M&A Synergies Framework: Due Diligence Checklist—Accounting and Finance

This is a brief checklist of accounting and finance items to address when evaluating merger and acquisition synergies between two firms. For a more detailed discussion, see M&A Synergies Framework: Accounting and Finance

Accounting Methodology

Accounting Standards. Countries use various accounting standards including International Financial Reporting Standards (IFRS) and their own Generally Accepted Accounting Standards (GAAP).

    • Understand that countries account for transactions differently. Knowing that countries account for transactions differently will help forego mistakes in valuing your target company.

Valuation. Differences in accounting standards, professional behaviors, and valuation methods can cause under- and over-valued bids.

    • Decide on a walkaway price before negotiations. Overvaluation of a company will result in write-off of goodwill. Although goodwill write-off is still possible, deciding on a walkaway price will likely prevent you from overpaying and thus prevent a large write-off in the future.

Professional Behavior

Professionalism vs. Statutory Control.1 The level of professional judgement used when recording transactions varies between countries.

    • People that are less educated may need training to reach the level of professional judgement needed.2 Take time to evaluate the level of professional understanding within each company and decide how to best train them.

Uniformity vs. Flexibility.3 Uniformity versus flexibility is a long-debated issue with no clear end.4  It is still necessary to consider when merging with another company, both in another country and in your own country.

    • Be aware that although accounting standards are set, the way a company interprets them may be different. Taking uniformity and flexibility into account will better help your company in the accounting due diligence process.

Conservatism vs. Optimism.5 The level of risk and caution preferred by certain culture differs. Below are some suggestions for working with conservative countries.

    • Check income and expense recognition of the target company. Some research suggests that conservatism creates less persistent income over time.6
    • Check asset valuations. Research has also shown that conservative cultures are more likely to undervalue their assets.7
  • Secrecy vs. Transparency.8 The amount of information a company publicly discloses differs between cultures.
    • Take time to teach employees the desired level of transparency. Since cultures have different ideas of the acceptable amount of information shared with the public, it is important to teach all accounting and finance employees the correct standards used by the company.

Fraud/Earnings Management. Because of the differences in accounting seen in the above values, the likeliness of fraudulent behavior is high when looking to abroad.

    • Consider a country’s Corruption Perception Index before merging. The Corruption Perception Index (CPI) score will tell you how prevalent corruption is within the country. This CPI could likely relate to the level of corruption within the company, which will provide clues about their accounting.

Previous: M&A Synergies Framework: Due Diligence Checklist—Environment

M&A Synergies Framework: Due Diligence Checklist—Environment

This is a brief checklist of environmental factors to address when evaluating merger and acquisition synergies between two firms. For a more detailed discussion, see M&A Synergies Framework—Environment.

Public Acceptance

Foreign Relations. A country’s relationship with that of the target company’s country can make or break a merger.

    • Be well informed about your home country’s relationship with the home company of the target. Government disapproval of a merger causes resistance which may inhibit the success of a merger. In some cases, a country may oppose a merger completely.
    • Check out Marsh’s political risk map. The Political Risk Map, created by Marsh (a risk management company), scores countries based on their level of political risk. This map may help you determine the political, operational, and economic risk of the country you are expanding in. Figure 1, below, is a screenshot of the political risk map for 2018.

Figure 1. Political Risk Map 2017

Source: https://www.marsh.com/content/marsh/political-risk-map-d3/prm-2018.html#

Public Perception. The public’s reaction to a merger may provide helpful information to the merging companies.

    • Consider the public’s likely reaction toward the merger in both companies’ home countries. The public’s reaction may foreshadow the outcome of the merger. Listen to their concerns and take them into account when making plans for the future.


Location. The physical location of a company can cause problems for merging companies.

    • Think carefully about the physical location of your Target company. Companies located in rural areas take longer to travel to. This could cause problems during the integration stages of a merger as people travel between company locations. It could also cause problems with new employees moving to that location.
    • Consider the location of the new headquarter for the merged company. Choosing the headquarter location of a company means choosing the time zone your company will primarily operate in. This can cause difficulty for international business meetings which often leads to employee dissatisfaction.

Regulatory Differences. The regulatory differences between cultures can cause unexpected challenges.

    • Know who makes the rules and what those rules are. Many countries have takeover panels that have specific rules for doing deals in their country. Other countries have a government department focused on takeover deals. Learning the rules of these organizations and committees will help with a smooth takeover process.


Previous: M&A Synergies Framework: Due Diligence Checklist—Management

Next: M&A Synergies Framework: Due Diligence Checklist—Accounting and Finance

M&A Synergies Framework: Due Diligence Checklist—Management

This is a brief checklist of management factors to address when evaluating merger and acquisition synergies between two firms. For a more detailed discussion, see M&A Synergies Framework—Management.


Leadership Turnover. Retaining top leaders can have a big impact on the outcome of the merger.

    • Be clear about who will be filling senior positions in the merged entity. Not only does upper management provide an example to their employees, but they also are probably the most invested in the merger. Keeping them will better help achieve the goals of the merger. Additionally, if firm culture is one reason for the merger, retaining the firm leaders will help retain that firm culture.

