Roles of Cultural Differences in the Mergers and Acquisition Failures - Report Example

Roles of cultural differences in the mergers and acquisition failures By Foundation Human Resource Name] [Department] 16 November 2014 1.0 Roles of cultural differences in the mergers and acquisition failures 1.1 Introduction The term “cultural distance” is a common hypothesis used widely in today’s world. In its most general meaning and use, cultural distance involves the costs, difficulties and risks that accompany any cross-cultural contact. An increase in the distance is directly proportional to the growing cultural differences between the entities involved, which may be groups, individuals or organizations. When measured in terms of differences in management style, cultural distance has been found to produce great impacts on organizational learning across cultural barriers, longevity of global strategic alliances and an organizations’ perceived ability to manage foreign operations (Weber 2013; Halibozek and Kovacich 2005). In the context of mergers and acquisitions, cultural differences can act as a source of confusion, hostility and distrust between members of the merging organizations. This has in most cases, been cited as the core reason for failure of most mergers and acquisitions. The paper will discuss why culture can make a legitimate cause of failures of mergers and acquisitions. It will provide a review on the role of culture in mergers and acquisitions with particular focus on the cultural differences and their implications on the performance of an organization. The paper will start with a brief discussion about reasons why organizations and companies get into a mergers or acquisitions and common reasons why most fail. 1.2 Reasons for mergers and acquisition The most common argument why mergers and acquisition are formed is the belief that there is an existence of “synergies” which would allow more efficiency in the combined arrangement as opposed to working separately for the companies involved. They, therefore, believe that that synergy may result from the organizations’ ability to eliminate duplicated functions, raise larger amounts of capital, share managerial expertise and exploit economies of scale. However, general research has shown that the predicted efficiency gains, often do not show up in most merger cases (Søderberg and Vaara 2003; Herndon and Galpin 2013). One of the common forms of merger arrangements is horizontal merging. Companies that operate at an equal level of production in a similar industry can merge in order to gain a greater market power (Carleton 2004). However, this kind of merging can lead to the creation of a monopolistic market thus leading to an unhealthy industry. Corporations may also pursue mergers and acquisitions largely for the purpose of diversification. The main purpose for this is for the corporation to spread its risks and to allow for exploitation of new markets. Another reason that drives companies into mergers and acquisitions is their quest to derive tax advantages that come with the arrangement. 1.3 Role of culture in mergers and acquisitions Several theories and models have been suggested to expound on the role of culture in mergers and acquisitions. The models have been used to show how cultural differences may affect the assimilation process that accompanies any merger or acquisition. There are three major categories of the most popular theories and models: cultural fit models, acculturation models and models that adopt a social constructivist perspective on culture. 1.2.1 The cultural fit perspective This model attempts to explain that the measure the compatibility of cultures of the companies involved in a merger or acquisition is a vital determinant of the integration process that follows. It mainly focuses on the association between the cultural differences before the merger and the results of the integration process after the merger. One of the most popular cultural fit models is the Cartwright and Cooper’s model of culture compatibility in mergers and acquisitions (Cooper and Finkelstein 2009). 1.2.2 The acculturation perspective Acculturation is defined as the product of a cooperative process which involve the establishment of a mutually determined culture through embracing of beliefs, values and assumptions of two hitherto independent work forces (Aguilera and Dencker 2004; Pablo and Javidan 2004). Acculturation is attained through development of mutual consideration, shared organizational language and all values that promote shared interests. Acculturation is considered to be a crucial element in any form of success of a merger or acquisition. 1.2.3 The social Constructivist perspectives Social constructivists view culture as one which is based jointly or partly shared patterns of culture interpretation that are created, replicated and continually altered by people who identify with them. The social constructivist perspective, therefore, views culture as an essentially dynamic phenomenon that comes into existence, and looks at how it relates or contrasts with another culture. Culture is, therefore, viewed as an interpretive and developing process rather than a steady system made up of norms and values. The three models discussed above are widely used to explain how cultural differences affect the merging and acquisition processes. For example, cultural fit models portray a functionalist and objectivist understanding of culture, explaining it as relatively stable. Conversely, the social constructivist perspective underscores the process of culture transformation after which new socially negotiated cultural identities are formed. However, despite the differences between the three models, they all seem to agree that cultural issues cannot be considered in isolation during the integration process and thus, other factors should also be considered. The paper will discuss of some of the alternative issues that should be put into consideration and which may also play a part in the failure of a merger or acquisition. 