Obstacles In Cross Border Mergers And Acquisitions
Introduction
This review attempts to investigate the obstacles associated with cross-border mergers and acquisitions (M&A). Companies have different reasons for choosing whichever option, either merger or acquisition. The basic motives for both choices are highlighted in the research. As mentioned earlier, there are various problems associated with growing through M&A even within the same cultural environment. Not surprisingly, the problems associated with cross-border M&A can be more difficult to overcome. This research highlights specific examples of the problems that occur in cross-border M&A.
Two specific examples of ‘corporate marriages’ that failed have been analysed in this research. In order to discuss in specificity the cultural issues involved with cross-border M&A, this research capitalises on German and American working relationships. The first example is of Wal-Mart’s acquisition of Wertkauf and Interspar while the second example involves the merger between Daimler-Benz and Chrysler. In both examples, one can discover how cultural impediments have affected alliances that would have been without doubt very notable.
This research also highlights the good working relationship that some Japanese companies have been able to maintain with the French.
To conclude the research, an analysis using Geert Hofstede’s cultural dimension was done. This compares the both cultures in order to explain the behaviours of both the Americans and the Germans in the business context. The comparison compares both cultures against the world average as well.
Brief Overview of M&A
The words merger and acquisition (M&A) are used interchangeably when discussing growth strategy of companies. M&A represent two different types of growth strategies and technically, they both mean different things in terms of processes, allocation of assets, ownership etc. Nevertheless, the objective of both strategies is growth and increased performance of the new company. The purchasing company in an M&A usually sees the acquisition as a profitable investment opportunity (Pautler, 2003). Cross-border M&A have increased since the mid 1990s especially due to trade liberalisation, service sector deregulation and privatisation of state-owned ventures (Chen and Findlay, 2003). Mergers and acquisitions represent a good percentage of Foreign Direct Investment (FDI) globally as multinational corporations use this as a growth strategy.
A merger is the amalgamation of two companies of similar size to form a new legal entity. The merger between Glaxo Wellcome and SmithKline Beecham is a notable example however; both companies are based within same cultural environment. Mergers do not occur quite often, as companies consider so many variables before a merger is successfully established. Regardless of whether mergers are cross-border or not, they are in fact very difficult to sustain. Looking at the history of M&A it seems as though the successful ones are businesses of similar cultures. The renowned mergers that have endured business obstacles in our world today are usually of homogenous culture e.g. ExxonMobil, GlaxoSmithKline etc. The influence of culture on cross-border mergers cannot be over-emphasised as culture is part of the larger institutional environment that affects the transformation of mergers (Aguilera and Dencker, 2004).
An acquisition on the other hand, is a complete buy-out of a smaller or less financially stable company by a wealthier one. Acquisitions are more apt to occur as some businesses find themselves struggling with capital requirements or customer’s demands. Nevertheless, a bigger company may still acquire a company that is stable if the entrant’s conditions in the new market are not favourable, as seen in the case of Wal-Mart and Asda. Asda at the time of the acquisition was a leading grocer in the UK while Wal-Mart needed to penetrate the UK grocery industry. The relationship between Asda and Wal-Mart is as a mutually beneficial one.
Motives for Mergers and Acquisitions
Before a company becomes a target for M&A, the motive for the purchaser is usually identified. However, it is not always easy to predict which companies are targets for M&A. According to Gonzalez et al (1997), “it is very difficult to recognize all the underlying takeover motives using publicly available information”.
Investment Opportunity
The most common reason for M&A is that is it seen as good investment by the purchasing company (Pautler, 2003). The purchasing company sees targets as having potentials that they are able to harness. M&A’s are potential growth and investment opportunities for companies. For example, Virgin Group has continued to grow and expand through a series of M&A with over 400 companies. The company (Virgin Group) identifies new business segments and then buys up existing businesses or engages in partnership. In Nigeria, Virgin collaborated with the national airline ‘Nigerian Airways’ to form ‘Virgin Nigeria’. Virgin Group consists of unrelated and diversified business units including media, drinks, airlines, telecommunications etc. Perhaps, the only thing the various business units have in common is the brand name.
