Impact of Cultural Differences on the Performance of Mergers and Acquisitions - Research Proposal Example

Impact of Cultural Differences on the Performance of Mergers & Acquisitions Name: Lecturer: Course name: Course code: Date: Abstract Multinationals in developing markets have experienced increased rates and volumes of growth. In unprecedented geopolitical and economic scenario, Latin American organisations have obtained financial advice from global and also regional investment banks, and applying it to enhance their operations in foreign markets. The questions to be answered in this study relate to; performance of Cross-Border M&A, Volumes of M&A and the effects of Cultural distance. The sample will be 1483 M&A transactions where 1140 will arise from local deals. The remaining 343 will be due to cross border deals. Also targets arising from developed countries will be observed. The case study of 25 companies in five Latin American companies using purposive sampling method. The study design will use the event study method and case studies of the five Latin American countries. The qualitative studies will employ regression statistics to establish the relationship between impact of cultural differences on performance of mergers and acquisitions. Since this research exclusively focuses on calculating the potential value creation and value depletion in Latin American bidders following the announcement of M&A operations, suggested additional research is to broaden the analysis through analysing the impact on the target’s stock price. Table of Contents Abstract 1 Introduction and Context 3 Statement of the problem 4 Research Questions 4 Specific Questions 5 Hypothesis 5 Significance of the Study 6 Literature Review 6 Survey of World Value 8 Cultural values of Schwartz 8 Cultural dimensions of Hofstede 9 Methodology 9 Data Selection 9 Research Design 9 Epistemological Assumptions 10 Sample and Sampling Procedure 10 Event study method 12 Justification 13 Case study method 14 Justification of qualitative case study 15 Multi-Variable Model- Regression Analysis 15 Operationalization of Variables 16 Ethical Implications 17 Limitations 18 Summary 19 Research Timetable 19 References 22 Aldrich, A.H. (2005). Pearson Correlation Coefficient (r). Introduction to Statistical Methods. Allan and Wayne 22 Impact of Cultural Differences on the Performance of Mergers & Acquisitions Introduction and Context Developing economies have led increased growth worldwide, and are set to directly reshape the corporate world. Multinationals in developing markets (Ficici, 2009) have experienced increased rates and volumes of growth. In unprecedented geopolitical and economic scenario, Latin American organisations have obtained financial advice from global and also regional investment banks, and applying it to enhance their operations in foreign markets as well as raise funds from American, European, Asian and Latin American investors; the world is now interconnected in all aspects of life (Barkema, 2008). According to a Mergers & Acquisitions survey conducted by Intralinks and Merger Market, approximately 70% of respondents expect significant growth in developing markets in Cross Border Mergers & Acquisitions over the next few years, particularly in China and Latin America (Market, 2011). The prospects of higher growth potential combined with underpenetrated markets means organisations in developing nations are attractive targets for regional corporations. Similarly, know-how, technology and expertise act as strong incentives for upcoming corporations to expand in developed economies through acquisition. There is not a great deal of existing literature focusing on the effect of cultural differences on Latin American Cross Border Mergers & Acquisitions transactions. In these terms, this paper aims to contribute to the Mergers & Acquisitions literature by means of a multi-variable Mergers & Acquisitions analysis concentrating on the Latin American region (Ahern, 2012). Existing M&A literature has broadly evaluated the phenomenon of Cross Border M&A activity worldwide and to what extent diverse endogenous and exogenous variables may impact such activity in regard to short- and long-term performance, volume evolution (volumes of deals and value of deals), and integration processes, the present study concentrates on evaluating such phenomenon in Latin America specifically. As such, this analysis focuses on addressing, using the empirical evidence obtained. Statement of the problem Present M&A trends have made it probable to identify Latin American companies diversifying abroad as facing several new and unknown issues. These have aggravated the complexity of these firms. Different cultural values, language, regulatory frameworks, traditions, and legal enforcement stand out as major challenges in which the firms start to face. At the moment, many financial journalists and academics points out to disparities and cultural clash issues among the key failures to success of mergers and acquisitions (Barkema, 2008). A case like Daimler-Chrysler illustrates and remarks on a phenomenon where culture plays a leading role in resource investment allocation. The determination