Work, Design and Team process: Mergers and acquisitions and it’s relation with cultural differences

Mergers and acquisitions and it’s relation with cultural differences

By linking organizational and human resource perspectives on mergers and acquisitions integration to notions drawn from the strategy and finance literatures on M&A, a better understanding of the mechanisms through which cultural differences affect the M&A performance will be developed.

Literature framework and research framework

The model central in this study focuses on two M&A performance outcomes: 1.synergy realization, as reflected in accounting-based performance improvements, and;

2.shareholder value creation, commonly measured in terms of cumulative abnormal returns.

With respect to the latter, there are two distinct processes by which cultural differences affect shareholder value in both the short-term and long term:

1. by influencing investors’ expectations about the future performance of the acquirer.

2. by affecting the likelihood that actual economic benefits are generated, a process that requires the realization of synergies.

The model thus point to the critical role of the integration process in determining the success of M&A.

Two aspects of the integration process are proposed to be critical for synergy realization: sociocultural integration and task integration. We propose that overall effective integration is an interactive process, requiring both sociocultural and task integration efforts. The model considers task integration outcomes, such as the extent of resource sharing or learning, as antecedents of synergy realization.

Numerous variables have been proposed to influence the financial performance of firms engaging in M&A activity, cultural differences being only one of them. Cultural differences are likely to be more associated with sociocultural integration outcomes than with realized synergies or long-term value creation for the shareholders, because they have a more direct bearing on the former than on the latter.

Impact of cultural differences on the integration process and M&A development

Sociocultural integration. We focus on aspects of sociocultural integration that seem most relevant to synergy realization, namely:

- the creation of positive attitudes toward the new organization

- the emergence of a sense of shared identity among organizational members

- the emergence of trust among organizational members

Hypothesis 1: differences in culture between merging firms are negatively associated with sociocultural integration outcomes.

Task identity. While many M&A literature tends to emphasize the potential problems in the integration process caused by cultural differences, the opposite view that cultural difference can be a source of value creation and learning has also been advanced by M&A researchers. This view is largely based on the assumption that differences rather than similarities between merging organizations create opportunities for synergies and learning. However, these benefits can be realized only if the cultural differences between the merging firms are not so large that they interfere with the successful transfer of capabilities, resource sharing and learning.

Proposition 1: there is a nonmonitonic relationship between cultural differences and task integration outcomes, such that moderately large differences will be positively associated with capability transfer, resource sharing, and learning.

Sociocultural integration, task integration, and synergy realization. Mergers and acquisitions may be motivated for financial reasons, but also to improve the competitive position of one or both of the firms by generating ‘synergies’ whereby in combination the two firms create more value than either could achieve alone. Some of the most common synergies are economies of scale and scope, cross-selling products through complementary sales organizations and distribution channels, and cost reductions through elimination of redundant staff and operations. The focus of this paper is not so much on the possibilities for restructuring and cost cutting that arise from overlapping activities, but rather on the potential for synergy creation through the transfer of capabilities, resource sharing, and learning.

Aspects of sociocultural integration such as mutual respect and trust made the postacquisition capacility transfer and resource sharing easier; successful task integration, in turn, facilitated the development of a shared identity and trust.

Proposition 2: the sociocultural integration and task integration processes interact to facilitate the realization of synergies.

Cultural differences and synergy realization.

Cultural differences affect the extent to which synergies are realized in two distinct, and sometimes opposing ways:

1.through their potentially adverse affect on sociocultural integration outcomes

2.by providing access to unique and potentially valuable capabilities, resources, and learning opportunities, inherent in a different cultural environment.

Poor sociocultural integration will block successful task integration, and task integration cannot be driven faster than success with sociocultural integration. There is no linear effect of cultural differences on combination potential: with growing cultural distance, the likelihood increases that the combining firms’ practices are incompatible and lead to implementation problems, thereby undermining the successful transfer of capabilities, resource sharing, and learning.

Hypothesis 2: differences in culture between merging firms are negatively associated with synergy realization.

