Cultural Integration in Cross Border Mergers - Coursework Example

 Table of Contents Title page 1 Table of contents 2 The importance of M&A cross-border cultural integration 3 The stages of mergers and acquisitions 4 The motive behind the acquisition or merger 4 Due diligence and negotiation stages 5 Post acquisition integration stage 6 Integration of organizational culture in M&A 7 Cultural integration in cross-border M&A 8 Cross-cultural management in M&A 9 Localization strategy 10 Transplanting the culture of the parent company 10 Evasion tactics 10 Cultural innovation by integration 11 Issues in cultural integrations in M&As 11 Conclusion 13 References 14 Cultural Integration in Cross-border Mergers and Integration: Issues and Solutions The importance of M&A cross-border cultural integration A merger or acquisition is often candidly described as a marriage of two organizations; in business, this would be between two enterprises. The combination of two domestic companies is an important business and economic undertaking because in many instances, such will assure the survival of an entity in the face of changing competitive structures or politico-legal mandates pertaining to the industry (Vaara, 2001). Cross-border M&As, on the other hand, gain a special importance because they play a vital role in foreign direct investment (FDI), directly impacting upon the entry of additional equity in the host economy, and providing an additional source of income investment for the home company. Organizations are comprised of persons real and natural, with all their complexities and idiosyncracies. The human element will be a consideration that will permeate all aspects of the post- M&A integration process. For local companies, this means the combination of two organizational cultures into one. In the case of acquisitions, one culture (the acquired) gets subsumed into the other (the acquirer), which thereafter becomes the dominant culture. For mergers, particularly between equally strong companies, it may not be so simple. As with all other activities, structure, processes and systems, there will be elements of each company which will prove to be desirable, and certain elements which would be better discarded. People, who are normally resistant to change, will naturally seek to enforce their own accustomed cultures, and resist the adoption of the other. Cross-border M&A is specifically defined as “an activity in which an enterprise from one country buys the whole asset or controlling percentage of an enterprise in another country (Zhu & Huang, 2007). In the process of cross-border mergers and acquisitions, the enterprises involved are prone not only to conflicts between their organizational cultures, but also their national cultures. This makes the problem of cultural integration more difficult, because national cultures are more closely equated with a sense of national pride and patriotism. Moreover, they often have profound religious or ethical implications more deeply ingrained in the psyche of a nation by centuries of social conditioning. The task of cultural integration of cross-border M&As, therefore, becomes double significant in that it seeks to create a new corporate culture out of two sets of organizational and national cultures, by harmonizing the synergistic elements and eliminating the conflicts (Zhu & Huang, 2007). The stages of mergers and acquisitions The merger or acquisition process is not a single event, but a series of stages that must be understood in order to determine the most effective manner by which integration can be carried out. This is because corporate integration is intimately related to the decision-making stage of the acquisition itself, not separate from it, and events and decisions during the intermediary stages influence the manner in which integration shall proceed. Tanure, Cancado, Duarte & Muylder (2009, pp. 138-142) identify four stages of the merger and acquisition process: 1. The motive behind the acquisition or merger This comprises the reason why one company may consider acquiring or being acquired by another, or why two companies should decide to combine. These reasons include: (a) the acquisition of greater market access; (b) expansion into another geographic area or strategic undertaking; (c) diversification of business activity; (d) broadening of the distribution network; (e) enhancement of existing competitive advantages and the gain of new, sustainable advantages; (f) acquisition of undervalued assets to increase shareholder value; (g) response to fundamental and structural changes in the industry; and (h) acquisition of new knowledge concerning other businesses, companies & industries. These reasons can be grouped into two general categories, namely those that are traditional, because they aim for the consolidation and expansion of the market, and those which are transformational, because their goal is the development of a new portfolio or business model (Steger, 1999 in Tanure, et al., 2009). In all these motivations, the common rationale is the creation of potential value, with the studied expectation that the acquisition or resulting merged entity will redound to the strategic or financial gain of the business. Seldom, however, does the value realized from the merger correspond to the potential value that was anticipated prior to the merger. While the type of merger may influence the eventual result, it is not solely determinative of it; much depends upon the manner the operation was carried out, as well as the nature and specific attributes of the companies being merged (Sinatra & Dubini, 1994, in Tanure et al., 2009). 