of long-term and short success is based on identifying appropriate strategic targets. Sometimes, managers become aware of the need for complete comprehension of the competitive environment (Casanova, 2009). This becomes a probable target for developing acquisition’s strategies but is underestimated in terms of potential effects on cultural differences by integrations costs. Research Questions General question: How does Culture Impact on the Performance of Mergers and Acquisitions? While the market perception, assessment of integration challenges, costs, potential synergies and gains within the scale may indicate a positive short-term performance for the bidder after the announcement of the acquisition. The study will examine whether Latin American Cross-Border M&A operations favour nations relatively closer in terms of their geographic location and cultural components. Cultural differences can have a negative effect on the short-term performance of the bidder, as the market agent’s price in integration challenges and potential overpayment in the stock price. Specific Questions Research question 1: Performance of Cross-Border M&A: What will be the short-term performance of bidder during public announcement to the market while desiring to acquire a targeted firm situtated in emerging and developed Markets outside thehome country? In the short-term, does the market perceive value destructive or value creative of Cross-border M&A operations? Research question 2: Volumes of M&A: What impact does cultural distance has on the geographic distribution of Cross-Border M&A volume of deals in Latin American? In terms of volume deals, has there been evolution in Latin American companies intending to take over firms situated in developed economies? Research question 3: Effects of Cultural distance: How are cultural disparities and similarities influencing the short-term Cross-border M&A Performance of Latin American firms and acquisition of targets situated outside the home country? Hypothesis Hypothesis 1: There is no relationship between short-term performance of bidder during public announcement to the market and acquiring a targeted firm situtated in emerging and developed Markets outside the home country. In the short-term, the market may or may not perceive value destructive or value creative of Cross-border M&A operations. Hypothesis 2: There is no relationship between the impact of cultural distance on the geographic distribution of Cross-Border M&A volume of deals in Latin America. In terms of volume deals, it may not ne significant to refeer as evolutionary the Latin American companies intending to take over firms situated in developed economies. Hypothesis 3: There is no relationship between cultural disparities and similarities influencing the short-term Cross-border M&A Performance of Latin American firms. These apply to acquisition targets situated outside the home country. Significance of the Study Since this research exclusively focuses on calculating the potential value creation and value depletion in Latin American bidders following the announcement of M&A operations, suggested additional research is to broaden the analysis through analysing the impact on the target’s stock price also. In doing so, it could be feasible to identify whether the net effect of the operation is positive or negative for the subject economic culture. As this research focuses on only five nations to represent Latin America more generally, it may be feasible to extend the study to all M&A operations in Latin American nations, with a longer timeframe (Casanova, 2009). Finally, to measure the aggregate effect of executing Cross-Border M&As, it is suggested to examine the longer-term outcomes for both acquirers and targets, by assessing the long-term evolution of their respective profitability and sustainability metrics, as provided in financial statements (Datta, 1991). Literature Review This section focuses on the literature addressing our hypothesis, being the effects of cultural differences on the performance of mergers and acquisitions. The majority of the empirical evidence as well as the literature addressing mergers and acquisitions (M&A) cover a range of diverse points of view, that is, performance, integration processes, the impact on volume through deals and quantity in Latin America. There is not a great deal of literature on evaluating the effect of cultural differences in the subject region but there are a number of previous studies carried out in other regions, such as the Middle East and Africa. In general, several studies found that cultural distance plays a vital role in influencing the performance of Cross-Border M&A (Casanova, 2009). The drivers and risks for M&A have previously been studied with the goal of understanding the reasons why organisations opt for acquiring companies outside of their borders, especially considering the challenging and uncertain legal, cultural and economic implications. Therefore, a critical aspect of such transactions has been identifying when expected synergies will result from the latest technology, specialised expertise, and competitive positions, to offset the costs associated with the integration