Cross-Border Mergers and Acquisitions Failure and the Role of HR - Example

Cross-border mergers and acquisitions (M&As) failure and the role of HR Introduction Walter and Barney (1990) identified five clusters of motives that drive companies to establish M&As. The first cluster presents goals that identify M&As as a mechanism whereby managers acquire scope and economics of scale. These goals are directed at creating scale in one firm by taking assets and skills from the other, thus using economies of scale as a competitive tool. The second cluster of goals identifies M&As as a mechanism that equips managers to handle ongoing interdependencies with other companies. The third cluster of goals identifies M&As as ways for motivated managers to expand their markets and product lines. The fourth cluster of goals suggests that M&As are ways for managers to enter into new businesses. The fifth cluster of goals identifies M&As as means for managers to optimize the financial capabilities of their companies. In spite of the fact that M&As are seen as strategies for growing and expanding businesses, 7 in 10 M&As do not manage to create long term shareholder value (Westropp, 2014). Failure of cross-border M&As is commonly attributed to failed integration of different cultures of the merging companies. Theories of M&A Contingency Theory The paradigm of contingency theory holds that organizational effectiveness originates from fitting such traits of an organization as its structure to the contingencies which display the organization’s situation. Three types of contingency on which the paradigm is built are environmental contingency, strategic contingency, and organizational size contingency (Gemunden and Frensch, 2007, p. 29). Environmental contingencies create the context for the organization to fit in and be effective. Strategic contingency implies that the context for the structure of internal organization is provided by different strategic choices. Organizational structure, on the other hand, depends on a firm’s size. Contingency theoretical framework considers transactions in cross-border M&As as means that help reach fit to the contingencies. Causes of failure in cross-border M&As Culture and workforce differences Cultural differences are the primary cause of failure in cross-border M&As. Cultural differences host a range of factors including differences of norms and values, differences of ethical and moral expectations from each other, communication barrier, and economic incompatibility between the merging firms. Large cultural distance increases the likelihood of failure in integration. Merger of Daimler-Benz and Chrysler provides an example where intentions of the companies were positive but they were jeopardized by serious misunderstandings. The companies contemplated joint board meetings at the time of their merger in 1998. While each company wanted to establish a good impression on the other in the first encounter, their ideas of what constituted an impressive presentation were radically different. Germans’ two-hours long presentation included a discussion of the company’s history, its model range, and anticipated future prospects whereas the 35-minute long presentation of the Americans included straight their range of models thus making them seem like “an overly-enthusiastic salesman” to the Germans whereas Americans commented on the Germans’ presentation as, “The Germans have a penchant for coming to meetings armed with tons of overhead transparencies and colored charts. It’s absolute information overkill” (Eaton cited in Schmidt, 2007, p. 5). Failure to integrate culturally causes key talent to leave the company in cross-border M&As. Cross-border M&As often fail because of this false assumption of the management that the other company is the same as them. Management tends to dismiss creating a deeper cultural understanding always a better option to create a cultural understanding before establishing a merger and operate the two companies independently till the time of merger. Ben & Jerry’s provides example of a company that managed to stand the test of time during its acquisition by Unilever. The post-acquisition phase of integration was very critical but Ben & Jerry’s managed to retain its corporate identity, culture, and brand image successfully and yet, made the business profitable (Page and Katz, 2012). Other Factors Poor planning Poor planning is a very important cause of failure in cross-border M&As. Proper planning has helped successful establishment of a number of M&As in the recent times, some of them being Publicis and Sapient, Fetch and Dentsu Aegis Network, and Viacom and Channel5. Cross-border M&As are directed at ensuring long-term engineering of the brand value in both countries. Branding and design can bring focus and clarity to the establishment of cross-border M&A. It is extremely important to undertake the diligence of such hard factors as legal, tax, and financial savings to establish cross-border M&A. Decision makers are concerned about creating value with the assets they own. VW leveraged the high volume Continental GT brand during its merger with Rolls Royce in order to launch the racy new model Bentley Continental GT with the price £130,000 while other Bentleys in the range were priced at £230,000 (Westropp, 2014). The best time to reveal the new identity is at the announcement of the deal. This was done by Carphone Warehouse and Dixons Retail at the time of their union to establish Dixons Carphone; “We have brought together the skills and expertise of our 44,000 fantastic colleagues within 2,900 stores across Europe, to give the best possible experience for our customers” (Carphone Warehouse, 2014). The time of merger is the time when the impact is the greatest. Level of integration At an abstract level, there are two types of nations on the basis of the institutions that characterize their labor and financial market systems namely coordinated market economies (CME) and liberal market economies (LME) (Hall and Soskice, 2001; Gospel and Pendleton, 