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Every merger or acquisition promises to create value from some kind of synergy. Yet statistics show that the benefits that look so good on paper often do not materialise. The failure of an M&A is frequently blamed on a clash of cultures between the merging companies that resulted in major integration problems and undermined the success of the deal. For example, an internal study conducted by Siebel Systems (which was recently acquired by Oracle) revealed that all of the company’s acquisitions had failed because of “cultural conflicts”.
In other cases, deals have fallen through before they were sealed because the culture of the two companies was vastly different. When the proposed merger between Monsanto and American Home Products was called off in 1998, for example, the failure of the deal was attributed to conflicting management styles and the fact that the two CEOs could not agree on a power-sharing arrangement. A Wall Street Journal article concluded: “Another drug industry mega-merger goes bust: Clash of cultures kills Monsanto-AHP marriage.”
The impact on performance of cultural differences in M&As
As merger fiascos continue to make headlines, executives have come to believe that differences in culture between merging companies almost inevitably lead to integration problems. Cross-border M&As, in particular, are notoriously difficult to get right because, in addition to the standard integration issues, there is a plethora of cross-cultural challenges.
At DaimlerChrysler, which was formed in 1998 when Germany’s Daimler-Benz purchased the US’s Chrysler, differences in compensation systems and decision-making processes caused friction between senior management, while lower-level employees fought over issues such as dress code, working hours and smoking on the job. Language also became an issue. While most managers on the Daimler side could speak some English, not all were able to do so with the ease and accuracy that is needed for effective working relationships. Among the Chrysler managers, meanwhile, few had any knowledge of German.
The cultural and communication challenges are even greater when the merger is between a western company and one from an emerging market, many of which now harbour international expansion plans. For example, when Lenovo, the leading Chinese PC maker, announced in December 2004 that it was acquiring IBM’s PC business, most observers were sceptical that a company that grew in a communist system, and until recently sold exclusively in China, could succeed in managing a global business. Merging two companies with vastly different business models and cultures, while staying competitive in the fast-paced PC industry, seemed too daunting a challenge. While the jury is still out on whether the IBM deal will help Lenovo become the global market leader, the sceptics were partly vindicated when in December 2005 – less than eight months after the takeover – Lenovo replaced its American CEO, Steve Ward. Michael Dell, chairman of Lenovo’s main rival, declared: “It won’t work.”
Recent research, however, has challenged the prevailing wisdom that cultural differences are unmanageable and a major cause of failure in M&As. Studies have shown that in cross-border M&As, cultural differences can enhance the combined company’s competitive advantage in a series of ways: by providing access to unique and potentially valuable capabilities that are embedded in a different cultural environment; by helping the company to develop richer knowledge structures; by overcoming rigidities and organisational inertia; and by fostering learning and innovation. Other studies indicate that cultural differences, which are more salient in cross-border M&As, lead the managers involved to pay greater attention to the less tangible, but critical, sociocultural and people factors that are often overlooked in domestic M&As.
Collectively, these findings suggest that the cultural issues inherent in cross-border M&As may not represent a daunting hazard. The same applies to international alliances and joint ventures. The alliance of Renault-Nissan, which is widely considered successful, is a case in point. As Carlos Ghosn, now president and CEO of both Nissan and Renault, has pointed out, “Cultural differences can be viewed as either a handicap or a powerful seed for something new.” Indeed, in recent weeks, Mr Ghosn has spoken of a potential three-way alliance between Renault-Nissan and an American carmaker.
Unravelling the mystery
How can we make sense of these conflicting experiences, theories and research findings? In an attempt to better understand the role of culture in M&As, Andreas Voigt of London Business School and I have examined the performance implications of cultural differences in a sample of 10,387 M&As, both domestic and cross-border deals. We used meta-analytic techniques – a statistical procedure for integrating the results of a large number of studies that address the same research question. The evidence points to an interesting tendency. In M&As that require high levels of operational integration – acquisitions that promise significant economies of scale or scope – cultural differences can create obstacles by exacerbating sociocultural problems in the post-merger integration period.
By contrast, in M&As that require lower levels of integration, we found that cultural differences – especially those at the national level in cross-border M&As – facilitated the realisation of synergies without leading to major problems at the sociocultural level. In these cases, acquired units are often granted a considerable degree of autonomy, which reduces post-acquisition stress and the likelihood of culture- and human resources-related problems. Thus, whether cultural differences have a positive or negative effect on the success of a merger – or any effect at all – is likely to depend on the level of integration required. As Oded Shenkar, a leading expert on cross-border M&As at the Fisher College of Business at the Ohio State University, has noted: “How different one culture is from another has little meaning until those cultures are brought into contact with one another.”