of operations. Conversely, Barkema (2008) concluded that cultural differences also have a negative impact on M&A transactions, in regards to the integration process, higher premiums paid at the time of acquisition, inadequate due diligence - in that cultural differences have not been taken into account in terms of valuing the target - and logistics for the integration of business operations (Barkema, 2008). However, Chakrabarti (2005) found that cultural differences have the capacity to generate a positive impact in regards to the long-term performance of the combined company. Literature in the fields of anthropology, sociology and psychology focuses on describing culture in terms of values, institutions and behaviours, complementing studies conducted in the financial field in order to understand differences in culture. According to Stulz (2003), culture's influence has the following aspects: 1) key values of the cultural group determine the economic culture, 2) the creation of legal institutions is highly influenced by cultural values, and 3) the allocation of resources as well as the means of production are affected by diverse cultural parameters. While Stulz’s approach concentrates on the basic premises, it is a valuable resource for understanding how cultures interact and impact upon various financial developments. The three most utilised resources in the financial literature with regard to cultural values have been as follows: 1) Survey of World Value, 2) Cultural values of Schwartz, and 3) Cultural dimensions of Hofstede. These will be discussed individually in the following section. Survey of World Value The Survey of World Value measures the values, beliefs and traditions of approximately 90% of the world's population with the aim of understanding the extent to which certain factors affect the political, economic and social environments. The survey provides support for explaining the impact of globalisation, happiness, religion, political stability, and immigration, among other factors. In his article, Ahem (2012) discussed how the impact of cultural variables on Cross-Border M&A is measured, as extracted from the Survey of World Value, as the survey has enabled such values to be categorised as hierarchies in terms of both their similarities and differences, and provides the most recent data on the cultural attributes for over hundred nations. Cultural values of Schwartz The three cultural dimensions identified and measured by Schwartz assess the following aspects: 1) autonomy, 2) hierarchy, and 3) harmony (Schwartz, 1994). The first variable, autonomy, makes reference to the extent to which the subject population tends towards being more or less individualistic. The hierarchy dimension assesses the degree of equality present in the subject country (Stulz, 2003). The third parameter, harmony, studies the degree of difficulty in adapting to the subject culture. Cultural dimensions of Hofstede Hofstede’s index is a combination of four separate cultural values, which are applied to quantify and compare the varying levels of cultural proximity or distance within 76 subject nations. Hofstede identified four distinct categories, and characterised nations with regard to cultural values such as individualism, power to distance, uncertainty avoidance and masculinity (Hofstede, 1980). Methodology Data Selection The sample of Latin American Cross-Border M&A deals evaluated in this study was extracted from Thomson Reuters records and includes all Cross Border M&A deals entered by publicly listed Brazilian, Mexican, Chilean, Colombian and Argentinean bidders during 2002 to 2011. To conduct a case study for the sample, compulsory per day returns were extracted from Bloomberg data. The study focuses on transactions from the above five Latin American countries because they have been the most influential nations in the region, particularly in regard to their population, stock exchange development, economy size and gross domestic product per capita (Datta, 1991). As such, they may also be regarded as indicative of the whole region. Research Design In order to analyse how markets react when an organisation announces its intentions to acquire a company and thereby understand when the market perceives Cross-Border M&A transactions as being positive for the acquired and negative in terms of the business operations of the acquirer, this study will employ a case study and event study methodologies. Such a technique is utilised in many empirical studies to identify and assess the conditions of the case and evaluate its origins. In the literature, a case study methodology is widely applied to identify the impact on stock performance of particular corporate actions like M&A operations, capital increments, debt issuances, alterations in the composition of the management team, corporate governance scandals, release of outcomes, changes in the board of directors and dividend payout policies, among others. Similarly, by applying this methodology researchers are able to capture spill over effects of the exogenous variables, such as macroeconomic data, geopolitics, industry-specific news and a number of other metrics of organisational valuation. Epistemological