2. Due diligence and negotiation stages This stage commences with a systematic evaluation of the target firm, which is the due diligence stage. Its aim is to gain sufficient information in order to develop financial and strategic forecasts that may address issues bearing upon the success of the acquisition. Often the final transacted price is determined largely on the financial considerations; unfortunately, at this point human resources management professionals are not able to contribute significantly to this phase of the merger process. HR departments are involved only in 25% of the planning of U.S. acquisitions, and the figure is even lower for Europe (Evans, Pucik & Barsoux, 2002). The failure to include the assessment of human capital during the planning stages precludes the adoption of a tentative deal-structuring plan that would address the organizational structures and human resources makeup of the integration team and probably even the subsequent merged firm (Stahl & Voigt, 2008). Such a pre-merger deal-structuring plan, no matter how tentative, may also help to alleviate unreasonably optimistic assumptions about personnel appointments and movements, and set more realistic expectations. To ignore the cultural aspect at the negotiation stage constitutes a major oversight because the negotiation process is particularly sensitive to national cultural factors. Negotiators tend to adapt their behaviour during cross-cultural interactions, and therefore while they may not be perceived by the negotiating parties, cultural factors play a central role in the early to middle stages of the acquisition or merger (Adler & Graham, 1989, in Tanure, et al., 2009). 3. Post-acquisition integration stage During the pre-merger stage, strategic fit takes center stage in the consideration of management; often overlooked, though, is the compatibility of management styles of the two merging companies. The integration team should therefore investigate closely the similarities and differences between the two companies’ culture, leadership, strategy, and structure, particularly in the compatibility of fundamental business styles (Davis, 1968 in Tanure, et al., 2009). Business style is however also intricately linked to the companies’ risk taking attitude, its preferred short-term and long-term returns, its shareholders’ profit expectations, and attitude towards delegation of authority, and the prioritization it accords the different functional concerns of its business. Two major considerations dominate in post-acquisition integration: the degree of interdependence, and the degree of autonomy exercised by the units. Three arrangements predominate in terms of these considerations, which are: (a) absorption, which has a high degree of interdependence and low degree of organizational autonomy; (b) preservation, having a high degree of autonomy but a low degree of interdependence among the combining units; and (c) symbiosis, which provides equal provision for both interdependence and autonomy, because the acquired capabilities need to be preserved in an organizational context different from the parent or acquiring company. Another typology was suggested by Tanure (2009), consisting of cultural assimilation, cultural mix, cultural plurality, and reverse movement. Integration of organizational culture in M&A Organization culture is defined as “the collective programming of the mind which distinguishes the members of one organization from another” (Hofstede, 1997, in Bajaj, 2009). It is also thought to be “the pattern of basic assumptions that a given group has invented, discovered or developed in learning to cope with its problems of external adaptation and internal integration,: (Schein, 1983 in Bajab, 2009), which assumptions are presumed to be considered valid, and are therefore passed down through new members of employees as the proper and correct way to act, think, feel, and perceive in relation to one another and to the company. Company culture is vital to the operation of an enterprise because it correlates a company’s strategy and the performance of its employees (O’Reilly, 1989 in Zhu & Huang, 2007; Barmeyer & Mayrhofer, 2008). Enterprises have different cultures, values and operating styles, because of their divergent backgrounds and the inconsistencies in their external environments (Zhu & Huang, 2007). In the process of merging a high degree of cultural conflict is detrimental to the company and a cause for morale and productivity to suffer, because cultural clashes cause employees of opposing sides tend to preserve the symbols, attitudes, values and beliefs associated with their corporate culture. Two aspects must be considered in addressing these concerns. The first is whether or not a “cultural due diligence” has been conducted prior to the merger or operation (discussed in the previous section) and the