Employee Turnover. One of the biggest assets in a merger is employees. Retaining them will likely result in greater synergy.

    • Communicate effectively to avoid high turnover. If there is a high degree of uncertainty surrounding the merger, employees may leave the company of their own accord. It is best to communicate as thoroughly as possible to reduce fear-based departures.

Large Power Distance vs. Small Power Distance.1 The appropriate distance between leaders and subordinates varies between cultures.

    • Find the proper person to take care of your issue. In hierarchical cultures, specific people have specific jobs. If this is the case, getting a task performed may take longer since that person may have other responsibilities or may even be out of the office.
    • Understand your position in the organization. Even though is often acceptable for U.S. workers to directly address high-level leaders in their own culture, other cultures may view it as inappropriate or presumptuous. Likewise, when you are the higher-level executive, employees may expect you to behave in a more formal, authoritative manner, often because they believe that you reflect company status.2

Decision Making

Consensual vs. Top-down.3 The way people from different cultures make decisions can be frustrating if it differs from your own decision-making process.

    • Be patient with the decision-making process. Americans tend to make decisions quickly and change that decision many times before a final decision is made. Other cultures are more averse to the change. They may take a while to get decisions made, but that final decision is often quickly implemented and rarely changed.
    • Participate in the decision-making process. In some consensual cultures, it is expected that everyone shares their opinion and ideas during the decision-making process. Others will notice if you don’t participate and decisions won’t be made without you.


Previous: M&A Synergies Framework: Due Diligence Checklist—Behavior

Next: M&A Synergies Framework: Due Diligence Checklist—Environment


M&A Synergies Framework: Due Diligence Checklist—Behavior

This is a brief checklist of behavioral factors to address when evaluating merger and acquisition synergies between two firms. For a more detailed discussion, see M&A Synergies Framework—Behavior.

Core Values

Individualism vs. Collectivism.1 The way people view their roles in workplace can be different between cultures because of their individual and collective mindset.

    • Collectivist cultures may take longer to perform work. Collectivist cultures may have group or department assignments which they complete together while the same assignment may be completed by a single person in an individualistic culture. The collectivist process usually results in a longer turnaround because it takes time to sift through everyone’s opinion. Employees in a collectivist culture place more importance on team success rather than individual achievement.
    • Realize that people from collectivist cultures may feel intimidated by your independent confidence. People in collectivist cultures are used to working and making decision as a team. In the United States, it is common to work individually. As such, give collectivists time to ease into making decisions and working by themselves.
    • It will take time for people from collectivist cultures to adapt to independent thinking. Providing them with group goals may be more motivating. Additionally, individualistic cultures are motivated more when they have more choices. Try giving collectivist cultures fewer choices for their decisions.

Masculinity vs. Femininity.2 Motivations for working are different between cultures. Masculine cultures generally focus on material success while feminine cultures focus on quality of life.

    • Know that your international co-workers may have different expectations about work-life balance. Americans are known for working long hours, taking little vacation, and frequently moving due to job changes. In other countries, employees might consistently leave work at 5:00 P.M. daily, observe a daily “siesta” or other routine breaks, and may even have double the vacation days of most American workers. Make sure you clearly understand and agree upon their expectations and your own.


  • Belief Systems. Belief systems can impact the business process. Learning these beliefs can help strengthen relationships between different cultures.
    • Become familiar with the implications of your counterparts’ cultural beliefs. Religious beliefs will impact holidays celebrated, days considered “holy,” dietary habits, styles of dress, and moral codes, just to name a few. Find out major holidays that interfere with work schedules and learn the daily rituals that may interfere with your work schedule.


Strong Uncertainty Avoidance vs. Weak Uncertainty Avoidance.3 Some cultures deal better with ambiguity than others. Try these ideas when working with the ambiguity-averse:

    • Reduce ambiguity in any way you can.4 Most decisions include some ambiguity, but helping to reduce the amount of ambiguity will help the ambiguity-averse build trust in your decisions.
    • Focus on helping managers understand situations. Getting managers to understand your decisions will in turn help employees get on board with your vision since managers tend to look to their managers for an example.

Task-based vs. Relationship-based.5 Cultures often differ in the amount of relationship-building that occurs before business is done. Use these ideas when working with a relationship-based culture:

    • Plan time for small talk. Relationship-based cultures need to build trust through friendship before talking business. Build trust by beginning meetings with personal conversation. Although this may at first feel like a waste of time, relationship-based cultures may refuse to negotiate deals until they have developed significant trust with you.
    • Spend time outside of work with your co-workers. Co-workers will trust you more once you build a personal, non-work relationship with them. Talk to them about your weekend, your family, your hobbies, your goals and ask them about theirs. These types of conversations will help build the co-worker relationships their culture is familiar with.

Confrontational vs. Avoids Confrontation.6 The meaning behind confrontation differs between cultures. Some find it productive while others find it offensive.