New Market Entrant Strategy
When companies intend to enter into cross-cultural markets, they may face some resistance by other competitors and even consumers. In this case, the best option for the company is to merge with an existing company in that industry. It also helps when the foreign company takes on the identity of the locals as in the case of Tesco in Thailand known as Tesco Lotus.
Gaining Cost-Efficiency
When two companies decide to merge, they combine their resources and take advantage of their capabilities. In terms of production or purchasing, the new company is able to engage in scale economies. Very often, smaller companies welcome M&A due to the cost-efficiency that they gain from their alliance. When companies purchase in large quantities, they have more power to influence their suppliers by driving the cost down.
Problems of Mergers and Acquisitions
A number of issues can prove to be obstacles in the way of cross-border M&A including language barriers, employee and management relationships, currency differences etc. The cultural dimensions of Geert Hofstede is used to analyse the effects of culture on businesses in cross-border M&A. Individualistic as against collectivist cultures, long-term relationship orientations versus short-term relationship orientations; all these have an impact on M&A and one cultural group would rarely back down for the other.
The price to pay for acquiring another business is also an issue in M&A as the target companies often expect a payout that is exceeds the company’s market value. This is a problem for the acquirer because business consultants make predictions for profitability nonetheless; business does not always align with the predictions.
Apart from the owners of the business, mergers and acquisitions also affect other stakeholders such as employees. Employees are often apprehensive of M&A as regards how it affects their job security (Agami, 2001). Decisions of M&A also affect senior management and force them to retire. The company may have to spend huge amounts as redundancy payments or early retirement benefits.
In the following case study, we will discover how companies have tried to manage M&A in a cross-cultural situation.
CASE STUDY 1
Brief Overview of Wal-Mart
Wal-Mart first opened in 1962 alongside Target and K-mart; however, neither has been quite as successful as Wal-Mart (Fisherman, 2006). The 40-year history of Wal-Mart has experienced sporadic growth in the industry including through acquisitions of whole companies as in the case of Woolco in Canada or, part acquisition of Walmex in Mexico with 31% share of the company.
The company has become one of the biggest privately owned companies in the world. Wal-Mart has grown by acquiring companies in countries where it plans to expand. Moreover, the company has sought world dominance by other cross-border M&A in countries within America as well as in Asia including Japan and China. Although not all of its cross-border M&A have been successful, the company still seeks to expand in many more countries in the world. Wal-Mart opens shop in India in 2009 albeit under a different brand name.
As part of its cross-border growth strategy, Wal-Mart in the late 1990s decided to compete in Germany by acquiring two smaller retail chains Wertkauf and Interspar. The ‘corporate marriage’ did not work out well for Wal-Mart and it eventually had to sell off its German subsidiaries.
Wal-Mart acquires Wertkauf and Interspar
Wal-Mart’s acquisition of Wertkauf and Interspar was a strategic alliance to penetrate the European retail industry. Wal-Mart that started in the United States already had chains of stores in Canada and parts of South America including Mexico, Brazil and Argentina. It is possible for culture to have a negative effect on business if two cultures do not properly integrate especially at the beginning of cross-border M&A (Antila, 2006).
Wal-Mart that acquired two retail chains in Germany, Wertkauf in 1997 and Interspar in 1998 failed to sustain business and was eventually forced to liquidate at a loss of $1b (Grose, 2006). The company had around 85 stores around Germany yet did not gain the expected foothold. The company having been successful in America was facing imminent problems in Europe. The management of Wal-Mart underestimated the importance of the integration process in influencing performance of cross-border M&A. Ignorance of important internationalisation strategies and cross-cultural management marked the failure of Wal-Mart in Germany.
Many critiques have argued that two of the reasons for the failure of Wal-Mart in Europe were
The managers, super-imposed American management technique on the Germans without consideration of their cultural differences.
The entry of Wal-Mart into Germany by ‘acquisition’ was flawed.
American Management Technique on Germans
Cross-border M&A is usually frustrated when careful consideration is not given to cultural differences in management and operation style. When companies do not fully appreciate specific differences in conditions in other countries, a ‘clash of cultures’ is often the result.