Different M&As require different solutions
According to our research, the effect of cultural differences in M&As depends on the ability of the acquirer to manage the sociocultural integration process. What constitutes effective integration management in a particular M&A, however, depends on the strategic intent behind the deal. The thousands of transactions that are lumped together under the term “M&A” actually represent very different strategic activities, and they have very different implications for integration management.
For example, companies that pursue a growth-through-acquisitions strategy, such as Cisco, General Electric or Teva, tend to “integrate” acquired units by absorbing them into existing units or establishing autonomous units. Mega-mergers such as DaimlerChrysler or AstraZeneca, on the other hand, involve two entities of relatively equal size coming together and either taking the best of each company (at least in theory) or forming a completely new organisation with significant competitive advantage.
These two scenarios require different – almost opposite – approaches to cultural integration. Research carried out by Susan Cartwright of Manchester Business School and Cary Cooper of Lancaster University Management School on a wide range of industries across Europe suggests that in mergers of equals (“collaborative marriages”), the cultures of the combining organisations must be similar because the success of the merger depends on the ability to create a coherent “third culture” which combines elements of both cultures. Since organisations normally strive to retain their own culture, mergers between companies with dissimilar cultures will result in major integration problems.
In cases where significant differences in power or size exist and the acquirer imposes its culture on the target, the attractiveness of the acquirer’s culture is probably a more important factor than cultural distance. If the acquired employees expect the takeover to result in increased autonomy and other benefits, they are likely to accept the acquirer’s culture and may even welcome the takeover.
This is why an absorption mode of integration, in which the acquired company is expected to conform to the acquirer’s way of working, need not be a “bad” thing from the point of view of the acquired company’s employees. This is especially true when the target’s employees see the acquiring company as being a saviour or having a more enlightened culture, or when they see a variety of positive outcomes in being associated with the acquiring company (better pay, more prestige and so on). Cisco, for example, buys companies for their technology and R&D talent and then assimilates them into the Cisco culture. But it attempts to retain most of the employees, including top management, and provides strong financial incentives and a vision of the merged entity that includes an important role for the acquired company’s employees.
Managing the sociocultural integration process
Integrating companies and cultures is complex and idiosyncratic. No guaranteed recipes or instant solutions exist, but a small number of companies have learned to avoid common mistakes. The following recommendations are based on academic research and on interviews with executives that piloted their companies successfully through alliances and M&As that transformed their industries. Their experiences suggest that whether differences in culture undermine the success of a deal or result in cultural synergies depends on four factors: a thorough assessment of the cultural fit; flexibility in the integration approach; the ambition to create something new and better; and opportunities for culture learning.
■ Make cultural assessment part of the due diligence process In the due diligence phase, learning about the “soft” factors is just as important as considerations of financial analysis and strategic fit. Undertaking a human capital audit to ensure that the target company has the talent to execute the acquisition strategy, identifying which individuals are key to sustaining value and assessing any potential weaknesses in the management cadre is key to the long-term success of the acquisition, as is an assessment of the cultural fit between the two organisations.
Sometimes, cultural due diligence is undertaken to reveal “deal killers”. Cisco, for example, avoids buying companies with cultures that are significantly different from its own, recognising that it would be difficult to achieve its aim of retaining key talent. However, in today’s global business environment, in which M&A activity is mainly driven by strategic imperatives, few companies can afford the luxury of avoiding deals on account of cultural issues. In the light of findings that cultural differences can be a source of value creation, innovation and learning, limiting acquisitions to target businesses with similar cultures may not be a winning strategy. But this does not mean that cultural differences can be ignored. On the contrary, because they are so critical, they have to be well assessed and well managed.
■ Flexibility in the integration approach For companies such as Cisco, GE and Teva, growth through acquisitions has become a central part of their business strategies. These serial acquirers try to learn from mistakes and accumulate experience, putting in place processes that enable them to execute deals more effectively. For example, GE Capital, the financial services arm of GE, has developed a set of guidelines and process tools for integrating acquired companies which has been applied successfully in many transactions. This systematic approach to implementing acquisitions, however, does not prevent the managers involved in M&A deals from finding the right answers for themselves. GE recognises that there are aspects of every acquisition integration process that are unique, so managers will have to improvise.