second is, given that the decision to merge or acquire has been taken, whether or not there are any interventions that the organizations involved could undertake to facilitate cultural change or integration, and the right time to introduce such interventions (Bajaj, 2009, p. 229). Organizations that have functioned for some time have developed various belief, values, habits, norms of behaviour and a system of interrelationships unique to that organization. Cultural integration in cross-border M&A When cross-border M&A occurs, the principal task of management is to oversee the integration of resources and operations such that the post-integration entity is capable of optimizing the pre-M&A strengths of both companies. Cultural differences arising from cross-border M&A are not confined to the company level, but more importantly on the national level. Culture becomes the determining factor in the communities’ chances at convergence into “a thinking, a behaving, and an expressing mode, etc., having similar values and individual pursuits” (Zhu & Huang, 2007). It is in the melding of these cultures in a cross-border M&A that the company attains meaningful development. The impact of national culture has been crucial to the success of cross-border corporate M&A as much as, if not more than, technological integration. Academic literature has indicated that more than 50% of acquisitions are expected to fail to attain their pre-merger goals (Cartwright & Schoenberg, 2006 in Tanure, Cancado, Duarte and Muylder, 2009, p. 136). Majority of these failures are due to national cultural differences, most frequently during two particular stages of merger – the pre-acquisition and the post-acquisition phases (Hoetzel, 2005, in Tanure et al., 2009). Case in point is the 1995 Pharmacia-Upjohn merger, which brought together two strong companies of equal size, where cross-cultural management was ignored, leading to disastrous consequences. Cross-cultural management in M&A The rate of global FDI inflows into developing economies has grown geometrically through the years, particularly to China (Arora & Vamvakidis, 2010) and India in pre-recession years (UNCTAD, 2009). This acceleration of cross-border merger and acquisition activity has underscored the necessity of cross-cultural management, so that the productive activity for which the merger or acquisition was contemplated could be resumed at the soonest possible time, with the least cost and maximum results. Cross-cultural management has its own principles and patterns. The basic principles include according mutual respect and understanding for the cultures of others, establishing meaningful avenues of communication, and the willingness to make adaptive changes. Management should aim to provide the conditions that would enable its personnel to perform to the best of their ability. This includes a consideration of their culture, which moulds the way people think and act. This necessitates transcending any cultural prejudices and stereotypes, in order to “synthesize the company’s strategic significance” within either company’s (or nation’s) culture, so that the effect is a culture entirely distinct from either that of the merging companies (Zhu & Huang, 2007). There are four models of cross cultural management. Zhu and Huang (2007) identify these as follows: 1. Localization strategy – This is pertinent when subsidiaries that are acquired by the parent company are located in other regions or nations. In this model, the subsidiary is allowed to conduct its business as an independent entity, determining its strategy and policies in the light of the local environment. 2. Transplanting the culture of the parent company – This model entails the acquiring company appointing its managers to take over the reigns of the target company so as to ensure that management supervision and communication is established as soon as possible and on the acquiring company’s terms. The eventual result is that the parent company maintains control over the target, and the latter eventually assumes the culture of the parent. 3. Evasion tactics – This model is resorted to, usually because the management of the merged entity (or the dominant acquiring company, for that matter) is constrained to deal with a tremendous cultural gap existing between the two cultures. It essentially involves the avoidance of issues that emerge because of key cultural differences between the two companies. A third party is usually responsible, in this case, of orchestrating the merger, appointed by the dominant or resultant company’s management. This model ignores the problem of converging cultures altogether, preferring instead to supplant superficial compromises or ignoring the conflict altogether and imposing an externally-contrived solution. This method is usually resorted to only as a transitional model, because it has many limitations in the long run. 4. Cultural innovation by integration – This third model involves mutual coexistence of the two cultures, to the extent that a new culture and management pattern emerge. The advantage of cultural innovation is that it is capable of harnessing the best of the potentials offered by two cultures, and any value that may be added to the sum of the two. The