Excerpt
Abstract
Based on a review of pertinent literature, the paper discusses the role and the complexities of cross-border mergers and acquisition in firms´ internationalization. The various stages that firms customarily go through as part of an international merger and acquisition process are outlined and debated from both a theoretical and practical perspective. Particular challenges related to the management of the post- merger integration process and complexities related to differences in national and organizational cultures, organizational design and knowledge- structures between the acquirer and the target company are discussed. It is argued that appropriate management of the merging firms´ human resources as the merging firms´ smallest common denominator, is the key to optimize the outcome of cross-border transactions and to achieve budgeted post-merger benefits. Based on the conceptual discussion, the paper concludes with key recommendations for how to manage a cross-border deal to minimize risks and increase the probability of achieving the objectives.
Keywords: mergers and acquisitions, intercultural management, corporate culture, international business, human resources
1. Introduction
Globalization of business in general and manufacturing in particular has increased greatly during the last decades as companies have internationalized their value-chains in a search of competitive advantage through scale and/or scope throughout the world. Combined with other developments, such as increased deregulation, technological change, privatization, and corporate restructuring, globalization has spurred not only increased international orientation, but also an unprecedented surge in cross-border mergers and acquisitions (M&A) (Finkelstein, 1999; Shimizu et al., 2004; Coeurdacier, Santis and Aviat, 2009).
From an international management perspective, international M&As may be analyzed from a number of theoretical and practical perspectives and the focus here will be on the customary stages in the preparation-, evaluation-, decision-making, implementation and the ultimate post-merger integration process. Also, since it is the human being in the role of board director, CEO, manager or employee in both the acquiring firm and the one being acquired who faces the challenges and/or suffer the consequences of cross border M&As, the emphasis in the following discussion is on the management of people as a resource in this context. In line with Shimizu et al. 2004, a cross-border M&A is defined as those involving an acquiring firm and a target firm whose headquarters are located in different home countries, even though it is realized that even a merger of two domestic firms may have international consequences if they integrate operations located in different foreign countries. The further elaboration starts with a brief outline of the motivations behind most M&As and the various theoretical approaches to the analysis with emphasis on how the conditions change and complexities increase when the operation is cross-border. Then the more analytical and practical phases of an international M&A are discussed before drawing some conclusions on how common pitfalls may be avoided and the outcome of a cross-border M&A optimized for those involved or touched by the process - people, as well as, the merging companies.
2. Theoretical perspectives
Cross-border M&As customarily follow as an evolutionary consequence of firms´ internationalization strategy and as such form part of their chosen long term business development. The strategic evolution of firms may be explained from various perspectives ranging from a focus on transaction costs and economics of scale in economics (Coase, 1937; Williamson, 2007) to a resource- or knowledge-based view of the firm in the strategy literature (Wernerfelt, 1984; Conner, 1996; Barney, 1996; Peng, 2001). The process of going international and join forces with other firms may even be considered as an entrepreneurial (McDougall and Oviatt, 2000) and innovative action (Williams, 1983; Baumol, 2002) when a firm is seeking opportunities abroad with the objective of increasing scope and accessing technology. Whatever the main driver, it can also be considered from a more general international business management perspective, keeping in mind the social networking and learning component forming part of firms´ search for markets and opportunities abroad (BarNir, 2002; Johansen and Vahlne, 2003).
The internationalization literature traditionally explains how firms appear to go through stages in their internationalization process consisting of gradually gaining knowledge and familiarization with international markets and opportunities (Johansen and Vahlne, 1977). As the internationalization theory developed, an increasing number of perspectives and explanatory variables included in the description of the internationalization process have emerged, among them greater relevance has been granted to networking´s role in strategic internationalization (Welch and Welch, 1996), a renewed focus on resources (Peng, 2001) and also an increasing consciousness of how also cognitive variables impact firms´ internationalization behavior (Hodgkinson and Sparrow, 2002; Javidan, Steers and Hitt, 2007; Kyvik, 2011).
There is agreement in the literature that a cross-border M&A is one of, if not the most, complex of the internationalization modes and usually considered only after gaining extensive resources and prior international experience. This is illustrated in Figure 1 (Appendix), indicating that firms´ internationalization process customarily starts modestly by casual export/import orders and subsequently pass through stages where gradually more complex integration of international activities form part of the firms´ business repertoire. It should be noted that cross-border M&A is conceptually considered as synonymous with direct foreign investments (FDI) as a mode of entry into a foreign market, a mode of internationalization requiring strategic resources, knowledge about international operations and commitment to a long terms presence abroad. It is further emphasized that the entry mode do represent greater control, but that this control is achieved through simultaneous greater exposure to risk. As indicated in Figure 1, and summarized by Shimizu et al. (2004), entry modes vary between equity based (greenfield, acquisition, joint-ventures) and non- equity based (export/import, alliances, etc.). As cross-border M&As reflect equity commitment, it represents greater control and greater risk, but also upside opportunities if well managed and with successful outcomes.
A cross-border M&A, here understood as acquiring an existing foreign business, represents an opportunity to obtain a foreign firm´s tangible resources such as technology, fixed assets and production plants and other installations as the case might be, while it also represents, from an organizational learning perspective (Argyris and Schön, 1996; Senge, 1990), access to the firm´s more intangible knowledge-base, such as management systems, competence and capabilities represented by the firm´s human resources. It also represents access to other strategic components such as new geographic markets and to the acquired firm´s existing domestic and international value chains.
