Excerpt
Content
List of Abbreviations
List of Figures
Management Summary
Zusammenfassung
1 Introduction
1.1 Overview of the M&A Market and Activity
1.2 Problem Statement
1.3 Research Method
1.4 Structure
2 Definitions
2.1 Transactions and Due Diligence
2.2 Culture and Culture Clashes
2.3 Trust and Language
3 Impact of M&A’s
3.1 In General
3.2 During the M&A Stages
3.3 Cultural Problems and Key Drivers in M&A Stages
4 Integration Models as Solution Alternatives
4.1 Analysis Approach
4.2 Selection of Existing Integration Models
4.2.1 The Delta Model by Faber
4.2.2 The Three Phase Model by Wollersheim
4.2.3 The Three Phase Model by Schneck
4.2.4 The Three Phase Model by Schuler
4.2.5 The Organizational Fit by Cartwright
4.2.6 The Customized CDD Model by Carleton
4.2.7 The Three Phase Framework by Trompenaars
4.2.8 Various Supplemental Models and Studies
4.3 Evaluation of the Models
5 A Set of Cultural Integration Tools
6 Conclusion
6.1 Summary and Conclusion
6.2 Outlook and Recommendations
Appendices
References
Other Bibliography
Eidesstattliche Erklärung
List of Abbreviations
illustration not visible in this excerpt
List of Figures
Figure 1.1 Key drivers for M&As
Figure 2.1 Due Diligence Types
Figure 2.2 Key Differences by Basic Culture Problem
Figure 2.3 Culture Problem Indices by Country
Figure 4.1 Human Due Diligence Delta Model
Figure 4.2 Cultural Due Diligence Assessment
Figure 4.3 Process for Capturing Value
Figure 4.4 Comparison of Existing Integration Models
Figure 5.1 The Cultural Integration Toolkit
Management Summary
Merger and acquisition activities have become an integral part of today’s businesses world. They are considered as strategic component to gain market share and extend product portfolios. Still, these transactions have a huge impact on an organization. This paper looks specifically at the M&A impact on company culture. Based on an analysis of identified key elements, which drive an M&A process, a cultural integration toolkit will be developed to solve identified cultural problems. Secondary data serves as source data for an inductive approach. Cultural problems and key drivers will be identified based on systematic research. The implantation of these key drivers in existing integration models will be further studied. Findings prove that not all of the identified key drivers are implemented in the models. Therefore, existing models solve the identified cultural problems semi-efficient. This leaves the need for a basic integration tool, which implements all key drivers, serves as guideline through an M&A process and provides specific instruments for realization of single steps. This paper develops such a basic integration toolkit in chapter 5. The toolkit meets all these requirements and proves that “managing culture clashes in M&A’s” is possible.
Zusammenfassung
Merger and Acquisition Aktivitäten sind ein integraler Bestandteil im heutigen Geschäftsleben geworden. Sie bilden eine strategische Komponente um Marktanteile zu vergrößern oder die Produktpalette zu erweitern. Dennoch, diese Transaktionen haben großen Auswirkungen auf ein Unternehmen. Diese Arbeit beschäftigt sich speziell mit den Auswirkungen auf Firmenkultur. Basierend auf einer Analyse von wichtigen identifizierten Elementen, die einen M&A Prozess antreiben, wird ein kulturelles Integrationsmodell entwickelt, das identifizierte Kulturprobleme lösen soll. Sekundärdaten bilden die Basis für einen induktiven Ansatz. Kulturelle Probleme und wichtige Elemente werden systematisch identifiziert. Die Implementierung dieser wichtigsten Treiber in bestehende Integrationsmodelle wird weiter analysiert. Die Resultate beweisen, dass nicht alle der identifizierten wichtigen Treiber in den Modellen umgesetzt werden. Daher lösen die bestehenden Modelle die kulturellen Probleme nur teilweise. Das führt zur Notwendigkeit eines grundlegenden Integrationsmodelles, welches alle wichtigen Elemente implementiert, einen Leitfaden durch die M&A Prozesse und Instrumente zur Umsetzung einzelner Schritte bietet. Diese Arbeit entwickelt solch ein Modell in Kapitel 5. Das Modell erfüllt alle diese Anforderungen und beweist, dass die „Bewältigung der Kulturprobleme in M&A’s“ möglich ist.
1 Introduction
1.1 Overview of the M&A Market and Activity
The focus of this paper is on merger and acquisition (M&A) activity. It starts with an overview of global M&A deal volumes. Mergermarket shows in their “Round-up for Year End 2011” an increase of global M&A deal values from 1,600 US$ bn in 2004 to 3,600 US$ bn in 2007. In the period from 2007 to 2009 the global deal value dropped to 1,600 US$ bn and leveled out since 2010 at around 2,000 US$ bn (mergermarket, 2012, p. 3). This deal activity leads to the question for key drivers which are discussed in several KPMG studies and other publications (KPMG, 1999, p. 8; KPMG, 2008, p. 8; KPMG, 2011, p. 8; Schuler, 2001; p. 240; Harding, 2004, p. 123; Bower, 2001, p. 94; Bech, 2007, pp. 18-28).