    • Understand that confrontational cultures are trying to be transparent and honest, not disrespectful. Other cultures may view confrontation as productive. If you notice a lot of confrontation in the other cultures, this is most likely the reason.
    • Don’t confuse emotional expressiveness with confrontation. 7 Some cultures disagree with loud emotions while some disagree in a quiet and calm manner. Both may find confrontation necessary to make decisions, but their manner in disagreeing is important to note.
    • Adapt the way you express disagreement to match that of the other culture. In this case, adopting the confrontational manner of the other culture will probably lead to better discussion and decision-making.

Linear Time vs. Flexible Time.8 Cultures have different ideas of how time should be spent which permeates into their views on scheduling.

    • Learn how to be flexible with your time. Some cultures will shift meetings around with short notice. If you learn to be flexible with your time, you can shift around your day to still get everything done.
    • Learn their meaning of “10:00 am.” Some cultures say a meeting will start at 10:00 am when in fact everyone arrives at 10:30 am. Learning the level of time flexibility within a culture will help you make better use of your time.


Previous: M&A Synergies Framework: Due Diligence Checklist—Communication

Next: M&A Synergies Framework: Due Diligence Checklist—Management




M&A Synergies Framework: Due Diligence Checklist—Communication

The Due Diligence Checklist uses the M&A Synergies Framework to provide practical advice to guide a businessperson looking to work with people of other cultures. This checklist is written in the U.S. perspective, but provides important considerations for anyone looking to do business abroad. The checklist gives cultural guidance in the areas of communication, behavior, management, environment, and accounting and finance. For definitions and examples of the following topics, see the M&A Synergies Framework.

Information Availability

Openness. Providing information to employees during the early stages of integration will likely lead to greater synergy realization.

    • Start open discussion early to build trust. When left in the dark, employees worry their job security is threatened. It is better to be open with employees about the direction of merging companies in order to gain their trust.
    • Difficult news doesn’t get easier to give so give it early. The longer you wait to give bad news to employees of both acquiring and target companies, the more they lose their trust in you as a leader. Being open early will likely increase employee moral over the merger and give employees more confidence in the firm leaders and merger direction.
    • Communication is key with the public, investors, politicians, and regulators. Communicate important details with everyone involved. This will help you build the relationships you need to create the synergy you want.

Language Barriers. Merging abroad often means merging with a company that speaks a different language than yours.

    • Try learning the language before hiring a translator. Subtleties and nuances can be missed through translation which may cause misunderstandings between parties. Even though learning the language might prove difficult and nuances may still be hard to catch, learning the language will be more helpful in the long-run. Taking time in the early stages to learn even just a few key greetings and phases demonstrates a concern for others.
    • Adopting a language before the merger can lead to better outcomes. Learning the language of your target company can show your commitment to them. Just like “adopting English makes it easier to recruit global stars (including board members), reach global markets, assemble global production teams and integrate foreign acquisitions,” adopting the language of your target company can have similar results1.
    • Forcing employees to learn a language may result in negative emotions and attitudes. “Slow learners lose their self-confidence, worry about their job security, clam up in meetings or join a guerrilla resistance that conspires in its native language. Cliques of the fluent and the non-fluent can develop. So can lawsuits: in 2004 workers at a French subsidiary of GE took it to court for requiring them to read internal documents in English; the firm received a hefty fine. In all, a policy designed to bring employees together can all too easily have the opposite effect.”2
    • Provide opportunity and incentives for employees learning the language. “Senior managers should explain to employees why switching to English is so important, provide them with classes and conversation groups, and offer them incentives to improve their fluency, such as foreign postings. Those who are already proficient in English should speak more slowly and refrain from dominating conversations. And managers must act as referees and enforcers, resolving conflicts and discouraging staff from reverting to their native tongues.”3
    • Educate counterparts about company-specific slang. Company slang can cause a language barrier, even within a single culture. Combining two cultures with different primary languages will be even harder when undefined slang (e.g. company specific terms) is involved. This can also lead to employees of the target company feeling ostracized.

Communication Style

High Context vs. Low Context.4 The level of explicit detail given in conversation often differs between cultures. Low context cultures give a lot of explicit information when speaking while high context cultures use implicit messages. Below are some key tips for communicating with low context cultures:

    • Know that you may be missing unspoken messages. The United States is one of the most low-context countries in the world. This means that when speaking with people of other nationalities, a US employee should be on high alert to listen for implied messages in the conversation.
    • Explain that repeating information is part of American culture. People in high context cultures often think you do not trust them if you keep repeating information. Though they recognize this as distrust, it is common practice in the U.S. Before your first meetings, simply explain that repetition is part of American culture.

Principles Based vs. Applications Based .5 Cultures have varying ways of learning and persuading. Knowing a culture has preferred ways of learning and persuading can help you in meetings and presentations.

    • Consider the way your audience best receives messages. Your presentation will go better if you present your material in the order your audience likes; attune your presentations to them. When working with a principles-based culture, present facts before findings. When working with applications-first cultures, present your recommendation before giving specific details.
    • Don’t be discouraged if your presentation didn’t go well. If your audience didn’t receive your message the way you thought they would, this might be because your message was presented in the wrong order. Listen to and answer their questions, and don’t jump to conclusions about their opinions.

