M&A has traditionally been a part of the core Finance syllabus in bschools, but in recent years has become increasingly anthropocentric in several ways. More and more attention is being given to how employees are treated through the M&A process, how culture affects M&A deal terms and structure, and post-merger integration (here’s a good book on that) and several bschools now offer courses like ‘HR in M&A’ which typically includes also culture issues. So clearly culture and communications – the human aspect of M&A – is coming increasingly into focus and we should expect companies to do a better job on this front as time goes on.
Let’s dig a little deeper. Obviously, culture exists at many levels. Two main groups of cultural issues worth considering in the M&A context are (i) societal culture; (ii) corporate culture. Let’s look at each very briefly.
Societal culture includes many sub-cultures, and both need to be considered in an M&A context. For example, if an American company acquires an Israeli company, as often happens, there are many cultural lessons each side will need to learn, and fast, in order for the companies and teams to work effectively. At the general cultural level, there are differences in power-distance, in how straightforward or diplomatically one speaks, in work-life boundaries, the significance of various days, holidays etc. There are also important sub-culture subtleties such as political, religious and ethnic sub-cultures that affect how people in the acquiree, for example, will react to the American acquirers. See this note on how one Israeli acquirer (TEVA), has done a good job on recognizing and addressing societal cultural differences.
Corporate cultures are an additional layer of complexity that needs consideration. Some companies are engineering drive; others sales driven. Some are explorative, encouraging entrepreneurial ventures, celebrating effort and innovation; others are purely results driven, discourage creativity and punish failure. Some are strongly hierarchical, others are pretty flat. Some have consensus driven decisions; others are more authoritative. This also applies to more mundane aspects of work: some fly you business class, others coach; some expect you to travel for weeks at a time, others don’t; some require you to clock in and work from the office, others encourage you to work wherever you’re most productive, and so on.
My anecdotal impression is that in an M&A context people are much more forgiving of differences in societal culture, and more strongly demotivated by difference in corporate culture. It seems that whatever can be put down to societal culture is shrugged off somewhat fatalistically as ‘well, that’s just how it’s done over there’. By contrast, company culture is a challenge to the other company’s modus operandi. When one company imposes its culture on another, it is effectively saying ‘out culture is better than yours’, and that gets acquirees uncomfortable.
So what can be done about the cultural challenge?
Firstly, there is the ‘observer effect’; just recognizing that there is a challenge should already go some way to meeting it. A recent study shows that cross-border M&A between companies in very different cultures actually outperform other deals (R Chakrabarti, S Gupta-Mukherjee & N Jayaraman ‘Mars–Venus marriages: Culture and cross-border M&A’, Journal of International Business Studies, 2009). The authors suggest it’s possibly because extra attention is paid to the cultural issues. In other words, in those cases the cultural challenge is obvious, and therefore it is given attention. Societal culture differences are much harder to ignore than differences in corporate culture, but both need to be recognized (and there are ways to measure and plot culture, e.g. http://geert-hofstede.com/). Beyond mere observation, there are now tools in place that ostensibly address the cultural challenge directly (and consultants now peddle advice on cultural aspects of M&A as a service they can provide; incidentally, that paper mixes between HR disruption in M&A, and cultural issues, but we can leave that for another time).
Second, there is now a considerable body of research that supporting the ‘hubris hypothesis’ – the notion that executives’ over-confidence largely drives M&A, underestimating the risk and overestimating the value the acquirer can extract (if you’ve read Nobel laureate Daniel Kahneman’s Thinking, Fast and Slow, he mentions this research there). Executives overestimate their ability to build successful companies. They’re also motivated to Empire-build, and M&A offers the perfect opportunity for a corporate version of cultural imperialism. Acquirers, by the nature of things, have the upper hand. They are purportedly the bigger, stronger, and the more successful of the two parties. Post-acquisition they will generally impose their rules, their budget, their board, their IT…. and their culture. There is an emerging trend of bottoms-up strategy building (see McKinsey’s article on this), and Merjerz (www.merjerz.com) is one of the M&A thought leaders leading this shift in M&A. As employees in the trenches, as well as customers and shareholders have more say in strategy generally and M&A specifically, executive hubris has less influence on M&A. As a result, cultural considerations become material to the M&A process, and not just something to be done away with post-merger.
Finally, with globalization cross-border M&A is increasing as a proportion of M&A transactions. American trained executives, engineers etc have always been ambassadors for American culture, and are bridge builders in transactions between American and foreign companies. Same goes for other countries. Unfortunately, American and British immigration policies are actually reducing in relative and absolute terms the enrollment of foreigners in their universities and this will have a result that these cultures have fewer ambassadors in foreign countries. But other countries, such as Australia and Canada are picking up the slack. This cultural cross fertilization prepares people, companies and societies for cultural mash ups and change.
In summary, awareness is growing, tools (including of course Merjerz) and metrics are being built, and there are long-term trends that are moving us towards better results from M&A of companies with different cultures.