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Figure 1.1 Key drivers for M&As
(Source: KPMG, 2011, p. 8)
The above shown extract of a KPMG study names as acquisition strategies: increase of market share, geographical growth, expanding into growing sectors, cost synergies, investment opportunities, entering new markets, acquiring brand (KPMG, 2011, p. 8). Schuler adds further strategies such as
“acquisition of cash, […] bigger asset base to leverage borrowing, […] gaining core competence […], talent / knowledge and technology [...]” (Schuler, 2001, p. 240).
There are many rationales behind M&A’s creating different challenges. M&A transactions cause a “fight for control” (Bower, 2001, p. 94) between the executive groups and manager groups of both companies, especially when equal companies merge. This leads to slowing down the decision making process and interrupting the due diligence and integration process. Cross border M&A’s face “cultural and governmental differences” (Bower, 2001, p. 94) slowing down specific legal due diligence steps. CEO’s pointed out in a roundtable meeting, that they tried to lay out the management structure, others started with their integration work by the time the acquisition was planned, and a few stated that communication is the key (Carey, 2001, p. 15). A wide variety of challenges comes along when M&A’s are planned and executed. They have a huge impact on the new organization, its strategies, structures, cultures and many other components. That requires a solid planning of M&A activities expressed in success measures. These are typically share price, market share, customer service levels and satisfaction, profitability, productivity, staff motivation and morale (Carleton, 2004, pp. 9-12). Deloitte has used some of these success measures to create risk areas to further examine failure rates of M&A transactions by four risk areas. The study evaluated data from Europe, America and Asia over six years and resulted in an average failure rate of 72.5% of all investigated M&A’s (Gerds, 2010, pp. 72-76). A McKinsey study from 2010 stated M&A failure rates of 66-75% as well (Deutsch, 2010, p. 5). McKinsey indicated in another study that many acquirers focus on cost savings instead of revenue increase. (Bekier, 2001, p. 3). The Vector Group sees
“(1) failure to assess the potential impact of attempting to merge and integrate the cultures of the companies involved and (2) failure to plan for systemic and systematic and efficient integration […]”
as the two major basic reason for M&A failure (Carleton, 2004, p. 1). Other failure reasons are named, but not exclusively, as draining financials, underestimating transition costs, power and politics as driving force instead of productive and organizational objectives, losing or mismanaging talent and totally different management styles (Schuler, 2001, p. 241; Carey, 2001, p. 12). Communicaid showed that 45% of M&A failures result from “unexpected post deal people problems” (Communicaid, 2011, p. 2). Increased internal focus leads to lack of focus on customers, low motivation and the loss of key staff and executives create enormous inefficiencies through loss of time – and “just have to be lived through” (Carleton, 2004, p. 15).
1.2 Problem Statement
The high failure rates signal a need for more awareness for and guidance through the integration process. While some M&A research areas study hard facts others scan soft issues and their impact on the organizational structure which affects long-term performance. This paper concentrates on culture clash specifically.
The purpose of this paper is to examine the correlation between cultural issues and M&A’s. Central aspects of an analysis are to identify cultural problems and to identify key elements which determine the M&A process. Based on this analysis the goal of this thesis is
to develop a basic cultural integration toolkit
that could solve the identified cultural problems. This toolkit could be used in all kinds of M&A’s, working like a structured mind map. Executives, key personnel, and other in integration work involved people would benefit from a solid guidance through an integration process.
1.3 Research Method
The complexity of this topic in conjunction with the goal of developing a basic M&A toolkit led to applying an inductive approach. Consequently, this paper is based exclusively on secondary data. Although expert interviews from own M&A experiences would underline certain issues this paper seeks to cover a broader range.
Research has shown that there is a great selection of case studies and models supporting M&A integration available. These include single case studies oriented on specific transactions within the same sector, or country, or supporting cross-border transactions, mergers of equals but also models combined with case study elements referring to special integration stages. There are also models for specific business strategies available.
This paper’s data collection is based on sources, which were published between 1996 and 2012. The majority of sources are not older than seven years. The collected data include secondary meeting minutes, recently published articles, books, academic documents, studies, and consultancy reports. All of them refer to integration topics and a variety of M&A aspects providing an overview or deeper insight in these topics. As such, they serve the purpose of this paper.