Assumptions This study is based on the understanding of human knowledge that the inquiry into the impact of cultural differences on merger and acquisition performance. It draws on the objective world view where the observers of cultural differences obtain it through experience. Though this discourse is seen on the contrary to affect performance of mergers and acquisitions, its influence by cultural differences is not within the will of human manipulation. It can be defined or experienced with messages having a fixed meaning and causal relationships. The cultural, geographical and economic actors are knowledgeable with formal logic and precise definitions of causal relationships. The actors knowledge in this case managers, are more accurately represented. Sample and Sampling Procedure The sampling method is purposive to reflect on the dependence of data on diversity of culture, economy and geography of a given region. The sample will include M&A transactions of Latin American countries within the period 2002-2011. The sample will be 1483 M&A transactions where 1140 representing 77% will arise from local deals. The remaining 343 will be due to cross border deals. Also targets arising from developed countries will be observed. The choice of this period in time is due to the turbulence and volatility of dot-com bubble burst. There are also the results if 9-11 wars in Iraq and Afghanistan. The economic boom during this period enabled Brazil to consolidate its per capita income growth. In 2007, M&A deals were high by value and volume (Stulz, 2003). Later, 2008-09 saw a fall which necessitated a global recession. The emerging markets came out of this crisis quickly to provide a good growth figures. Developed economies took a bit longer to recover (Ficici, 2009). Figure 1: Sample Characteristics and M&A Industry in Latin America Source: World Bank Website, 2011 Figure 2: Filtered data and sample selection Source: Argentinean stock Exchange Event study method This method has been used to point out the influence of specific corporate actions by stock performances. This includes; debt issuances, capital increases, M&A operations and release of results among others. The event study method utilizes several models such as constant return model, market- adjusted return model, market model and CAPM. In this study, the market model will be used since it captures the effects of an event especially regarding the announcement of the acquisition of the target share price. The rationale behind choice of the market model is because it takes into account the market trends and firms’ specific risk (Ficici, 2009). To start with, the sample of firms are identified and the stock prices of observations earlier collected about three months to the announcement and one and half weeks after the announcement, where the announcement date (t=0). Thereafter, stock returns will be computed through logarithmic returns and discrete returns. This study will specifically use logarithmic returns since it has a tendency of being normally distributed, easier to accumulate and precise. It will be necessary after the actual observation returns to determine the Market portfolio returns (Ahern, 2012). This study looks in to the impact of cross cultural differences of five Latin American countries, hence the Market portfolio returns will have to correspond to time t returns levels of the IBOV Index, IGBC Index, MERVAL Index, IPSA Index and MEXBOL Index for Brazil, Colombia, Argentina, Chile, and Mexico respectively. Below is the Market Model equation; Source: Aldrich (2005) Justification For calculations of the market model, return of a particular security is based on a linear relationship assumption relating to the market performance and specific security returns. This model considers systematic risk existence using market returns and industry specific risk impact. Beta and alpha are the common statistical parameters used. This method will be crucial since it provides a window to evaluate the degree of actual returns experienced within the announcement dates derived from the expected returns. Case study method The study is largely qualitative and involves identifying some specific companies in the five Latin American countries mentioned and describing their stock prices and core business areas. The case study method is purposive and is meant to capture the uniqueness of data obtained from the companies operating from different industries. Case study of Brazilian Companies will be based on the following companies; Petroleo Brasileiro, Compinhia Brasileira de Bebidas, Companhia Vale do Rio Doce, Gerdau, Banco Itau Holding Financeira, JBS, Mafrig Frigorificos, Iochpe Maxion, and Banco do Brasil. Mexican companies will be; Cemex SA de CV, America Movil, Grupo Simec, Grupo cementos, Telefonos de Mexico, Mexichem, Grupo Fianceiro Banorte. Chilean companies are; Sonda, Endesa Chile, Empresas, Singdo Koppers. Colombian companies will be Cementos Argos, Inversiones Nacional de Chocolates and Almacenes Exito. These will provide adequate generalization to the country and cross border cultural differences. The choice of companies will be largely due to geopolitical implication