Direct vs. Indirect Negative Feedback.6 The way feedback is given in varying cultures also affects the way feedback is received.

    • Don’t try to give feedback in another’s style. Instead, explain that you will be giving both negative and positive feedback and both are important. Trying to mimic the feedback style of others may make your feedback too extreme in either direction which will cause more issues.
    • Be careful about where you’re giving feedback. In some cultures, it is appropriate to give individuals feedback in front of a group. In others, feedback should be given during one-on-one meetings. Figure out the proper setting for feedback to avoid embarrassment to yourself and others.


Although underestimated, nonverbal communication is critical to building strong relationships across cultures. This section supplies a list of common mannerism differences between cultures:

    • Be aware of the physical distance between you and your interlocutor. When speaking with people of different cultures, their definition of personal space may be different from your own. For example, in Latin America and the Mediterranean, physical distance is very close and hugging business partners is common. On the other extreme, Asian countries avoid physical contact to the extent that even handshakes are inappropriate. 7  Learning the suitable distance between business people in a certain culture can prevent uncomfortable situations due to misunderstandings or misinterpretations of proximity.
    • Make sure to sit in the appropriate seat at a meeting. American bosses tend to sit at the end of a table, also known as the “head” of the table. Similarly, in Japan, “the seating [in conference rooms] is strictly hierarchical, with the manager sitting at the head of the table and the subordinates sitting in decreasing order of hierarchy.”8 However, in other Asian countries the most senior member of the team will sit in the middle of one side of the table.
    • Give thought to when and how long you make eye contact. In some countries, eye contact shows your level of attention while in others firm eye contact is ill-mannered. The chart above shows the level of eye contact preferences across countries.9
    • Be careful about when you smile. Smiles have different meanings in different cultures: “While in the United States the smile is an expression of joy, in Japan, it may imply a myriad of emotions (including embarrassment, displeasure, or anger). Russians, for example, rarely smile at the beginning of a negotiation, but as it progresses in a favorable manner, they start to smile.”10  Smiling at stranger in Korea implies that one thinks the person is stupid.
    • Figure out how to greet someone before meeting them. In America, it is common to greet a business partner with a firm handshake regardless of gender. However, in India, only men use a firm handshake; women use a gentler grip. In the Middle East, everyone uses a gentle grip when shaking hands. In Japan, it is customary to bow instead of shake hands.11


Next: M&A Synergies Framework: Due Diligence Checklist—Behavior

Case Study of a Successful M&A—Concluding Thoughts on Lenovo’s Acquisition of IBM PC


Lenovo has yet to resolve all its cultural issues. As one global director said, “Until now, I think… [cultural integration] has not been completed…there still remain many cultural problems…I think this part is the most difficult one for the whole acquisition.”1This is an important reminder that the cultural integration process is measured in years, not months.

Regardless, Lenovo truly is an example of a successful cross-border M&A and is regarded as such in academic literature. Through attentive care and cultural awareness, Lenovo has been able to achieve cultural synergy. The current appointed “Chief Diversity Officer,” Yolanda Lee Conyers, is quoted on the company website saying, “We succeed when each of us respects and appreciates the diversity of the individuals we work with. We transcend traditional geographic and cultural borders to better anticipate and serve the complex needs of our customers around the world.”2 This synergy between the companies has been reflected financially. In 2003, Lenovo had income of $129 million3 and a global market share of 2.0%.4 In the same year, IBM PC Division had losses of $258 million5 and a market share of 5.3%.6 By 2016, although Lenovo was struggling with a $128 million loss due to economic fluctuations and restructuring costs, it had captured the largest global market share of the PC industry at 20.7%7 and had earned net income of $829 million the previous year, remarkable growth for what was once considered an underdog company.8

The Lenovo case is very useful for understanding the cultural issues that are central in M&A transactions and what integration looks like in practice. The lessons learned in the Lenovo-IBM acquisition can—and should—be applied to companies pursuing similar endeavors. To successfully prepare for an M&A transaction, further detailed research would be necessary to understand applicable cultural nuances, gain an educated perspective, and prepare to successfully integrate.

Previous: M&A Synergies Framework—The Role of Accounting & Finance in Lenovo’s Acquisition of IBM PC

First in Series: M&A Synergies Framework—Introduction to Lenovo’s Acquisition of IBM PC

Case Study of a Successful M&A—The Role of Accounting and Finance in Lenovo’s Acquisition of IBM PC

It is a significant challenge bringing together two companies that have different cultural values concerning accounting and finance.  Lenovo and IBM adhered to different accounting standards and come from cultures that have divergent perspectives on secrecy, uniformity, optimism, and corruption.  These often-overlooked differences caused challenges for the merged company.

Accounting Methodology

There has been little to no release of information regarding the details of cultural difficulties in this particular area of the Lenovo-IBM acquisition, which is likely for financial confidentiality reasons. However, there undoubtedly were cultural conflicts within the accounting functions during the efforts to integrate Lenovo’s Financial Department, especially since Mary Ma, a Chinese employee, maintained the CFO position after the acquisition and had to figure out how to combine financial processes and departments. With the company now operating globally, financial requirements are even more complex. In this section, differences in accounting approaches between U.S. and Chinese nationals are presented in an effort to provide insight on common differences between these two cultures with regards to accounting functions.