Impact of cultural differences on shareholder value creation

There are two distinct processes by which cultural differences may affect shareholder value in acquiring firms:

1.by influencing investors’ expectations about the future performance

2.by affecting the likelihood that actual economic benefits are generated.

Announcement returns.

-differences in management styles between the combining top management teams were negatively associated with stock market gains;

-the existence of significant cultural differences may be perceived by investors as a factor increasing postacquisition administrative and consolidation costs;

-cultural distance may result in an inadequate understanding of the foreign market and may cause an acquirer to overpay.

Hypothesis 3a: cultural differences are negatively associated with acquisition announcement retruns for the acquiring firm’s shareholders.

Long-term shareholder value.

Despite the inability of stock performance studies to determine whether takeover create real economic gains and to identify the sources of such gains, it seems reasonable to assume that the synergies realized as a result of the value-creating activities of the emerged firms translate into longer-term wealth creation for the shareholders. To the extent that cultural differences have an impact on the realization of projected synergies, the acquiring firm’s market value should be affected.

Hypothesis 3b: cultural differences are negatively associated with postacquisition stock returns for the acquiring firm’s shareholders.

Moderators of the relationship between cultural differences and M&A outcomes

Dimension of cultural differences.

-national culture represents a deeper layer of consciousness and is more resistant to change than is organizational culture.

-cultural differences at the national level create relatively greater barriers to successful integration than do organizational cultural differences.

Hypothesis 4a: differences in national culture between merging firms are less negatively associated with sociocultural integration outcomes than organizational cultural differences.

-The cultural differences as in cross-border M&A are likely to be associated with higher levels of capability complementarity and greater learning opportunities than those inherent in domestic M&A.

-acquisitions in unfamiliar cultures can enhance the development of technological skills, trigger new solutions, and foster innovation, because firms operating in different cultures and markets are exposed to a wider variety of ideas, practices, and routines.

-Collectively, these arguments suggest that cultural differences inherent in cross-border M&A can be a source of value creation and learning.

Hypothesis 4b: differences in national culture between merging firms are less negatively associated with synergy realization than are organizational cultural differences.

Hypothesis 4c: differences in national culture between merging firms are less negatively associated with shareholder value than are organizational cultural differences.

Firm relatedness

The degree of relatedness is a potential moderator of the relationship between cultural differences and M&A outcomes because of its impact on the level of integration. Related M&A generally require higher levels of operational integration and lead to greater organizational changes and more extensive interaction among the employees of the two firms – and thus enhance the potential for cross-cultural conflict. Conversely, in M&A that require lower levels of integration, acquired units are often granted a considerable degree of autonomy and there is less extensive interaction among the members of the two firms, which reduces postacquisition stress and the likelihood of culture-related problems.

Hypothesis 5a: cultural differences are more negatively associated with sociocultural integration outcomes when the degree of relatedness is high than when it is low.

Taking cultural and human perspectives into account it is unclear whether the advantages of relatedness in terms of greater synergy potential offset the costs and risks associated with a more hands-on integration approach generally required in a related M&A. Realizing synergies entails considerably higher interaction and coordination costs, and the associated cultural and human resources probably may increase the risk of failed implementation.

Hypothesis 5b: cultural differences are more negatively associated with synergy realization when the degree of relatedness is high than when it is low.

In M&A, the acquirer is less likely to exhibit cultural tolerance, but rather tends to impose its culture and practices on the acquired company. Higher levels of conflict and dysfunctional behavior is expected due to changes resulting in autonomy removal such as decreased productivity, high absenteeism and turnover, and failed implementation. These arguments suggest that degree of relatedness may moderate the relationship between cultural differences and expectations of future firm earnings.

Hypothesis 5c: cultural differences are more negatively associated with shareholder value when the degree of relatedness is high than when it is low.

Conclusion

Whether cultural differences have no effect, a positive or negative effect on M&A performance, depends on a number of contingencies, including the degree of relatedness and the dimension of cultural differences separating the merging firms. Furthermore, consistent with a process perspective on M&A, the ability to manage the integration process (in particular the sociocultural aspects) in an effective manner is a key factor in determining the extent to which synergies are realized.