Firstly, Wal-Mart appointed an American CEO in Germany who was not willing to learn German and showed plenty of ignorance of the framework of the German retail market. This reflected a lack of respect of the German culture and was offensive to the employees. Another CEO who failed to integrate Interspar into Wal-Mart then replaced him. This created many upheavals between the two cultures.
Secondly, the business culture that forbade an employee from dating influential colleagues was introduced (Schaefer, 2006) in Germany. Hitherto, this was an accepted culture in German business. Ideally, the HR managers at Wal-Mart should have analysed the cross-cultural business differences of the German target companies (Antila, 2006). In situations where there are extreme differences in business culture, top management needs to find a middle ground for compromise. According to Antila (2006), in order to create a flawless fusion, HR managers ought to understand their cultures first before trying to understand the cultures of target acquisition.
Flawed Entry by Acquisition
Wal-Mart’s acquisition of Interspar is still widely criticised, as the supermarket was the weakest among leading supermarket chains in Germany. The company spent huge amounts in renovation of the dilapidated branches around Germany yet returns made from sales were not impressive and did not match the expenses. When companies decide to acquire targets, it is important, that the company’s strategic purpose is clear and that stakeholders benefit from the M&A. The risk of uncertainty is reduced in M&A by the initial strategic analysis (Angwin, 2001). With Wal-Mart’s acquisition of Interspar, the strategic purpose was not quite clear as the company was struggling and did not seem to have any potential.
Perhaps Wal-Mart did not quite understand the German market before they decided to enter (Business Europe, 2003). The main strategy of Wal-Mart that had previously been successful in its other acquisitions was ‘constantly lowering prices’. In the German market however, the consumers already had a number of cost-leaders to choose from like Lidl and Aldi, so the ‘Wal-Mart Effect’ was not particularly special.
Again the company flawed by attempting some pricing policies that the German government considered illegal. Wal-Mart tried a policy of refunding customers that found the same items bought at lower prices elsewhere. This was an infringement of some important German laws (Dess et al, 2008). The company also never established good relationship with the labour unions in Germany (Dess et al, 2008).
The next case study shows how a partnership can go wrong if one group tries to dominate the other. The growth strategy is merger, which means both companies are supposedly of equal size.
CASE STUDY 2
Daimler-Chrysler Merger
The merger between German automaker Daimler-Benz and American automaker Chrysler was one of the biggest transnational mergers ever. In 1998, the deal was signed in London and the combined net worth of both companies was $132b. The CEOs of both companies admitted in their press conference that both companies relied on the merger for an opportunity to compete on a global scale (Neubauer et al, 2000). The aim of the Daimler-Chrysler merger was to take advantage of a growth opportunity and expand geographically. The plan was use to create a situation whereby both companies could share capacities, infrastructure and facilities (Blasko et al, 2000). Ideally, mergers should create better business condition where both companies mutually benefit from each other.
However, one of the major obstacles that stood in the way of the Daimler-Chrysler merger was more of cultural differences between the Germans and the Americans. In this case, it was not a ‘merger of equals’ as researchers like Farkas-DiNardo et al (2006) claimed. The merger witnessed a superiority of the Germans ensuring that the American top management employees were either sacked or forced to retire in the span of only two years.
Prior to the merger between German based Daimler-Benz and US based Chrysler, the automobile industry had not witnessed a merger of such magnitude. Part of the problem of this particular merger was that the Daimler merger team went into the agreement with the aim of being superior to the Americans thus, creating a struggle for leadership. On the other hand, the American team strived for equality between both companies rather than dominance of only one company. There was clearly a misunderstanding between the management of both companies concerning the terms of engagement.
Conflicts within Daimler-Chrysler
The management of both companies were probably not very thorough in their research before lunging into the merger and this reflected in all the conflicts that the company experienced. The location for the company was a problem for both companies as none of them was willing to compromise. The head of Daimler claimed he could never move the company out of Germany rather he would welcome the idea of integrating Chrysler into Germany (Badrtalei and Bates, 2007). In addition, the naming of the new company was a cause of disagreement as the Germans refused to compromise. The Americans suggested “ChryslerDaimler-Benz” but their German counterpart refused, explaining that the name “Daimler-Benz” had a long history and as such could not be subject to such change.