Accounting Standards. As of 2007, the Chinese Accounting Standards (CAS) are required for financial statement preparation for Chinese companies.1 Although there are some differences—for instance, regarding leases, fair value methods, and impairment losses—the Chinese standards are considered to be quite close to International Financial Reporting Standards (IFRS), with the intent to converge them even further. Due to the nature of the principles-based IFRS, the convergence process has been a parallel of the difficult shift from China’s fixed, government-based economy to one with capitalist elements.2 U.S. Generally Accepted Accounting Principles are still quite different than both CAS and IFRS, and the U.S. is not in current pursuit of full convergence, which could mean difficulty in interpreting financial statements from the different systems.

Valuation. Chinese firms are often known for offering large premiums in M&A transactions. Reasons may vary: providing targets an extra incentive to overcome difficult regulation processes, investing in what is believed to be a long-term profitable venture, assuring entrance into a promising market, and in some cases, just overpaying through lack of experience.3 Additionally, a tendency towards long-term investments may have an influence on which financial statements are considered more important to each culture:

In the US there is greater emphasis attached to the income statement as the short-term financial performance is seen as crucial; such as cash flow, revenue and profitability, with the goal of quick results. However, the Chinese people have traditionally taken a long-term perspective of life throughout history, and they have emphasized tradition in order to secure a peaceful and reliable society. Therefore, China is significantly more long-term oriented, where the focus lies more on the balance sheet – emphasizing sustainability and a healthy financial position.4

This could result in a conflicting focus on financial performance, which could contribute to differing valuation preferences.

However, unlike what might be expected from a Chinese firm, Lenovo’s bid for IBM’s PC Division was considered by many to be a low price, even by U.S. standards. As one U.S. analyst said, “The price tag was a little bit lower than I would have expected.”5 Another U.S. academic said, “Maybe the price wasn’t as good as it could have been [for IBM].”6 Perhaps because IBM had been churning out constant losses from its PC department or because IBM highly valued the attainment of Chinese relationships, Lenovo was able to get a bargain on its purchase.

Professional Behavior

Professionalism vs. Statutory Control. China has a long history of very strict laws, governmental regulation, and expectations of conformity. Professionalism is very minimal since “the application of rigid and uniform accounting regulations has also not encouraged accountants to equip themselves with comprehensive analytical skills.”7 Because of this, China leans towards the “Statutory Control” end of the spectrum. The Chinese accounting profession does have intentions to move towards a more Anglo-Saxon style of accounting, which would include the use of more professional judgment necessary for the principles-based IFRS system, but the deep-rooted tendencies towards reliance on regulation may limit the pace of this intended shift.

Uniformity vs. Flexibility. China tends to have a uniform approach to accounting due to its strong government, weaker accounting profession, and long history of control. This shows the impact of the country’s Confucian heritage with its hierarchical emphasis and collectivistic mindset requiring a unified approach.8 In contrast, U.S. accountants tend to use flexibility in practice. This is not to say that U.S. accountants can simply apply accounting standards with any amount of freedom and flexibility. Rather, in the U.S., “there is more concern with inter-temporal consistency together with some degree of inter-company comparability subject to a perceived need for flexibility.”9 The U.S. accounting profession balances consistency with necessary adaptation.

 Conservatism vs. Optimism. Interestingly, China has historically had a mixed approach to these principles. Conservatism and prudence used to be regarded as a “tool of capitalist exploitation” and a “bias against working classes.” However, since the 1990s, conservatism has been accepted as a basic accounting principle and with time China has actually become very conservative, which impacts practices today.10 For example, “The historical cost principle is pervasive in asset valuation. Regular revaluations of assets and investments are not allowed. At the same time, the Ministry of Finance has been cautious in introducing new accounting practices.”11 These tendencies are in contrast with the U.S. accounting approach, which many studies consider to be among the most optimistic in the world with regards to measurement and risk-taking.12 With China’s mixed history on this principle contrasted with the strong favoring of optimism in the U.S., there were likely difficult transitions to be made with these principles.

Secrecy vs. Transparency. Typically, more transparent nations are viewed as “safer” for investment because there is not asymmetry of knowledge between capital market investors and corporations. “The transparency of corporate disclosure made by Chinese publicly listed companies has always been an issue. Companies are criticized for lack of disclosure [and] transparency and corporate scandals in recent years further strengthen this point of view.”13 The standards-based accounting approach of the U.S. strongly emphasizes disclosure of financial information for investors, while the uniform accounting system that the Chinese use does not.14

Transparency was recognized as an issue in the Lenovo M&A. After the acquisition, clashes between cultures grew since, “The Western leaders…were not accustomed to the secretive, noncommunicative approach that was more typical of the Eastern workplace culture.” Ironically, some of the Chinese workers perceived the Westerners as less transparent due to their adaptability: “Eastern managers may see Western leaders as being more objective and more willing to renegotiate goals as the context changes. This comes across as being less transparent and committed.”15 These different mindsets may have been difficult to coincide in the accounting realm. However, in recent years Lenovo has produced thorough annual reports of over 200 pages full of information and disclosure that show greater transparency and insight into the company’s operations. It appears that the U.S. tendency towards transparency has won over the company with regards to reporting.

