A. (2001), p. 185-186.

^[43] cp. Sudarsanam, S. (2003), p. 527; Reed, S. F., Lajoux, A. R. (1999), p. 643.

^[44] cp. Haspeslagh, P. C., Jemison, D. B. (1992), p. 173-174.

^[45] cp. Galpin, J. G., Herndon, M. (2000), p. 181-184.

^[46] cp. Picot, G. (2002), p. 429.

^[47] cp. Sudarsanam, S. (2003), p. 527.

^[48] cp. Haspeslagh, P. C., Jemison, D. B. (1992), p. 175-176.