Similarly, Teva, the world’s largest generic drug manufacturer, has made flexibility an integral part of the acquisition implementation process. According to Haim Benjamini, former vice-president of human resources, Teva’s guiding principle in integrating acquisitions is that each deal is different and, therefore, flexibility in arriving at solutions is important. When Teva encountered resistance after acquiring Abic, then the second largest pharmaceutical company in Israel, its executives realised that a culturally sensitive integration approach was needed. Although the anticipated synergies were high, Teva decided to approach integration slowly and to run the acquired company as an independent business unit until employees had overcome the initial culture shock.
In another case, Teva’s acquisition of the Hungarian drug manufacturer Biogal, the integration team worked closely with local management to determine the best way to deal with cultural issues and the necessary redundancies. Those people who were negatively affected were given retraining and loans that allowed them to start their own businesses. This helped build trust and set the stage for a successful integration.
■ Don’t miss the opportunity to create a new culture A window of opportunity exists during the short time after an acquisition when the organisation is “unfrozen” and employees expect change and are malleable to new ways of doing things. This is the time to make painful decisions and create something new and better. As one AstraZeneca executive interviewed by Peter Killing, professor of strategy at IMD, noted: “A merger is like an erupting volcano. Everything turns to lava, and lava is fluid. You can mould it and shape it and turn it into new things, but eventually it solidifies. In the period when the lava is molten you have an incredible opportunity to do things differently – take advantage of that situation.”
While it is clear that this process has to be driven from the top, it is essential to get the buy-in and ideas from employees at all levels of the organisation. Soon after the IBM-Lenovo deal was closed, for example, call centre employees at IBM’s operations centre in Raleigh, North Carolina thought up the idea of videotaping each other throwing their IBM badges away, and sending this video greeting to their counterparts at Lenovo. To stimulate creative thinking, Fran O’Sullivan, chief operating officer of Lenovo International (the former IBM parts of the business), started a programme called the Trash Bin Project. This encourages staff to submit examples of things that they did as part of IBM but don’t want to do anymore.
What is even more important than leaving the past behind, however, is to create something new. In a transformational merger, this means that you have to create an organisation that is better than either of the two companies coming together. When pharmaceuticals company Novartis was formed with the merger of Ciba-Geigy and Sandoz in 1996, the proposed management style for the new company reflected the desired transformation: “We listen more than Sandoz, but decide more than Ciba.” CEO Daniel Vasella led the change process by communicating the new set of core values in numerous workshops with key employees and visits to Novartis’s operations around the world. These interventions, supported by a new performance management system and investment in training and development, helped Mr Vasella and his team to build the desired “high-performance” culture.
Create opportunities for culture learning
According to Mr Benjamini, who oversaw the integration of many of Teva’s acquisitions, the best way to integrate acquired units is to get people working together quickly to leverage each other’s expertise and solve business problems that could not have been solved before the merger. There are a number of activities and integration mechanisms that can be used to ensure that people are aligned around the same objectives and to create a co-operative context that facilitates the transfer of capabilities. Cisco, for example, routinely uses a one-on-one partner system (called the buddy system) in the integration of acquired companies. Cross-company teams are another powerful tool for getting employees to think in new ways, challenge existing practices and eliminate us-versus-them thinking – as evidenced by the important role that these teams played in the successful turnaround of Nissan.
However, as new units are created with people from different cultures, who may even have been competitors, the opportunities for misunderstandings and conflict abound. Rather than wait for a culture clash, there are approaches that executives can employ to ensure cultural learning. Recent research in a Fortune 500 company conducted by David Schweiger and Philip Goulet of the Moore School of Business suggests that deep-level cultural learning interventions can facilitate synergies by altering negative stereotypes, developing constructive employee attitudes and enhancing communication between the combining organisations.
The process begins with a managed flow of information between acquiring and acquired employees to provide a constructive forum whereby the parties get accurate information about each other. Through such information, inaccurate perceptions are eliminated and real differences are brought to light. Rather than differences being seen as a problem, cross-fertilisation is encouraged and the best features of both cultures are highlighted.
Recent research suggests that differences in culture between merging companies present a doubled-edged sword: they may enhance the potential for synergies and learning, but can undermine the success of a merger by exacerbating sociocultural problems. Yet, few companies seem to devote significant attention and resources to the management of the elusive “cultural issues” inherent in the M&A integration process.
One thing is for sure: cultural synergy is not for free – it requires sound leadership, the right integration approach and mindset, and culturally sensitive integration management.
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