The impact of cultural differences on the post-merger performance in international acquisitions

Seminar Paper, 2017

23 Pages, Grade: 1,7



1. Introduction

2. LiteratureReview

3. TheoreticalBackground

4. Analysis
4.1 Individualism versus Collectivism
4.2 Power Distance

5. Discussion

6. References

7. Appendix


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1. Introduction

As the number of international mergers and acquisitions (M&As) increased for­midable during the last decades, it is a highly discussed phenomenon, which is becoming more and more important (Erel et al., 2012, p. 1045). Nearly 30 years ago, in 1987, there have been merely 5.000 M&As worldwide, whereas in 2016 already 50.000 M&As were concluded and as presented in Table 1 (IMAA, 2017) latest stats even predict increasing numbers of M&As.

M&A experience might both harm and help post-merger performance in interna­tional acquisitions. As stated by Schoenberg (2000, p. 46) national cultural dif­ferences mainly present a strong challenge for cross-border acquisitions. Since the initial financial expectations are met simply by one half of all M&As, cultural differences might be at fault for this high failure rate (Zollo and Meier, 2008, p. 69). Given that cross-border M&As consolidate two or more different cultures, it has to be taken into consideration that incidents such as differing legislations, currencies, languages and cultural norms do play an essential role. As a result of those distinctions, costs to the integration process might occur and the capa­bility of firms to achieve synergies might be subverted. Thereby, the expected economic advantages of the merger or acquisition will be affected, too. Key fac­tors like the integration of the participating companies in each other and enor­mous adaptation operations are irrecoverable to accomplish synergies and ad­vantages of M&As.

The hypothesis whether national cultural differences between acquirers and targets are likely to undermine post-merger performance has been researched myriad. An appropriate classification reclines in whether cultural differences matter, when they matter, underwhat conditions and in which way they do.

The elaboration of this paper is based on the theory of Hofstede (1980), who was one of the first to explicitly address the impact of culture on the integration process of M&As by explaining cultural differences might generate misunder­standings and conflicts between the two merging organisations. Hence the aim of our analysis is to dissect the impact of cultural differences on the post-merger performance in international acquisitions by focussing on two out of four dimen­sions of Hofstede (1980) by means of the works of Ahern et al. (2009) and Huang et al. (2017).

By defining the terms related to our work readers will get a first impression what the paper deals with. Culture in our work refers to national culture and is de­fined by Hofstede (2003, p. 1) as “[...] the programming of the mind, which dis­tinguishes the members of one human group from another.“ The term Cultural differences in this paper is directly related to the key cultural dimensions of Hofstede (1980). His model enables the comparison of different national cul­tures regarding “Individualism versus Collectivism”, “Masculinity versus Femi­ninity”, “Power Distance” and “Uncertainty Avoidance”.

M&As are established to generate synergies by integrating two businesses and therefore to maximise competitive advantages through various processes (Gartner, 1985, p. 184). Moreover M&As are motivated by gaining access to technology and knowledge of the target firm, as well as assigning those to the acquiring firm. An era dominated by knowledge as the most important resource for achieving positive economic performances arose and cultural distances may harm these knowledge transfers intensively (Bresman et al., 1999, p. 454). The last essential term of this paper Cross-border M&A signifies that a company in a country of destination (target/acquired company) might be acquired by an en­tity ofthe domestic country (acquiring company).

First of all, the literature review will give an overview of the current state of re­search and will determine the academic void, followed by the theoretical part focussing on Hofstede’s (1980) model of cultural dimensions. The subsequent analysis will be divided into two parts, distinguishing two of Hofstede’s dimen­sions Individualism versus Collectivism and Power Distance. To conclude there will be implications and limitations for further research studies.

2. Literature Review

To find relevant literature for this paper, we have used different research meth­ods (e.g. the internet, libraries, databases, etc.) supported by tools such as Google Scholar, VHB Jourqual, Researchgate, and JSTOR. During our re­search key words like cross-border mergers, international acquisitions, financial performance, national culture and German and Czech equivalents were used. Mostly secondary materials have been used, as the submission is limited for the public. Regardless we are aware that the selection of the sources may affect the outcome of our paper.

During the last century, various theories and studies distinguishing national cul­ture have been established (e.g. Trompenaars and Hampden-Turner, 1997), but one of the most common and influential studies of culture is Hofstede’s (1980) model of cultural dimensions. However, there has been strong polemics with the Dutch researcher to be outdated and unimplemented for modern societies (e.g. Bergiel et al., 2012 and Spector et al., 2001). We decided to focus on Hof­stede’s model (1980) in spite of considerable criticism, since it is proven for more than 35 years that the model helps to understand national culture and en­ables to compare the cultural dimensions among countries.

