Influence of Culture on Cross-Border M&A Activity

QUESTION
How does culture influence cross-border M&A activity? Illustrate this relationship using examples, either real (even anecdotal if you have any) or conceptual. How do similar and dissimilar cultures affect pre- and post-merger performance?
ANSWER
1. Introduction
Organizational culture will not be the main focus of the study since its impact on M&A activity has been studied in depth in management literature. A holistic case study of the merger between the German company Daimler-Benz and US firm Chrysler will be used since this is considered a classic example of clash of national cultures. The inductive methodology used in the Daimler-Chrysler case will be initially used in the attempt to separate national culture from organizational culture and study its direct impact on M&A activity. Any findings and conclusions drawn from this case study will be initially tested against any theory provided in management literature. The aim in the end is to possibly come up with a new model explaining the impact of culture on M&A activity, which will be a useful framework for managers in the future.
In this research paper, the focus will be on studying the importance of culture in M&A activity. The objective of the paper is to separate the impact of national culture from organizational culture on M&A activity. The distinction between the two is important since national culture is considered an unmanageable force a firm encounters when it operates in a foreign environment, while organizational culture is a manageable force the firm can manipulate in order to coordinate and integrate activities when working with a potential partner.
Globalization has led to ever-increasing business activity across national borders. This has fueled the pace of cross-border mergers and acquisitions (M&A) in today’s global economy. Culture has been identified as a critical factor which has a significant impact on the outcome of international business activity. Cross-border M&A is an activity that takes place when a company from one country merges or takes over the assets of a company in another country.
1.1 Importance of Culture in Cross-Border M&A
Despite the prevalence of literature regarding the role culture plays in business, in particular cross-border mergers and acquisitions (M&A), it remains a relatively unexplored and underestimated factor in comparison to other theoretical lenses such as synergy or agency theory. It is widely recognized that national cultural differences are to be found in the differing thoughts, actions, assumptions, and a range of behavioral and material artifacts (Hofstede, 2002); all of which are key components of a society. That said, the fragmented and multidisciplinary nature of cultural theory development to date, it has yet to be fully integrated into M&A research and practice. However, there are various instances within the literature that infer assumptions to the effects of culture on M&A. For example, it is often cited as a reason for failure (Cartwright and Cooper, 1992), a costly barrier to be overcome during post-merger integration (Haspeslagh and Jemison, 1991), or a factor that should be included in the pre-acquisition screening process (Prahalad and Doz, 1987). While these examples bestow importance, it is not sufficient evidence to unequivocally prove it as a critical factor in M&A, and to date there is no defined framework or model that seeks to understand culture with respect to an entire M&A process. This is not to say cultural impact is always negative; a recent study by Stahl and Voigt (2008) identified that high cultural differences between two companies could lead to a lesser likelihood of bidder overpayment in an acquisition deal. However, the context of this result was within financial terms rather than the long-term integration process, and as aforementioned, this is not a widely explored area. With this considered, on the basis that culture is a central aspect of national identity, it can be viewed as a key and relevant aspect to any process involving two differing nations or organizations. This does not necessarily imply that any M&A between two differing national organizations will be heavily influenced by culture, for culture is a very broad and subjective concept, and there are varying levels of cross-border M&A; hence, the theory suggests that cultural impact will vary depending on the circumstance.
1.2 Objectives of the Study
The primary goal of this project is trying to figure out the impact of national and organisational culture on cross-border mergers and acquisitions, in the hope that better understanding of the influence of culture can help in avoiding some of the obvious pitfalls, and lead to successful integration which is the ultimate mark of a successful M&A activity. As this is an exploratory study, no hypothesis is put forward as it seeks to find new insights and information in the hope of forming a new theory. This has led to much of the research being in a more qualitative manner, although many questions do lend themselves to quantitative analysis. Measures of national culture provide a good base to look at the cultural issues, and matched-pair studies of companies involved in M&A activity can give good indications of the influence of culture on M&A and what actually occurs during the process. By looking at the level and nature of the increased M&A activity in the last 15 years, from the standpoints of both acquiring company and target firms, insights can be gained as to why the increase in M&A activity has led to mixed results, and how culture may be a key factor regarding this. Being an exploratory study, no specific culture dimension or issue is singled out, rather it looks at broad overall influence that culture may have at the national and organisational levels. A literature review is done on the failures and success stories of M&A activity, and there have been many case studies that offer comparisons such as two companies of different nationalities, one which has succeeded in M&A activity and one which has not. This provides much insightful data for the matched-pair studies and goes towards meeting the goals of this research.
1.3 Methodology
Another belief is that the culture of a society can be described by the values and norms present (Tayeb, 2000). Although it is possible to measure culture directly with various means, indirect measurement is probably the most effective, possibly using a society’s political or legal systems as a function of the culture it represents. Due to the breadth of values, norms, and the multi-level nature of culture, measuring the exact effects of culture on M&A activity is problematic and has only been extensively attempted by the very biggest firms in simulated training exercises. This encompasses a number of variables that would be best done by multiple means and at various levels, to provide a comprehensive understanding of the various issues involved. This too is evident throughout the research, as nearly all the micro-level events that created problems during M&A could always be related back to a difference of values or norms.
The research’s underpinning philosophy is the belief that culture affects behavior. This belief was supported by Yalcintas (1981), Guy and Beddow (1983), and Seth (1986). Yalcintas suggested that M&As were of an international nature and therefore present many problems in terms of differences in national policies, mentalities, and ways of doing business. Guy and Beddow and Seth also suggested that the variables of nationality and culture were of major import in M&A activity and provide one of the better frameworks within which to understand M&A behavior (Guy and Beddow, 1983; Seth, 1986 cited in Cartwright and Cooper, 1993). This belief was held throughout the EFA and case study and remained evident in the various responses received during the research, and some of the contradictions and practical problems that were found; each of which was possible to explain by cross-cultural differences. If we consider Schneider and Barsoux’s argument that cultural variation causes different mental programming, which creates ambiguity in cross-cultural encounters (Schneider and Barsoux, 1997), i.e. different behavioral patterns and an expectancy of behavior between parties in the M&A, the importance of effects of national factors and culture in M&A become more transparent.
II. Essay Summary
2. Theoretical Framework
2.1 Definition of Culture
2.2 Cultural Dimensions
2.2.1 Power Distance
2.2.2 Individualism vs. Collectivism
2.2.3 Masculinity vs. Femininity
2.2.4 Uncertainty Avoidance
2.2.5 Long-Term Orientation
3. Cultural Influence on Pre-Merger Performance
3.1 Cultural Due Diligence
3.2 Cultural Compatibility Assessment
3.3 Communication and Integration Challenges
3.4 Leadership and Decision-Making Styles
3.5 Employee Motivation and Engagement
4. Cultural Influence on Post-Merger Performance
4.1 Organizational Culture Alignment
4.2 Change Management Strategies
4.3 Employee Retention and Talent Management
4.4 Knowledge Transfer and Learning
4.5 Performance Measurement and Control Systems
5. Case Studies
5.1 Cross-Border M&A Success Stories
5.2 Cross-Border M&A Failures
5.3 Lessons Learned
6. Conclusion
6.1 Summary of Findings
6.2 Implications for Cross-Border M&A Practitioners
6.3 Recommendations for Future Research