Excerpt
Index
1. Introduction
2. Theoretical Background
2.1 Mergers and Acquisitions
2.2 Organizational Culture
3. The Role of Culture in a Merger
3.1 Culture as Reason to Fail
3.2 How to Deal with Cultural Differences in a Merger
4. The Case of Fiat-Chrysler Automobiles N.V. (FCA)
4.1 The Merging Companies
4.2 The Merging Process
4.3 Analysis of the Merger
5. Conclusion
6. References
1. Introduction
In times of globalisation, mergers and acquisitions (hereafter: M&A) are an important and common tool for companies in order to expand their operations as well as to face changing market conditions and increased competition.
Over the past three decades, M&A have therefore become a truly global phenomenon: While in 1985 there were only 2,675 M&A transactions worth 347 billion USD, there were more than 46,000 global transactions, worth more than 4.5 trillion USD in 2015. In comparison to 2014, the number of deals increased marginally by 2.7 percent in 2015, while the value of the transactions grew by 16 percent (Institute of Mergers, Acquisitions and Alliances (IMAA) 2016).
Nevertheless, and despite the increasing popularity of M&A transaction worldwide, several studies yield that mergers actually have a high rate of failure. Depending on whose research results one relies on, the failure of M&A-deals varies between 60 and 75 percent (see Lodorfos & Boateng 2006; Kelly et al. 1999; Deutsch & West 2010). In this context, it should however be distinguished between the failure of creating any business benefit (especially shareholder value) and the total failure of the merger (and a segregation afterwards, as e.g. Daimler-Chrysler did) which most likely will be a much lower percentage.
As one recent study found out, culture has been identified to be the cause of 30 percent of failed integrations (Dixon 2005). These cultural differences between the merging companies become even more important in cross-border mergers where people from different cultural groups with different opinions, attitudes and values interact with each other. Although it is known that culture plays a key role in the integration process and therefore also for the success of the whole merger, it is often given relatively little attention to by the managers (Lodorfos & Boateng 2006).
After building a theoretical background on M&A and organizational culture, the paper will focus on the role of culture in a merger: It will be analysed which role the organizational culture plays in a merger, why so many mergers fail due to cultural differences and how the factor culture can be successfully managed within a merger. In the second part of the paper, I will briefly present the merger of Fiat and Chrysler, shedding light on their different cultures and the integration process. In the end, there will be a short summary.
2. Theoretical Background
2.1 Mergers and Acquisitions
Due to globalisation, economies become more and more integrated and the increasing competition limits the profitability for firms. Through M&As, companies are able to acquire expertise, technology and products as well as to achieve economies of scale and scope. They are “a vital part of [ … ] economies and are often the primary way in which companies are able to provide returns to their owners and investors ” (Sherman 2011, xi). This statement is in line with Stahl and Voigt (2008) who argue that there are two major M&A performance outcomes: synergy realization and shareholder value creation.
In the academic literature however, there is neither a consistent definition for, nor a consistent distinction between the terms ‘merger’ and ‘acquisition’ (Wirtz 2014; Jansen 2008) and, as Jansen mentions, the term strongly depends on the scientific lens, it is investigated from.
A first rough approach is given by Wirtz (2014) who states that M&A are fusions and takeovers of organisations, divisions or subsidiaries. Epstein (2004) defines a merger as a combination of two formerly independent corporations of more or less equal stature which enter into a marriage, using the best of both firms. In this context, Gertsen et al. (1998) distinguishes between transferring all assets to one surviving firm or fusing the two companies into a single new enterprise. In contrast to that, an acquisition means that one firm buys enough shares in order to gain control of the other one and subsequently tries to integrate the acquired company into the existing structures. The acquisition can either be friendly or hostile which depends on how the acquisition is perceived by the shareholders of the acquired enterprise. (Gertsen et al. 1998; Epstein 2004).
As Søderberg & Vaara (2003) mention, the difference between a merger and an acquisition is that in a merger, companies that have a rather similar size are combined towards a new (one) organisation “where neither party can be seen as the acquirer” (p. 11). An acquisition is the simple process of integrating a smaller company into the existing structures of its larger acquirer which is easier than a merger. In a merger, every aspect of both companies’ cultures and practices is opened for discussion; whichever way is selected in the end has to be discussed which can, in turn, lead to various conflicts (Epstein 2004).