Fraud/Earnings Management. The Chinese corporate world has had its share of fraud: “Extensive false reporting and earnings management by companies have discredited accounting information and hampered the development of the capital market.”16 The improvement of the accounting system and the strengthening of the profession are both efforts to combat this issue.

Regarding fraud in general, according to research from Transparency International—a global anti-corruption movement—China consistently receives a relatively unfavorable score in the “Corruptions Perceptions Index,” ranking countries by least to most corrupt.  In 2005, the year of the Lenovo-IBM acquisition, China ranked 78th out of 158 countries surveyed. In the same studies, the U.S. showed was ranked at 17th.17 Of course, this doesn’t mean that Chinese companies are invariably proponents of fraud and corruption. In fact, there seem to have been no claims—at least publicized claims—of fraud or earnings management on the part of either company involved in the Lenovo M&A.

Previous: M&A Synergies Framework—The Role of Environment in Lenovo’s Acquisition of IBM PC

Next: Concluding Thoughts about the Lenovo-IBM Merger

Case Study of a Successful M&A—The Role of Environment in Lenovo’s Acquisition of IBM PC

To say that the announced Lenovo-IBM merger was met with skepticism is an understatement. The US government pushed back as did the press, many leery of losing a company with a long, reputable reputation and technical know-how to a company with strong ties to the Chinese government and whose products were viewed with suspicion. Lenovo overcame some of environmental issues by locating its new company headquarters in the US.


Public Acceptance

Foreign Relations. Since the era of World War II, anti-communism became a common U.S. sentiment. Some Americans still view China—run by the communist party since 1949—with lingering suspicion to this day.1 In the 1990s, China’s central government began efforts to encourage companies to “go global.”2 This resulted in more companies looking to expand overseas or simply acquire other companies in an effort to increase resources and market share. This was one of the motivations for the 2005 acquisition of IBM’s PC division. American news sources called it “the latest example of big Chinese firms aggressively expanding abroad, under orders from their government.”3

Public Perception. At the time of acquisition, many economic and political news sources considered the purchase to be risky for IBM. Competitor Michael Dell of Dell Technologies was quoted as saying of the acquisition, “It won’t work.”4 The Economist believed it “unlikely that Lenovo can bring much by way of management skill or strategy to its target.”6 Economists cited Lenovo’s lower-than-average gross margins and wavering Chinese market share as indicators of potential inability to maintain and improve Lenovo. Additionally, IBM’s own declining revenue growth and continual bottom-line losses were cited as indicators of downturn in the PC market as a whole.

Reactions in the U.S. over the acquisition were mixed, ranging from opposition to acceptance to indifference.  Lenovo’s partial ownership by the communist Chinese government sparked some fear and concern among U.S. citizens and politicians. Ironically, the Chinese public tends to be suspicious of private businesses, assuming that behind the closed doors of private operations, there must be something to hide.7

Chinese companies often have stereotypes to overcome if they are to successfully do business with foreign firms. To Westerners, Chinese companies are occasionally perceived as cost cutting and rule disregarding. The opinion of some was that “Lenovo was unknown in the United States and that made-in-China products have a dubious reputation.”8 Research of consumer reactions has found that negative social norms associated with emerging markets (China) result in lower purchase intentions of consumers from developed nations (the U.S.).9

In contrast, some reactions simply expressed indifference to the change of ownership. As one U.S. branding consultant said, “The deal is a wash. That is, people generally don’t care where technology comes from as long as it works. […] The general reaction is probably just a shrug, and an ‘oh well, OK.’ … We all have such a global mentality now, people think it’s fine for products to come from other places in the world, particularly technology products because it’s generally accepted that there are great technology companies in Asia.”10

The IBM employees themselves were quite enthusiastic about the change, especially since it meant stepping out of the shadow of other IBM divisions: “The general sense of excitement also seemed shared among the IBM PC executives, who had for years felt like the unpopular stepsister in their former company…. At the call center in Raleigh, employees filmed themselves triumphantly throwing their old IBM badges into the trash.”11

The Chinese public had both critics and supporters of the acquisition deal. Some business professionals considered it “a magnificent acquisition” while others stated they were “cautiously optimistic.” Those opposed to the deal believed IBM to be the greater beneficiary of the arrangement. Some Chinese considered the deal to be risky given Lenovo’s limited international exposure and others thought it was an unwise distraction from “the possibility of Lenovo becoming a super IT company.”12

It should be noted that Lenovo has transitioned away from Chinese state ownership. By 2012, stock ownership from the Chinese Academy of Sciences was down to 33.58%. The Academy had reduced its previous 65% stake by selling to private investors in an effort to shift the company away from being owned indirectly by the government and focus instead on market structure.13 However, there are still tensions today in the U.S. regarding the continued connection to the Chinese government. Some politicians support a ban on using Lenovo products in government work for fear of cyberespionage.14 These tensions have yet to be resolved.