disadvantage is that this entails a longer process, for which there are no pre-defined formula. Each merger is unique from all others because so many factors are specific to the situation, such as the nature of the businesses involved, the particular cultures being melded, the corporate philosophies of each of the companies, and the specific individuals involved which include all practically all personnel of the merging companies. This model, however, promises the greatest possibility of complete cultural integration of the two merging companies. In actual practice, seldom is a single model adopted in the course of effecting a merger. Usually, a combination of two or all of the models is resorted to, allowing the management the flexibility of addressing particular problems and issues in what would appear to be the most appropriate model for the moment. In time, situations adjust and management may respond by resorting to another model. While cross-cultural management may not be perfect, it is at least a systematic approach to recognizing the problems of cultural conflict in cross-border M&A, and of targeting possible solutions to minimize the conflict and maximize productive results (Saunders, Altinay, & Riordan, 2009). Issues in cultural integration in M&As Oftentimes the matter of cultural integration in mergers and acquisitions is discussed in terms of absolutes; however, there is as much to consider by way of the manner the integration is conducted in determining the degree of success that may be achieved. For instance, the speed of integration is a salient factor in executing an effective post-M&A integration. This is defined as the shortness of the time period that is required to complete the unification of systems, structures, activities, and processes of the merging companies. In some situations benefits are created by an expeditious integration, and in others there are detriments associated with the eventual reconciliation of organizational differences when done quickly. A survey of 232 horizontal mergers and acquisitions have indicated that speed creates the most advantageous conditions when so-called “external relatedness” between the merging firms is low and “internal relatedness” is high; and conversely, speed becomes most disadvantageous when the merging companies have low internal and high internal relatedness. In this study, external relatedness is taken to refer to how the two firms related in terms of target markets and the firms’ market positioning in terms of product price and quality, as well as other such external aspects. Internal relatedness, on the other hand, focuses on the firms’ management styles and other similar facets of organizational culture (Homburg & Bucerius, 2006). Relatedness studies in themselves have presented additional considerations for determining the success of a merger or acquisition. The measure of relatedness depends on whether the companies involved: (a) serve the same or similar markets or resort to the same distribution systems; (b) make use of the same or similar production technologies; and/or (c) exploit similar science-based research (Tanure, et al., 2009). The phenomenon of Asian acquisitions of companies in other countries has established a noticeable trend, with more than 1,900 deals valued at $145 billion in 2009 alone (Cogman & Tan, 2010, p. 8). What makes Asian M&As unique is that they have taken an unconventional approach: they opt not to integrate. The reason for such a laid-back approach is simple: Asian M&A philosophy seeks to minimize the short-term risk of failure, preferring instead to forego the benefits of immediate synergies to explore more keenly the advantages of expanding into unfamiliar territories, product lines, and capabilities. In other words, recognizing their own inexperience, they are willing to learn from the operations of companies that are acquired for mastery of a particular business environment (Cogman & Tan, 2010). It is to this strategy that the success of the acquisition by China’s Lenovo of IBM’s PC division is attributed (Cones, 2009). Conclusion The area of cross-cultural adaptation in mergers and acquisitions is more and more gaining impetus not only because cross-border M&As are increasing in number, but that they are also increasing in complexity. There are numerous corporate failures, despite successful technical and strategic merger processes, because of poorly managed cultural integration during PMI. As with any business undertaking, people remain the principal determining factor as to whether or not an undertaking succeeds. If the cross-cultural integration is handled well, then the rewards could be substantial with little cost to the company. Otherwise, the results could be huge financial losses, and more importantly, lost golden opportunities never to return. Wordcount = 3,000 excluding title, table of contents, and references References Alba, J D; Park, D; & Wang, P 2009 “Corporate governance and merger and acquisition (M&A) FDI: Firm-level evidence from Japanese FDI into the US” Journal of Multinational Financial Management, vol. 19, pp. 1-11 Arora, V & Vamvakidis, A 2010 “Gauging China’s Influence” IMF Finance and Development. 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