and their activity at the stock exchange (Ficici, 2009). The case study will be in-depth investigation of all the mentioned companies. The method provides a great degree of detail and description on cultural difference of the Latin American countries. This sets the groundwork for prospective studies in this area of M&A. It was chosen since it offered greater opportunities for this research which would not have been attained. Case study will use the Pearson correlation to establish the relationship between the cultural difference variables; cultural, geographical and economic and how it influences the performance of mergers and acquisitions. The correlation (r) is obtained as below; Source: Aldrich (2005) Justification of qualitative case study The essence of case study is the contextual and particularistic feature is possesses. The aspect of investigating cultural differences between countries is seen in the development of the theory of mergers and acquisitions though it may not be representative of the larger business setting involving cross border deals. This case study approach explores the depth and richness of cultural differences in capturing the three major variables to identify their influence on performance of mergers and acquisitions. Multi-Variable Model- Regression Analysis Multi-Variable Model will be useful in this qualitative case in correlating the variables associated with culture and economy of the various Latin American countries in the study. An announcement or a given event influences given stocks owing to exogenous and firm- specific variables. Specifically, transactions of Cross-Border M&A considers the degree of integrating both operations which may yield negative or positive results to the acquirer (Ficici, 2009). This study will focus on establishing the magnitude of various social, cultural and economic variables which describes the changes experienced in Cumulative Abnormal Returns as given in the equation below; Source: Aldrich (2005) Where; Hofstede’s Index The PDI is the for Power distance, IDV(Individuality), Masculinity (MAS) and UAI (uncertainty Avoidance Index). Operationalization of Variables i) Cultural variables: Cultural distance differences and similarities are measured by applying Hofstede's Cultural Model (Four Dimensions) and extra-cultural factors like language, domestic origins and religion as an indicator of cultural distance within two nations. Regarding Hofstede’s cultural dimensions, this study concentrates on testing the varying impact of each cultural dimension on the short-term performance of the Cross-Border M&A transactions (Dimensions, 2013). ii) Geographic variables: This is computed based on type in which the acquirer targets to purchase an organisation dependent on a separate industry (Ficici, 2009). The study utilises this variable to determine the potential effect of acquiring the company dependent on a separate industry in which the target does not have the adequate expertise and knowhow to swiftly and successfully overcome the potential problems associated with the industry. However, acquiring companies in various sectors may also be viewed positively when both the sectors generate the operational synergies. Furthermore, geographic proximity is utilised to determine to what degree geographical distance between two organisations affects the market perception of the M&A transaction. This aspect is measured using a control variable, which takes a value of 1 when the nation of the bidder and the nation of the target are neighbouring nations and 0 otherwise. iii) Economic variables: These are determined by Gross domestic product (GDP) per capita difference. Economic differences within nations have been analysed with a view to understanding the impact on share value of M&A announcements in various economic cultures, not just in terms of the economic size and GDP, but also per capita income and GDP per capita. Chakrabarti (2005) utilised per capita income as a parameter to identify major socioeconomic differences within nations. Ethical Implications Contact with humans is an essential part of the research. Ethics requirements will be taken into consideration. The Human Research Ethics Committee requires all Australian Universities to ensure that all their candidates who deal with Human participants to following certain ethics requirements. Building on that, the researcher must seek ethic approval by the University of Newcastle Human Research Ethics Committee, which is the department concerned with the clearance of the research ethically. The two main ethical issues that will be of concern to our research are voluntarism and privacy of the participants of the research. In regard to voluntary participation of the proposed participants, the researcher will give the participants the option to participate or not in the study. It will be clarified to the participants that they have the right to make their decision about participating in this research or not. The conductor of the research will also take privacy of the participants into consideration. The study will not contain participants’ personal information or any data that indicate their background. The researcher will replace