In the last six decades, M&A transactions have always occurred in waves which can be divided into four different phases: The conglomerate wave were non-related firms join together, the vertical wave between firms at different production stages but in the same branch (e.g. purchase from suppliers or the retail stage), the horizontal wave between firms in the same branch and at the same production stage as well as the concentric wave between firms in different but related branches (e.g. a manufacturer of sports equipment and a manufacturer of leisure wear).
During the 1960s and 1970s large firms’ aim were regularly to seek for diversification which resulted in conglomerates of various types whose companies often did their business separately further in an independent way. During the 1980s until today, the dominant waves in M&A are from horizontal and vertical nature. The aim is not anymore to diversify but rather to achieve synergies, economies of scale and other advantages of large-scale productions (Gertsen et al. 1998; Cartwright & Cooper, 1992). This is in line with Nasreen & Yasmeen (2016) who state that executives pursue those transactions due to three reasons: i) in order to acquire technologies, products and market access, ii) to create economies of scale as well as iv) to establish a global brand presence. In doing so, their main aim “ is it to produce advantages for both the buying and selling companies compared with the alternative situation in which both companies will continue independently ” (Hovers 1973, cited in Cartwright & Cooper 1992, p. 21).
According to Gertsen et al. (1998), the horizontal and vertical wave in M&A requires much greater integration between the two merging firms in terms of finance, personnel policy or even joint offices, as well as a cultural integration, typically expressed in a common management style or common norms and values. However, Cartwright & Cooper (1992) state that the main focus of all four waves lies on strategic and financial possibilities rather than on aspects like culture and people which are mostly neglected.
2.2 Organizational Culture
As Barney (1986) mentions, there are many different and sometimes competing definitions for the term or concept of ‘organizational culture’. The concept has its origins in the cultural anthropology and is mostly investigated in the scientific field of organisational behaviour as well as in the management and marketing literature (Hogan & Coote 2013).
According to Barney (1986), organizational culture can be defined “ as a complex set of values, beliefs, assumptions, and symbols that define the way in which a firm conducts its business ” (p. 657) and which is shared by members of an organization (Hogan & Coote 2013).
Lodorfos & Boateng (2006) mention that it “has a historical basis and, through a process of socialisation, members within an organisation learn how to act accordingly”. It is therefore a hidden social force which is very powerful and used to cause desired organisational outcomes (Hogan & Coote 2013) due to the fact people rely on the underlying values, beliefs and assumptions to guide their behaviour and decisions. In addition, organisational culture sets a broad framework for organisational routines and practices (Hogan & Coote 2013) and defines not only the relevant stakeholders (employees, customers, competitors, suppliers) but also how the company interacts with these (Barney 1986, referring to Louis 1983).
The concept of organisational culture is not about the personality of each individual organisational member but rather about the organisation’s personality as a whole. It deals for example with questions like what the organisation values, how the general mood is, if only individuals or whole teams are rewarded or receive recognition or even if birthdays and other anniversaries are usually celebrated or ignored (Horn 2012). Thus, culture defines “ the way things get done in an organization ” (Marks et al. 2014, p. 45), mostly done intuitively without any conscious thoughts.
As Nasreen & Yasmeen (2016) argue, culture has three important implications: First, culture is implicit due to the fact that people with the same cultural background find it difficult to recognize their own culture. Second, culture has a direct influence on the behaviour of people as well as their self-conception and actions. This in turn leads to the fact that their actions and beliefs feel ‘right’ to culturally influenced people and they do not understand (or also question) why they act the way they do and if there would be other appropriate alternatives. Third, culture is resilient which means that it is a long-standing concept, not easily influenced by trends or fads. This is supported by the fact that their actions feel ‘right’ to the people and are not questioned. Therefore, new cultural influences rarely change the actual cultural values and beliefs in the long run.
As a consequence - and due to the fact that people in organisations are humans with individual personalities and driven by a shared culture - organisational culture and its effects have a broad and far reaching influence during the integration of two companies. According to Stahl & Voigt (2008) it is an important aspect of success for every M&A transaction in terms of the organisational and human resource perspective.