In the past there used to be an exclusive focus on strategic and financial ante­cedent variables in studies of post-merger performance (e.g. Pinches and Na­rayanan, 1992). Since the nineties the researchers began to concentrate on “softer”, social and cultural issues, which imply an important determinant of the result of the post-merger performance of international acquisitions (e.g. Hof­stede, 2003; Kogut and Singh, 1988; Schweiger and Goulet, 2000). Many studies, articles and books research the effect of culture in general on cross-border acquisitions. Nevertheless, there have been surprisingly few em­pirical and statistical studies, which have tested this contention. Existing studies do not show unambiguous identical results, but rather quite the opposite. On the one hand, some studies report positive or unrelated effects of culture on the M&A performance (e.g. Ahammad et al., 2016; Larsson and Risberg, 1998; Mo- rosini et al., 1998), but on the other hand researchers argue that national cultur­al differences do not have an effect on the post-merger performance (e.g. Chat­terjee et al., 1992; Datta, 1991; Weber, 1996).

To compare the post-merger performance with Hofstede’s cultural dimensions we have followed the argumentation and data of Ahern, Danielli and Fracassi (2010), which presents the influence of culture on post-merger performance in international acquisitions by means of Collectivism versus Individualism. Further we used the research of Huang et al. (2017), who focussed on Hofstede’s di­mension Power Distance, to illustrate that the results are not by hazard but em­pirically documented in two autonomous studies.

3.Theoretical Background

The main focus of the theoretical part of our paper is on the key cultural dimen­sions model of Hofstede (1980). Together with the rising number of cross­border M&A deals, also the importance of non-economic factors, which are in­fluencing a successful integration of the target company have started to be tak­en into consideration (Teerikangas and Vary, 2006, p. 31). One of the most sig­nificant factors is the question regarding cultural differences between acquiring and acquired companies, since the successful over-bridging of different cultural backgrounds might lead to higher performance in terms of profit.

The term culture has to be subdivided into different factors, which influence all cross-borders deals. In our work, the focus is on the impact of national culture on organisations. One of the most influential works is the study of Hofstede (1980), which does not only emphasize the influence of culture on M&A deals, but also describes four key dimensions enabling comparison of different nation­al cultures.

The first dimension Individualism versus Collectivism refers to “[...] the de­gree which individuals are supposed to look for themselves or remain integrated into groups [...] ” (Hofstede, 2003, p. xx). In individualistic countries, the con­tractual relationships are based on bilateral advantages, while in collectivistic societies they are based on moral foundations. Organisations in highly individu­alistic societies emphasise the importance of freedom and financial rewards for achievement that promotes the innovation and leads more easily to empower­ment of employees. This is also positively associated with employee morale and post-acquisition performance (Morosini and Singh, 1994, p. 393). People in in­dividualistic countries are rather compatible with society’s cosmopolitan orienta­tion and extroversion, which may facilitate the interaction of different national cultures after the merge or acquisition (Hofstede, 2003, p. 212; Morosini and Singh, 1994, p. 393). This dimension also influences the M&A negotiations im­pressively, because the decisions in individualistic societies are usually made by a limited number of top managers, in collectivistic countries just the opposite. Collectivism affects the need of stable relationships between the managements of both companies. Therefore, a stable relationship, which of course takes more time to be established and might be reflected by lower performance, has to be built (Hofstede, 2003, p. 436).

Another dimension is Power Distance, which describes the “[...] extent to which the less powerful members of organisations and institutions accept and expect that power is distributed unequally.’’ (Hofstede, 2003, p. xix). In the case of M&A deals, the difference in power distance might lead to unequal ac­ceptance of subordinates and managers in both companies in terms of respect and social acceptance and may result in friction when firms try to merge (Datta, 1991, p. 293). Especially in large power distance societies, where it might lead to problems with accepting and respecting the “new” management team if the leaders treat employees as equals, this is difficult (Ahern et al., 2010, p. 8 - 9). On the contrary in low PDV-driven cultures egalitarianism is considered as an ideal. Hence people are insensitive to differentiate in their hierarchical positions and seek to treat each other as homogeneous (Huang et al., 2017, p. 974).

Third dimension Masculinity versus Femininity opposes “tough” masculine societies with preference of assertiveness, decisiveness and achievement to “render” feminine societies that have more preferences on cooperation, modes­ty, life-work balance and interpersonal relationships (Hofstede, 2003, p. xx). Organisations in feminine cultures strive for equality and therefore the manag­ers and subordinates are on the same level. Also, the feminine businesses may be rather a cooperative venture (Hofstede, 2003, p. 279 - 313), because they are more likely to resolve conflicts through compromise and to strive for agree­ment (Hofstede, 2003, p. 436). On the other side in masculine cultures the or­ganisations are based on internal competition and achievement, which is meas­ured by accomplishment (Hofstede, 2003, p. 313).