participants’ names with symbols in accordance with Information Privacy Principles (Section 6 of the Privacy Act 1988). All in all the proposed study will follow the requirements of National Privacy Principles (Section 95A of the Privacy Act 1988) for the purpose of privacy confidentiality. Appropriate tools will be also considered to store the data so the soft copy of this study will be saved at safety digital storages and will be protected by automatic passwords generator such as token or smart card, the hard copy will be stored in a locked room at the library of Newcastle University. Limitations Geographic concentration: This aspect reveals the significant limitations of the study, as it has reduced the number of M&A operations used in the study. Therefore, this research has been reduced to observing potential value creation and destruction, for bidders, in a region where M&A is still only a recent development; as such, the robustness of the study's outcomes is limited (Ahern, 2012). Methodology: The case study methodology determines to what extent the real returns of the subject stock diverge from the expected outcomes provided through the market model. The market model expected returns are calculated applying separate statistic parameters within the stock and market returns. When the market efficiency is semi-strong and weak, and routine liquidity is highly volatile, the outcomes obtained through the market model may be exposed to unjustified higher volatility. This is another limitation of the current research, as Latin American stock exchanges tend to have semi-strong and weak efficiency. Short-term valuation: if an organisation announces its intentions to acquire another company dependent on a foreign nation, market players would quickly price the effect of the announcement into the valuation of the acquirer. However, in several cases the market players do not fully understand the strategy behind the announcement nor the costs and financial structure planned for executing the transaction. This inadequate understanding may lead to a mispricing of the stock, which abnormally affects the outcomes obtained. Summary As part of this research, Cross-Border M&A activity in Latin America is analysed by employing a case study methodology and generating cross-regression research. Utilising the above methodology, abnormal returns are calculated for a diverse range of cases and the significance of diverse cultural variables is measured in order to determine to what extent Cross-Border M&A performance is influenced by separate cultural parameters. This research also analyses the extent to which cultural distance affects the Cross-Border M&A short-term performance of Latin American organisations acquiring targets situated outside of the home nation. Cultural and geographic proximity are calculated utilising Hofstede’s cultural dimensions and particular cultural factors, such as language, legal origins and religion. GDP per capita is referenced as an indication of economic size, in order to evaluate whether differences in economic wealth in separate nations affects the short-term performance of the acquirer. Research Timetable The research will have commenced in January 2013, and expected to be completed for final thesis submission in late 2015 or during 2016. Following is a tentative schedule for the first year of the study: Task Start End Appointment of supervisor Agree on the research concept 1-01-2013 1-05-2013 Develop the full proposal 2-06-2013 26-08-2013 Submit ethics application 22/7/2013 Conduct literature review 23-07-2013 1-12-2013 Submit Chapter 2 draft 1-12-2013 1/01/2014 Finalise methodology 2/01/2014 1/09/2014 Finalising all relevant forms, developing Submission for ethics approval, Interview and survey questionnaires: 2/09/2014 1/11/2014. Submit Chapter 3 draft 12/11/2014 Completion of data collection 12/01/2015 Submit Chapter 4 draft 30/06/2015 Submit Chapter 5 draft 30/09/2015 Submit Chapter 1 draft 23/11/2015 Submit dissertation to supervisor 1/12/2015 Final submission 18/2/2016 Conclusion This study has shown that M&A allocation is strongly influenced by cultural and geographic proximity. As such, the Cross-Border M&A deals registered in the timeframe referred to in this research are closer in regard to geographic distance or cultural values (Ahern, 2012). Additionally, after the 2008 financial crisis, the swift economic recovery experienced in emerging economies, when compared to developed nations, has driven the prevalence of cross-border deals, especially with targets operating in developed nations. The multi-variable model utilised in this research indicates that exogenous factors such as culture, geographic proximity and economic size have a distinct effect on the outcome at the time of announcements on the stock value of the acquirer (Ahern, 2012). In regard to the effect of cultural differences, it appears that they have a negative effect on abnormal returns, but such outcomes are not statistically significant. References Ahern, K. R. (2012). Lost in translation? The effect of cultural values on mergers around the world. Journal of Financial Economics . 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