2.0 Common reasons for mergers and acquisitions failure A merger or acquisition can be an exceedingly stressful process for all parties involved. Some of the common arising problems in such cases include job losses, uncertainty caused by imposition of new corporate culture and identity and anxiety and resentment among employees (Dowling, Festing and Engle 2008). Companies, often concentrate much on the short-term financial and legal considerations involved in the process of merging and acquisition. They neglect the cultural factors that may eventually prove equally important especially on their impact on the workers’ productivity (Bamber, Lansbury and Wailes 2004; Mccarthy and Dolfsma 2012). Another common reason for merger and acquisition botches is the high expenditure by the mother company in acquiring the acquisition. The high and over-enthusiastic bid may drain away any gains that the acquisition may make (Bower 2001). One of the possible outcomes in any merger or acquisition is deprivation of authority and promotion opportunities especially from workers in managerial positions (Cardel 1998). It has been found that this sudden change, in most cases lead to the merger having a workforce with very low morale and consequently, poor productivity. 3.0 Impacts of cultural conflicts in mergers and acquisitions As earlier mentioned, cultural diversity in mergers and acquisitions can have adverse effects and may eventually lead to failure of the organisation (Mendenhall, Oddou and Stahl 2007; Herlev-Pedersen, 2003). However, numerous studies indicate that most failures are caused by an underestimation of the cultural issue. The parties involved may not see culture as irrelevant in mergers and acquisition processes. The organisations thereby end up in a cultural conflict. There are various sources of cultural conflicts in such organisations: common misunderstandings related to differences in communication and opinions that stems from cultural differences, competing needs of assimilation such as conservation of a particular cultural or ethnic identity, the manner in which power is distributed, competing goals within the new organisation and competition for scarce resources. The culture clashes are likely to occur severally during various steps of the merging process and thus, managers are required to be cognisant of the kinds of struggles to expect in order to manage them anticipatively (Frensch 2007). There are various levels where cultural incompatibility occurs during a merge or acquisition: Management- differences in pre-existing management methods of the companies involved, for example, individualised, centralised or teamwork. A shift in the management style may lead to employee turnover who are opposed to changes. It can also lead to loss of top talents in either company, and this can rapidly weaken value in an integration through drainage of the intellectual capital and market links (El Hag 2009). Decision making styles such as individual decision making or a group consensus. Effective integration requires quick decision making. Therefore, if various decision-making styles are adopted in a merger, it may lead to sluggish decision-making, total failure to make decisions or a failure to implement the decisions made. Ability to change- this involves the willingness by a company to change from a focus on meeting current goals or maintaining the current state. Some may be unwilling to implement new strategies while others may find it difficult to accept the inevitable differences that accompany the formation of a new company (Straub 2007). Information flow and communication method- whether to use the continual or exceptional method. Policies and procedures- these are the rules that govern an organisation. It is, therefore, advisable that before targeting a company for merging or acquisition purpose, the cultural and ethical values shared by both should be put into consideration. The culture of any organisation is referred to as corporate culture. Corporate culture dictates the attitude and behaviours of members within an organisation. The idea of understanding the corporate culture of the target company for a merger or acquisition is imperative. Some of the common types of organisational culture include: Market culture- centres on competitive advantage and market dominance. Clan culture- focuses on internal maintenance of cohesion, morale and commitment. Hierarchal culture- comprises of orders, rules and bureaucratic structures. Adhocracy culture- Emphasises on flexibility, creativity, entrepreneurial culture and innovation. () 4.0 How to prevent failures caused by cultural differences to mergers and acquisitions There are various usable approaches to solving the cultural differences and achieve better results in a merger or acquisition. The choice of any of these approaches, however, is dependent on factors such as the companies size involved, the geographical and market presence, the respective staff and workers and the motive of transaction among others (Schein 2010; Child, Faulkner and Pitkethly 2001). The approaches are: Total integration (imposing your culture) This approach is one of the most popular although it may involve risks of destructing significant values. The approach can be very effective if directed for noble reasons. It involves explaining and convincing the acquired company to accept your culture. For this to happen, it calls for a definition of clear motives and showing why your culture is more adapted to the new company structure. It is the role of the management to explain the advantages the new systems and norms and the symbols to be imposed cooperatively in the merged company (Edwards and Rees 2006). Cultural autonomy (Differentiating cultures) Organisational culture depends among others on the environment in which a company evolves and thus is especially influenced by the national culture. Therefore, when two companies evolving from two very different environments or countries are merging, it would probably be more suitable to follow this method and keep the varying culture separated. However, this approach may limit possible synergies although it lowers the risk of a failed merger or acquisition (Gaughan 2002; Depamphilis 2013). Creating a new corporate culture This is the most complex approach to establish and involves building a new culture that performs better than the two cultures working separately. It achieves this by exploiting the best of each culture. It is most appropriate where merging companies have similar processes, cultures and systems (Harzing and Pinnington 2010; GrüSgen et al. 2011). 5.0 Conclusion Looking at the discussion, and the literature used, the success of most mergers and acquisitions is pretty much reliant on how differences in organisational cultures are handled. There certainly are other factors that can contribute to mergers and acquisitions failures but culture is one of the key element to be keen about if the merger is to achieve success. There are various theories that help to understand about how cultural integration can be used to reduce risks of merger and acquisitions failures. 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