Cultural Impact in Cross-border Acquisitions

Working Paper Cultural Impact in Cross-border Acquisitions: A Critical Review of the Literature Benjamin R. Hoetzel* University of Applied Sciences Heilbronn, Germany Abstract This paper critically discusses the impact of culture on the performance of cross-border acqui- sitions. Acquisitions can be divided in two phases, the pre- and the post-acquisition phase. Especially during the post-acquisition phase culture has a profound influence on the success and may also be the cause for failure. Therefore, as much attention must be paid on integrat- ing different national cultures as on strategic issues. This paper discusses some preliminary findings and builds the basis for future research regarding the impacts of culture on post- acquisition processes. Copyright © 2005 Benjamin R. Hoetzel, University of Applied Sciences Heilbronn, Germany INTRODUCTION the blame on the “clash of cultures” (Gro- tenhuis and Weggeman 2002, p.84) and on Ongoing globalisation, increasing competi- the general cultural differences which oc- tion, new financing possibilities and cur in the merger process (Buono et al. changes in regulation have opened the 1985; Datta and Puia 1995; Olié 1994). doors for mergers and acquisitions (M&A). Therefore the discussion within this work The increasing popularity of M&A also is based on the statement of Grotenhuis raises negative headlines, e.g. over 80% of and Weggeman (2002) that “ignoring a M&A do not reach their financial goals potential clash of cultures can lead to […] (Nahavandi and Malekzadeh 1993) and failure” (p. 84) in international M&A. about 50% fail at all (Cartwright and Coo- Although cultural conflicts mainly occur in per 1995). Despite the numerous reasons the post-acquisition phase, the degree of for merger failure, some researchers put compatibility between cultures in all * Benjamin R. Hoetzel is Research Fellow at the University of Applied Sciences Heilbronn in Germany. His primary field of research contains organizational process improvement and the identification of patterns. Cultural Impact in Cross-border Acquisitions: A Critical Review of the Literature phases of M&A has a profound influence Many researchers in this case argue about on the success of a merger (Olié 1994). the term ‘cultural fit’ or ‘cultural compati- Stahl and Sitkin (2004) report on the Geigy bility’ and Cartwright and Cooper (1993) and Sandoz merger where the new phar- suggest that those expressions are ‘well- macy company Novartis arose from. There, used but ill-defined’ (p. 60). Mainly those the post-merger syndrome caused at the expressions are understood as a term ex- personal level a cultural shock. As a result, pressing the fit in corporate culture in a employees in the acquired company felt merger but Weber et al. (1996) also sug- fear, betrayal, and anger which caused a gest to integrate the fit in national culture reduction of their performance at work. At during the merger process. Weber et al. the cultural level, there was a dislike of (1996) also found evidence that national each other which caused further bias (the and corporate culture each has its impact “we vs. they” syndrome). on the post-merger process. Therefore, this work focuses on the importance of national As the Novartis example shows, cross- culture as a fact for merger failure. In the border mergers suffer from performance following some research findings which problems due to cultural differences analyse the impact of national culture on (Morosini et al. 1998). These differences international M&A are critically discussed. have its source in firm-specific differences such as organizational culture (Buono et al. CULTURAL DIFFERENCES: 1985, Chatterjee et al. 1992, Mirvis and A CRITICAL FACTOR Marks 1992). But international mergers While the importance of corporate culture also suffer from differences in national is widely researched, less focus is put on culture, bringing together people with dif- national culture. The study of Weber et al. ferent norms, values and beliefs (Hofstede (1996) delivers the outcomes that the dif- 1980). Those differences manifest in lan- ferences in national culture as character- guage, dress code, habits and behaviour ized by Hofstede (1980) anticipate stress, which represents a border between two and negative attitudes towards the merger. foreign groups (Olié 1994). According to This corresponds in particular to the vari- Cartwright and Cooper (1995) this border ables individualism, uncertainty avoidance, is even more conspicuous the dissimilar and masculinity. Weber et al. (1996) con- the groups are. clude that national culture delivers essen- tial inputs for the merger process. How- ever, Weber et al. (1996) do not give evi- Benjamin R. Hoetzel 2 Cultural Impact in Cross-border Acquisitions: A Critical Review of the Literature dence to the degree in which national cul- thermore, Angwin and Savill (1997) found ture influences the merger positively or that about 60% of the executives consider negatively. Furthermore, the research of national culture as risk factor for cross- Weber et al. (1996) only focuses on eight border M&A. These facts provide evidence mergers between international companies to the first question, as afore mentioned. and U.S. companies. Therefore, no definite Moreover the study also found that merg- conclusions can be drawn from Weber ers between neighbouring countries are (1996) on the following questions: cited as most problematic for cross-border • How does national culture influ- M&A. According to Angwin and Savill ence cross-border mergers? (1997) the reason for this is the risk aware- • To what extent does national cul- ness of managers. That is, those companies ture has influence on the success or are more aware of the (cultural) risks due failure of M&A? to greater experience and understanding of • How does national culture influ- the culture. ence the merger process of two in- In fact, cultural distance plays an important ternational companies other than role in the different phases of the acquisi- U.S. companies? tion (e.g. pre- and post-acquisition). There- fore, cultural distance is one reason which Although Weber et al. (1996) have found affects the success of M&A and a measure evidence that national and corporate cul- for the extent of national culture on M&A. ture both determine international mergers, Cultural distance is therefore more closely some questions remain unanswered. In the examined. following some other researches will be In the study of Kogut and Singh (1988) the discussed to ascertain the effect of national effect of cultural distance in the pre- culture on international M&A. But before acquisition phase is researched more looking at possible reasons for the influ- deeply. Kogut and Singh (1988) found that ence of national culture on international there is a correlation between cultural dis- M&A, more evidence on the impact of tance and cross-border acquisition. That is, culture should be provided. the closer the national cultures between The studies of Norburn and Schoenberg two companies are, the more one company (1994), and Angwin and Savill (1997) both tends to acquire the other. This evidence is figure out that 90 per cent of mergers supported by Barkema et al.