Location. Upon the merging of the two companies, Lenovo initially established its main headquarters at an office building in New York but then soon moved to North Carolina, where the former IBM staff continued to work­­. However, as the company has grown and spread globally, there are now key locations all over the world: Beijing, England, France, India, and Hong Kong, just to name a few.

One of the challenges of this acquisition was (and continues to be) the fact that Lenovo, once just located in China, is trying to figure out how to direct a company structure that has existed for 95 years and has been international for decades. As one leader commented, “IBM had a big employee team across more than 100 countries. How to manage them is a still a crucial problem.15

The nature of international business includes the difficulties of time zone differences. Glassdoor.com, a website for the open exchange of employment information, cites many employee reviews complaining about the difficulties of the time zone gap:

“We work very long hours due to the global nature of our jobs.”16

“There are conference calls day AND night, which eat up into time which should be spent with your kids. Mine are about ready to disown me!”17

“If you work in a U.S. office, expect to be on conference calls at all kinds of strange hours–the U.S. employees are the ones who have to cater to the schedules of the other worldwide offices.”18

The difficulty of work-life balance is continuously a topic of conversation on informative public websites. It’s an area of concern that stems from the inconvenience of the global spread of the company.

Regulatory Differences. In addition to lengthy preparatory procedures on the part of both companies, U.S. regulations require careful screening of many M&A transactions originating in countries that are areas of concern, including China. USA Today reported the following:

The relationship sparked U.S. fears the minute the deal was announced. Rep. Don Manzullo, R-Ill., fretted that Lenovo staffers in the company’s Raleigh offices might be able to get into nearby IBM research labs and send cutting-edge technology to China. The Committee on Foreign Investment in the United States, the U.S. government group that vets deals affecting national security, investigated the deal. It eventually gave the go-ahead.19

Approval was received May 1, 2005, about 5 months after the initial announcement of the M&A.

Although regulatory processes can also be difficult on the Chinese side of things, the Chinese government—once invested in a company’s success—is likely to make the path clear. As one academic stated, “Lenovo, with the backing of the government, will be willing to do anything to ensure that this works. It’s too strategic a deal to let fail.”20

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Case Study of a Successful M&A—The Role of Management in Lenovo’s Acquisition of IBM PC

Determining who should lead the newly merged company is a critical decision. Management and employee turnover is disruptive and adds stress to the organization as it integrates people and processes. The new Lenovo team recognized that leadership and the way they make decisions would mean the difference between success and failure.


Leadership Turnover. Lenovo split top management positions almost exactly in half between Lenovo leaders and former IBM leaders. As part of this change, IBM’s Steve Ward was assigned to be the integrated company’s new CEO while former CEO Yang Yuanqing stepped into the position of chairman.1 Most popular news sources evaluated this as a wise decision. One source stated that, “as they enter foreign markets, Chinese execs realize they lack essential skills. ‘China needs brand names, reach, logos, marketing, distribution — and the management that attends to all of those.’”2 In fact, a search for management talent may have in part motivated the acquisition as a whole. As CFO Mary Ma said, “We were simply finding a boss for ourselves.”3

Lenovo has continued to choose leaders of various backgrounds and as of 2015, had seven nationalities represented on its top management board, an unusual accomplishment even among globalized companies. Upper management boasts upbringing and education from a variety of nations including France, Italy, U.K., Australia, and of course, the U.S. and China.4 Although study results are mixed with regards to the effectiveness of having diverse leadership, the findings of 53% higher ROE (Return on Equity) and 14% higher EBIT margins (Earnings Before Interest and Taxes) in the world’s most diverse companies as compared to the least diverse companies seems to support the idea that diversity can significantly add real financial value. Among other benefits, if nothing else, “employing nationals from the target countries may help forestall some of the ‘liabilities of foreignness.’”5

In addition, Lenovo introduced a unique company-created position of “Chief Diversity Officer” in 2007 with the purpose “to ensure that Lenovo employs a broad array of talents around the world” as well to aide with cultural integration and awareness.6 Although at the time a Chief Diversity Officer wasn’t unheard of in other companies, Lenovo was the first Chinese company in any industry to staff this position.7 This allowed for clear upper management focus on cultural integration and signaled to both employees and the public that it was a top issue for Lenovo.