3. The Role of Culture in a Merger
3.1 Culture as Reason to Fail
The effect of cultural distance in mergers is a frequently discussed topic. As one recent study found out, culture has been identified to be the cause of 30 percent of failed integrations (Dixon 2005). These cultural differences between the merging companies become even more important in cross-border mergers where people from different cultural groups with different opinions, attitudes and values interact with each other.
Cross-border mergers are difficult to carry out because of its “ double layered acculturation ” (Stahl & Voigt 2005, referring to Barkema et al. 1996, p. 151): Here, different corporate cultures clash with different national cultures which may lead to various conflicts that limit the “ potential for trust to emerge between the parties involved ” (Stahl & Voigt 2005, p. 52). It includes not only fundamentally different values, beliefs and goals on a corporate level, but also language barriers, different legal or political systems or administrative structures on a national level. This may also be reinforced by cultural stereotypes, an increasing nationalism or even xenophobia (Stahl & Voigt 2005, referring to Vaara 2001, 2003).
Most researchers argue on the basis of studies that cultural distance negatively affects the effectiveness of the integration process and subsequently also the likelihood of a successful merger. This means that the greater the cultural distance between two merging companies is, the smaller are its synergy gains and the success of the whole entity resulting from the merger; they also regularly fail to create shareholder value in the medium term (Lodorfos & Boateng 2006; Stahl & Voight 2008; Ahern et al. 2012; Marks et al. 2014). Therefore, culture can be seen not only as a make- but also as a break-factor in the merger-equation (Lodorfos & Boateng 2006, citing Fralicx & Bolster 1997).
Because of this, many firms try to avoid acquiring or merging with companies that have different - in their eyes incompatible - cultures. Here, they try to rely on the fact that cultural similarity acts as a force which brings the members of the two merging organisations together by “ creating a sense of cohesion and consequently achieving synergy ” (Lodorfos & Boateng 2006, p. 1407).
The reality however shows that no company culture is completely congruent to another, even if the company is operating in the same industry, and that there are always some differences between the joining companies (Mark et al. 2014): Even if two companies seem to share similar values, goals, organisational practices or technology, there mostly exist several differences in the micro level (on the personal level) which can constitute a major obstacle or - in the worst case - a cultural clash (Gertsen et al. 1998). Moreover, cultural compatibility or the cultural fit of two organisations alone is not a guarantee for a merger’s success.
Nevertheless, it has been demonstrated that cultural heterogeneity between the two merging entities “ creates tensions and affects financial and managerial performance ” (Lodorfos & Boateng 2006, p. 1407): Those cultural differences create not only organisational challenges that complicate the integration process and increase the general acquisition costs but also diminish the profitability. Furthermore, cultural heterogeneity (or cultural fit) is a variable which is underestimated by most managers during a merger (Lodorfos & Boateng 2006, referring to studies by Bijlsma-Frankema 2001; Faulker et al. 2002; Krishnan et al 2004). As a consequence, it is often given relatively little attention to by the managers: they are normally fully engaged with the management of the financial and operational aspects of the integration process, along with the parallel running daily operations. Cultural differences or clashes are therefore often ignored, denied or trivialised (Marks et al. 2014).
As a matter of fact, employees - as members of merging organisations - usually react in a negative way when being acquired which is referred to as cultural clash. Research has shown that it often results in power plays (Søderberg & Vaara 2003), “ a lower commitment and cooperation among the acquired employees [ … ], greater turnover among the acquired managers [ … ], a decline in shareholder value of the buying firm [ … ], and a deterioration of operating performance of the acquired firm ” (Lodorfos & Boateng 2006, p. 1408). This is also in line with Cartwright & Cooper (1992) who state that mergers with a high level of cultural heterogeneity often lead to cultural ambiguity, confusion and hopelessness.
As Stahl & Voight (2008) mention from a social theorist view, people (not only as members of organisations) are usually attracted by those who share similar attitudes, values and norms; this encourages, as a consequence, the development of trust. By implication, the trust for each other can also erode, when organisational members do not share the same key values. Furthermore, organisational members show a bias towards their own group and have therefore a negative attitude towards members of the other organisation. In relation to the management level, managers often “ adopt an attitude of superiority and treat the members of the target firm as inferior ” (Stahl & Voight 2008, p. 162). It is therefore necessary to develop “ a sense of shared identity and positive attitudes toward the new organization ” (ibid.), as well as trust
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