2003). LMEs are shareholder value nations in which performance is gauged through market value and short-term evaluation of returns while the state rarely intervenes in the economy. Countries that are included in this category include the UK, the US, Ireland, Canada, and New Zealand. In contrast, CMEs are branded by non-market relationships and include such countries as Germany, Scandinavian countries, Switzerland, and Japan. Vodafone’s (English) successful hostile takeover bid of German Mannesmann in 1999 is an example that shows the differences in corporate governance between CMEs and LMEs. Not only did Vodafone have to deal with codetermination, but also the company had to cope with a completely different structure of ownership influenced by opaque accounting, banks, and a weak culture of equity (Hopner and Jackson, 2001). Cross-border merger success story: Volvo bus-Ford Volvo bus and Ford had large cultural gap. The Weak restraining force of cultural differentiation coupled with robust driving forces of organizational integration drove the integration to assimilation. It took the two companies 7 years since the acquisition announcement to successfully integrate in terms of marketing, technology transfer, and sales. Role of HR in successful cross-border M&A Resolution of differences HR plays a very important role in successful cross-border M&As. Adjustments to the national institutional environment are prominent in the field of HRM. HRM practices in CMEs “include more restricted employer autonomy, difficult hiring and firing decisions, lower geographic and professional employee mobility, and a stronger link between type of education and career progression’ (Sparrow et al., 1994, p. 286). For example, work councils in German industrial organizations govern training policies within the companies and may intervene in work reorganization (Casper and Hancke´, 1999). In contrast, education and training in LMEs traditionally takes place in educational institutions and employees have relatively general skills as poaching may cause loss of investment in company-specific skills. Before establishing M&A, HR departments of the concerned companies should convey their respective practices and policies and resolve their differences in advance to make the process of M&A smooth. Clarity of vision Definition of a vision for the newly merged business is very important for successful cross-border M&A. Branding may serve as a crucial communication mode to help guide and support the overall transaction. When a company establishes and communicates an aligned brand positioning internally, employees get their share to rally behind. Customers and clients externally get a good reason for being. Employees of the newly merged company may defect without having a clearly defined vision, mission, and code of ethics of the new company and the customers may not have a clear vision of what services they can expect from the business. Public image Chances of establishment of a successful cross-border M&A are brightened when one of the two merging brands is clearly more dominant. An example of this is taking over of Warner Lambert by Pfizer. At the time of merger, Pfizer had already become a dominant player with Lipitor for high cholesterol in the cardiac market and Norvasc for hypertension (Herper, 2002). In such mergers, the acquirer simply makes use of its corporate visual identity. This important decision should be driven by consideration of the involved brands and the newly merged company’s vision. The most effective option that optimizes the combination of both companies is a fusion. Design plays a very important role in such cases. The success of a merger partly depends upon safeguarding public image of the brands involved, it is recommendable to follow such a branding strategy that tends to explicitly transfer the equity from the merging companies into the new company. An example of this is provided by the M&A of United and Continental Airlines to United. Shares of both firms soared up after announcement of the deal in morning trade in New York. Increase in the shares of United’s parent UAL Corporation happened by 51 cents whereas Continental shares increased by 2.28% to $22.86 (BBC News, 2010). Conclusion Summary References: BBC News 2010, United and Continental Airlines to merge, [Online] Available at http://www.bbc.co.uk/news/10095080 [accessed: 3 December 2014]. Carphone Warehouse 2014, Dixons Carphone, [Online] Available at http://www.carphonewarehouse.com/dixons-carphone [accessed: 3 December 2014]. Casper, S, and Hancke´, R 1999, Global quality norms within national production regimes: ISO 9000 standards in the French and German car industries, Organization Studies, Vol. 20, pp. 961–985. Gemunden, HG, and Frensch, F 2007, The Social Side of Mergers and Acquisitions: Cooperation relationships after mergers and acquisitions, Springer Science & Business Media. Gospel, A, and Pendleton, P 2003, Finance, Corporate Governance, and the Management of Labour: A Conceptual and Comparative Analysis, British Journal of Industrial Relations, Vol. 41, pp. 557–582. Hall, P, and Soskice, D 2001, Introduction’. In Hall, P. and Soskice, D. (eds) Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, New York: Oxford University Press. Herper, M 2002, Pfizer Buys Pharmacia For $60 Billion, Forbes, [Online] Available at http://www.forbes.com/2002/07/15/0715pfe.html [accessed: 3 December 2014]. Hopner, M, and Jackson, G 2001, Political Economy of Takeovers in Germany: The Case of Mannesmann and its Implications for Institutional Change, Working Paper of the Max Planck Institute for the Study of Societies, Cologne. Page, A, and Katz, RA 2012, The Truth About Ben and Jerry’s, Stanford Social Innovation Review, [Online] Available at http://www.ssireview.org/articles/entry/the_truth_about_ben_and_jerrys [accessed: 3 December 2014]. Schmidt, PL 2007, In Search of Intercultural Understanding: A Practical Guidebook for Living and Working Across Cultures, Meridian World Press. 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