The Germans clearly dominated most of the aspects of the new company with the Americans constantly forced to make compromise. The method of decision-making within the organisation was another source of conflict as both companies had different backgrounds. Within the Americans, mid-level managers were empowered to make certain decisions whereas with the Germans, they were not. Even the work habits of both cultures were clearly very different. The Americans are generally more informal favouring dress-down style to work and meetings while their German colleagues were always formal adhering strictly to the suit-and-tie dress code of the company (Badrtalei and Bates, 2007).
Another important source of disagreement between the two companies was the method of financial reporting which differed considerably in both countries. The styles of reporting financial information in the US was on an efficient quarterly basis while the Germans on the other hand reported based on full-year reports. It was very evident that the differences between the two cultures were a huge obstacle in the way of what would have been undoubtedly, the biggest merger in the automobile industry.
To worsen the already bad working relationship between the Germans and the Americans, Jurgen Schrempp the CEO of Daimler-Benz had an autocratic style of leadership towards the dominance of the automobile world. He constantly overrode the decisions of his American co-chairman Bob Eaton.
Benefits of Mergers and Acquisitions
It is difficult to generalise when determining the benefits M&A as many fail to produce the desired benefits. Quite often, both companies record losses and the partnership ends in a ‘corporate divorce’. More often than not, one company benefits much more than the other does. According to Hakanson (1995), an important question that arises in M&A is ‘when, how and to whom does acquisition create or destroy value?’ The fact remains that the failures of mergers and acquisitions are unpredictable and even the slightest friction caused by differences in backgrounds can create problem and may eventually lead to a ‘deal-breaker’.
For Wal-Mart, there were almost no benefits whatsoever in setting up shop in Germany as its experienced financial setbacks of various kinds that eventually led to selling its subsidiaries off at a loss of $1b. The company, which had done so well in order countries like Brazil, Argentina, Mexico etc as the top retail chain could not get find the recipe for success in Germany.
In the second case study on Daimler-Chrysler, it was clear from the start that the merger will be tough to accomplish given the various conflicts that lurked. The problem perhaps is that the Germans and the Americans have still not mastered the art of working seamlessly without creating ‘hubris’.
Comparing German y and the United States Using Hofstede’s Cultural Dimension Model
Comparing the German and the American culture using Geert Hofstede’s model of cultural dimension shows little difference in terms of power distance, masculinity and long-term orientation. The slight differences are in individualism and uncertainty avoidance in which the United States ranks higher in the former while Germany ranks higher in the latter.
Bothe countries rank higher that the world average in terms of masculinity and this perhaps is one of the reasons that they never seem to come to a cultural compromise. In the case of Wal-Mart, the Americans displayed a higher level of masculinity by forcing their culture on their German colleagues. This may be more understandable since it was an ‘acquisition’ not a ‘merger’ and naturally, the ‘acquiring company’ wants to prove their control by way of management or business ethics. On the other hand, however, it is difficult to understand why Daimler-Benz proved to be rather domineering with Chrysler as it was initially tagged a ‘merger of equals’. Although Germany has a higher masculinity level of about 65%, the United States does not fall far behind with a masculinity level of about 62% (Hofstede).
Perhaps, the French and the Japanese have found a better way to work seamlessly despite their vast cultural differences. The alliance between Nissan the Japanese automaker and their French counterpart Renault has recently reached its tenth year. Other strategic cross-border alliances in the automobile industry the Japanese and the French are also set to take place between Peugeot and Mitsubishi.
Conclusion
In conclusion, it is important to note that culture will always play an important role in cross-border M&A however; companies need to find a way to compromise on certain issues. From the case studies of Wal-Mart’s flawed entry into Germany and Daimler-Benz’s dominance of a supposed ‘equal merger’, one may conclude that both the Americans as well as the Germans have very strong cultural values and they never seem to be able to compromise when engaging in M&A.
Human resource managers need to consider issues concerning culture when it comes to M&A as people are hardly ready for acculturation in a culture conscious society. The culture shock that takes place within organisation perhaps hits the employees that hardest as they experience first-hand the changes that have resulted from integrating a new culture.