1.4 Structure
Section 2 starts with definitions and further delimitations. Section 3 shows the impact of M&A’s in general and during the M&A stages. This chapter finishes with the identification of cultural problems and key drivers in the M&A process. Section 4 introduces various integration models. Prior to this the analysis approach is outlined. The model introduction finishes with comparing and evaluating them. Section 5 develops a basic cultural integration toolkit. The paper ends in section 6 with a short review and provides an outlook on future developments and research areas.
2 Definitions
The correlation between M&A’s and culture issues is considered as a framework for this study. Before discussing them more in detail, relating key elements will be defined in this chapter. Section 2.1 starts with basic hard issues such as transactions and due diligence. The soft issues culture and culture clash will be explained in section 2.2. The chapter finishes with clarifying trust and language as crucial parts within this framework.
2.1 Transactions and Due Diligence
There are several definitions of “Mergers” and “Acquisitions”. This paper refers to Trompenaar’s clear definitions:
“Mergers entail two organizations integrating into a third entity. […] An acquisition is when one company buys another and integrates it into its own organization. […] A strategic partnership or alliance may differ in this regard as there may only be integration of a department or a smaller part of an organization.“ (Trompenaars, 2010, p. 4)
Due to their various impacts on culture clashes M&A’s are further divided into “mergers of equals”, and “mergers of un-equals”, as well as “acquisitions and integration”, and “acquisitions and separation” (Schuler, 2001, p. 240).
Looking at M&A’s by direction does not correlate with culture issues and is therefore not part of this paper.
Conducting M&A’s happens in stages. A description of typical M&A stages includes: 1) a pre-combination stage, 2) the combination or integration stage, and 3) the solidification or assessment stage (Schuler, 2001, p. 243). Merger stages will be discussed further in chapter four during the introduction and development of integration models.
The pre-combination stage includes the performance of due diligence, which is defined by Achtleitner as:
“careful examination and analysis of a company, especially in view of its economic, legal, tax and financial situation, which is made by a prospective purchaser of a business” (see Gabler Wirtschafts-lexikon Online, translation by the author).
Even though “due diligence has only limited ability to set accurate expectations of total synergies” (McLetchie, 2010, p. 11), it is a vital process in deal making. Due diligence covers all business areas: finance including, commerce, legal, operation, strategy, IT, HR and culture. Figure 2.1 shows due diligence types by frequency of conduction. The graphic indicates clearly that HR due diligence was only performed in rare cases although it is one of the first process steps of cultural due diligence.
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Figure 2.1 Due Diligence Types
(Source: KPMG, 2011, p. 18)
According to Carleton culture due diligence (CDD) is “a diagnostic process conducted to ascertain the degree of cultural alignment or compatibility between companies” (Carleton, 2004, p. 53).
2.2 Culture and Culture Clashes
Research of general culture definitions resulted in two definitions, which seem to cover the broadest spectrum. Schein defines culture as:
“pattern of basic assumptions – invented, discovered, or developed, by a given group as it learns to cope with its problems of external adaptation and internal integration – that has worked well enough to be considered valid, and, therefore, to be taught to new members as the correct way to perceive, think and feel in relation to those problems” (Schein, 2004, p. 17).
Hofstede summarizes culture as:
“the collective programming of the mind that distinguishes the members of one group or category of people from another” (Hofstede, 2001, p. 9).
Company culture is expressed in behavior of people who have their own culture, which is composed of elements reflecting their origins. Hofstede’s fundamental definition refers to nations. He gives solid examples of how national cultures affect company culture. Therefore, his definition is used as a starting point in this paper. Consequently, this paragraph focuses on Hofstede’s IBM study, represented in Hofstede, 2001, in order to understand the complexity of culture. Although the IBM study takes only a small part of the today’s business world into account its findings provide the most comprehensive overview about culture and a basis for other academic work. Therefore, other opinions are not considered in this definition section. Culture consists of values expressed in symbols, heroes and rituals - in total: behavior. Hofstede sliced culture into impact levels: family, school, work, politics, religion, society. This paper refers to level ‘work’ exclusively. In a second step Hofstede divided culture into five basic issues: 1) Power Distance (PD) referring to power distribution between boss and staff, 2) Uncertainty Avoidance (UA) referring to the stress level which occurs about an unknown future, 3) Individualism versus Collectivism (IDV) reflecting the orientation towards groups or individuals, 4) Masculinity versus Femininity (MAS) referring to emotional roles between men and women, 5) long-term versus short-term orientation (LTO) referring to the people’s focus on the future or the present (Hofstede, 2001, p. 29). Figure 2.2 outlines three examples of key differences per basic problem. The index columns “low” and “high” show indicators for the specific basic problem. For instance: a low power distance index for basic problem “Power Distance” can be identified when a) the company is decentralized structured and has a flat hierarchy, b) the leadership style is rather consultative, c) the staff expect to be consulted before decisions about their work will be made.
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