The last dimension Uncertainty Avoidance describes the extent of “[...] socie­ty’s tolerance for ambiguity.’’ (Hofstede, 2003, p. 436). In countries with low un­certainty avoidance fewer written rules and less structured activities might be found and people tend to be more tolerant to different ideas and practices. The trust enables better integration process and therefore facilitates the post-merger cooperation (Zak and Knack, 2001, p. 310 - 311). Therefore, the number of M&A deals usually will be higher in those countries (Ahern et al., 2010, p. 11). By contrast in higher uncertainty avoidance societies, organisations incline to present a great resistance to change, a lower acceptance of conflicts, a reduced labour mobility and a lower tolerance for foreign managers (Hofstede 2003, p. 145 and p. 436; Morosini and Singh, 1994, p. 393).

Cultural distance based on the four above mentioned dimensions (PD, ID, MA and UA) defines the degree to which culture of one country differs from culture of another country (Kogut and Singh, 1988, p. 422). Table 2 shows the cultural dimensions in different countries, especially that ID and PD are negatively cor­related. Diversification of the dimensions for M&As between Scandinavian and English-speaking countries, which have an individualistic, low power distance and low uncertainty avoidance society may be seen as ideal (Hofstede, 2017; Ahern et al., 2010, p. 44).

As Hofstede argues, companies as well as their employees are strongly influ­enced by their own national culture, which might result in negative interaction and problems within culturally distant firms. Those may lead to a decrease of loyalty, commitment, satisfaction and finally to less production in the post­mergers cooperation (Hofstede, 2003, p. 240; Morán and Panasian, 2005, p. 18). The reason for the high failure rate of performance in M&As is validated by several empirical researches as the national cultural distance, where the man­agement, organisations’ structure, HR and codes of ethics are diverse (Datta and Puia, 1995, p. 337; Teerikangas and Vary, 2006, p. 31).


Consistent with the cultural distance hypothesis, the purpose of this chapter is to give evidence that the national cultures of merging firms have to be similar or at least complementary to integrate successfully.

4.1 Individualism versus Collectivism

The data used for this analysis were elaborated by K. Ahern et al. (2010), who on the basis of SDC Platinum databases researched samples of 127.950 mer­gers, of which 30.907 were cross-border deals (Ahern et al., 2010, p. 10). In their research, the focus was on three key dimensions of national cultures: first, Hierarchy versus Egalitarianism, second Trust versus Distrust and last Individ­ualism versus Collectivism, which our work deals with (Ahern et al., 2010, p. 6).

To illustrate that, Table 3 summarises the relation and activity between the Top- 30-nations in cross-border deals (including domestic ones) since 1985 until 2008. As it can be seen the worldwide leader by far is the USA with 55.407 tar­gets, followed by the UK (21.689), Canada (6.752), Australia (6.128) and Japan (3.513). Above all, the Scandinavian countries are counted among those Top- 30-nations. For further illustration of the complexity of international mergers Figure 1 is taken into consideration, where the proportion between the coun­tries’ number of domestic mergers and the cross-border merger activity is demonstrated. This figure is essential to show that the trading partners were not chosen accidently, but with purpose. The evidence points out that English speaking nations have strong M&A ties (e.g. USA and Canada, USA and UK) and that some of the biggest domestic markets have less cross-border mergers (e.g. Japan, Australia and Malaysia) (see last row in Table 3). This last row in Table 3 delineates that less than 6% of acquisitions of Japanese companies are made by foreign acquirers, compared to 24% for the entire world. Additionally, there is a clear evidence that cultural differences between countries have an impact on the choice of the trade partner but also the geographical isolation of island-nations might influence the number of cross-border mergers (e.g. Japan, Australia) (Ahern et al., 2010, p. 11).

In order to measure the role of culture in reference to value creation by mer­gers, the sample size is reduced to 815 cross-border mergers across 38 coun­tries, because the available stock price data was limited for the public (Ahern et al., 2010, p. 20-21).

This research computes the acquirer’s and target’s abnormal returns in a three- day window around the announcement of the merger. The cumulative abnormal return (CAR) is the sum over three days and it is considered to be the variable of interest in this analysis, whereas the combined CAR refers simply to “[...] the average of the acquirer’s and target’s CAR, weighted by each firm’s market val­ue two days before the announcement.’’ (Ahern, et al., 2010, p. 21). Research­ers discovered that the average combined CAR in a three-day window around the announcement is 2,13% and that cross-border deals have an average com­bined CAR of 3,46% (for comparison: domestic mergers only 1,85%). As a re­sult of that it can be said that mergers create an average value, whereas cross­border mergers even create a higher value than domestic ones.

Table 4 describes the effect of cultural differences on combined returns in 815 cross-border mergers.


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The impact of cultural differences on the post-merger performance in international acquisitions
University of Augsburg
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Cultural Differences, Hofstede, M&A, Mergers & Acqusitions, Performance, international, management, Schwartz, Impact on the performance, international acquisitions, post-merger
Quote paper
Ricardo Escoda (Author), 2017, The impact of cultural differences on the post-merger performance in international acquisitions, Munich, GRIN Verlag,


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