However, despite the rhetoric of strategic benefits gained through synergy in international M&As, the empirical evidence reportedly does not quite support this claim. As a matter of fact, based on an analysis of international M&As by US firms during the 1950-1986 period, Porter (1987) argues that, “only the lawyers, investment bankers, and original sellers have prospered in most of these acquisitions, not shareholders”. Thus in spite of a trend towards more and bigger M&As, research shows that a majority of deals fails to achieve their objectives (Rosson and Brooks, 2002). Findings from several studies (Bleeke and Ernst, 1993; Chatterjee et al., 1992) report an overwhelming preoccupation by the acquirer on financial results (“hard” issues) and too little concern for integration of the two companies (Morosini, 1998).
As a consequence, it has been argued that the major challenge of cross-border M&As is the management of people and the human resource (HR) function and that HR ought to play a more strategic role in this type of organizational change process (Antila and Kakkonen, 2008). Many cross-cultural M&As appear to get into trouble because too little attention is paid to the “soft” issues such as vision, leadership, stakeholder communication, employee morale and retention, integration speed and momentum and employee motivation at the post-merger stage. Thus a change in management focus and priority from the short- term monetary outcome to the long term corporate “well being”, must take into account both the differences in corporate culture and the potential cultural distance between the joining firms´ home and host countries.
While an assessment and evaluation of cross-border M&As are analytically complex, including both quantitative and qualitative variables, the hands-on implementation of the process itself is also highly management-intensive on all levels. As illustrated in Figure 2 (Appendix), the following paragraphs outline the customary stages of a M&A from a combined theoretical and empirical point of view, following the sequence of events as they appear over time from when the strategic decision of a cross-border merger as an internationalization-option is evaluated, the decision taken, the deal negotiated and the merger executed including the integration process of the two firms.
3. Stages in the international M&A process
3.1 Cross-border acquisition as a strategic choice in the firm ´ s evolution
The following argumentation assumes that the acquiring company is considering a cross- border operation as part of an ongoing international strategy-development, and based on first gaining experience through one or more of the less complex stages of internationalization outlined in Figure 1. It is further assumed that the cross-border merger proposition is based on a rigorous strategic evaluation of the available modes of entry into the foreign market in question. A straight forward and methodologically sound procedure might be to proceed based on an analysis of internal strengths and weaknesses combined with an assessment of external opportunities and strengths (SWOT). This resource-based perspective (Barney, 1996; Wernerfelt, 1984) has the benefit of making logical sense and its outcome and findings are relatively easily communicated between internal decision-makers and to other stakeholders. An important part of the SWOT-analysis will be a focus on the key drivers of the proposed merger, whether this is access to foreign markets, resources, managerial- or technical knowledge etc. or a combination.
A cross-border merger proposition must be based on experience from prior international operation and solidly based on a strategic evaluation, i.e. what Finkelstein in the context of cross-cultural M&As calls the “strategic logic” (Finkelstein, 1999) of the company´s past internationalization experiences and objectives of further international presence and expansion.
3.2 Preparation and selection of M&A candidate(s)
When a strategy of increased international presence through a cross-country M&A has been chosen, comes the time to locate one or several candidates and, depending on the degree of operational unification intended after the M&A, to evaluate their strategic fit to the company´s current operation and overall international strategy.
The post cross-border M&A integration process is highly critical for the success of most acquisitions (Shimizu et al., 2004). Actually, several studies claim and among them Haspeslagh and Jemison (1991), that assumptions made during the pre-merger strategic planning phase often turn out to be erroneous with a “disproportionate emphasis on the strategy task, leaving aside practical impediments to value creation, such as interpersonal, inter-organizational, and intercultural friction” (ibid, p. 302). The challenges of integration are affected by the differences in corporate culture between the two firms as well as by the institutional and cultural distances between the firms´ home countries. As reported by Shimizu et al. (2004): “the greater the integration, the closer the coordination necessary to implement it successfully and, therefore, the greater the importance of cultural differences” (p. 332). Similarly, Weber, Shenkar and Raveh, (1996) found that differentials in corporate culture affected the cooperation between the two firms´ top managers and with greater negative attitudes the greater the perceived difference in corporate culture.
The differences in management attitudes, style, cognitive structures and business logic may thus greatly complicate interpersonal relationships during the merger process. Taking into account the case of a fully integrated cross-border M&A, the differences in corporate culture will not only be reflected in internal routines, management criteria, measurements, standards, management information systems, but also in the way the individual firms actually operate and organize their business before the merger. The differences in corporate culture will also be greatly amplified by differences in a wider social perspectives and contextual phenomena such as regional or national culture, value system, language, traditions and religion. For instance, with reference to Hofstede´s cultural dimensions, it might be found that the personnel of the merging firms have dramatic variance in “software of the mind” (Hofstede, 1991-1997). Power distance, individualism and uncertainty avoidance might be very different and with direct impact on leadership, management, perception of daily management responsibilities, decision-making and the attitude towards problem-solving.
It seems quite safe to extrapolate and conclude from this that intercultural complexity and management´s sensitivity and approach to these differences greatly will influence the ultimate cost of the transaction, if not also the long term probability of success or failure of the cross-border M&A. It also seems reasonable to recommend that a conscious and rigorous analysis of how the two companies will be integrated is done in advance of the execution of the cross-border M&A. A clear top-management consensus on the implementation of the integration will greatly increase the probability of a positive outcome and increase management´s ability to deal with complexities when arising. The issue of integration after a cross-border merger is discussed in further detail in paragraph 3.5.
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