Employee Turnover. In the initial stages, Lenovo adopted a “parallel management” model for the acquisition, essentially treating the companies as two independently run branches.8 The only departments that were quickly integrated were those with functional purposes, such as HR and Finance. These efforts created a sense of security and continuity in the firm, which encouraged employee retention. One Lenovo employee stated, “We wanted them [employees from IBM] to realize our company was not a low budget traditional Chinese company… we kept the former welfare and salaries and didn’t cut off anything…”9 In fact, in the first year after the acquisition, the employee turnover was less than 2% allowing the company to retain intellectual talent.10 Eventually, with further integration in the Raleigh, North Carolina office in 2006, the company did have to execute some lay offs, which impacted 1,000 of the 21,400 employees at the time. These cuts were spread equally across all of the company’s geographical operating regions.11

Large Power Distance vs. Small Power Distance. Chinese culture tends to prefer a “Large Power Distance” between high-level and low-level employees.12 This shows a strong preference for clear distinctions between classes or roles, and an expectation that higher management to be respected and knowledgeable. Confucian principles are in part responsible for this philosophy that is still in effect within the Chinese workplace:

“To this day, perhaps because of their Confucian heritage, East Asian societies, from China to South Korea to Japan, have a paternalistic view of leadership that is puzzling to Westerners. In this kind of “father knows best” society, the patriarch sitting at the top of the pyramid rarely has his views or ideas challenged. And though Asian countries have begun to move past these narrowly defined roles in politics, business, and daily life, due in part to the growing influence from the West, most Asians today are still used to thinking in terms of hierarchy. They tend to respect hierarchy and differences in status much more than Westerners.”13

Although this mindset might be accepted in China, it is not a part of Western culture. The U.S. instead tends to be a low power-distance culture, preferring an “even playing field” between superiors and employees. Work is best completed and respect fostered if the boss is considered by the employees to be “one of us.”

Within Lenovo, “Western leaders talked more about the empowerment of the individual and tended to see traditional Eastern leadership as hierarchical and less flexible.”14 It appears that Yang Yanquing, who had originally set up the IBM acquisition deal and was re-established as CEO in 2009, recognized the existing power distances in the company and wanted to change them. He is “probably best known for his efforts to break down Lenovo’s hierarchies and empower employees at every level” even to the point where he divided his own $3 million bonus among lower-level employees.15 Additionally, “YY,” as he is called, made efforts to “Westernize” Lenovo as preparations were made for the IBM acquisition. Changes included dressing in a more Western style, receiving training on specific phone etiquette, and requiring employees to address leaders by their given name, rather than by formal title. Employees struggled to change their ingrained habits, but persistence prevailed. YY has been praised for these efforts to transform “the company’s culture from ‘wait and see what the emperor wants’ to a much more egalitarian, welcoming environment for colleagues from the West.”16

Decision Making

Consensual vs. Top-down. The Chinese have a strong top-down decision-making preference. The U.S. tends to be mid-range on a world scale, which makes it seem consensual by comparison to the Chinese. Several U.S. Lenovo employees expressed frustration with the top-down directive approach of Chinese management. These employees described Lenovo as a “Chinese company fully directed by chinese execs [sic] that don’t understand the US or world market,”17 and stated, “It seems all the power has shifted back to Beijing”.18

In contrast, it is obvious that the U.S. employees relied on a more consensual decision-making process. On Glassdoor.com, one employee located in North Carolina mentioned the following: “…lots of e-mails to process; lots of meetings to attend; decisions were made by group consensus.”19 Consensual decision-making was consistently employed at U.S. Lenovo locations. An employee said, “Sometimes its [sic] difficult to get decisions and directions approved because of the diversity of cultures.”20 Dealing with the contrasting approaches proved to be laborious.

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Case Study of a Successful M&A—The Role of Behavior in the Lenovo’s Acquisition of IBM PC

National culture plays a significant role in the way people behave. The Lenovo team had to adjust to differences in the way Chinese and Americans workers interact among themselves and with each other. American employees tend to be more concerned with themselves while Chinese employees try to put the collective good of the organization first. They also have dissimilar belief systems and approach confrontation differently. Additionally, the combined company had to learn to adjust to the way meetings are organized and conducted.


Core Values

Individualism vs. Collectivism. On the scales of individualism and collectivism, the U.S. and China are on direct opposite sides.  This is thought to be due at least in part to political influence: “The Chinese Communist Party has especially upheld collectivism for the last several decades and the advocacy of communist morality encourages people to devote themselves to the state and society.”1 Although this collectivistic mindset is still the dominant tone in the country, it should be noted that individualistic tendencies are becoming slightly more common as China has recently experienced political and social changes over the last few years.

Chinese Lenovo employees complained about Westerners’ “less human” approach with its process-based, individualistic focus, while Westerners viewed traditional Eastern leadership as too stiff and not allowing for individual empowerment. With the help of external advisors, Lenovo implemented a model called, “My Self—My People—My Business.” This model was used to develop understanding and collaboration between the opposing mindsets. Chinese leaders were encouraged to see the value of certain individualistic attributes in the way they could strengthen employees and enable leaders. On the other hand, U.S. leaders were taught to think beyond individual achievement to consider the greater company context, in this way acknowledging a beneficial collectivistic viewpoint.2

On a different note, collectivism impacts not only employee interactions, but also consumer behaviors. Research suggests that collectivistic cultures are more sensitive to social value of brands. Consumers from a developing country like China would likely be more positively drawn to products from economically developed countries like the U.S. because of admiration for the social status and lifestyle.3 This would be in Lenovo’s favor within the Chinese market since the acquisition of IBM added to Chinese products the appeal of the relatively higher U.S. social status.

Masculinity vs. Femininity. Both China and the U.S. are considered relatively masculine societies: “…Chinese business community is driven by profitability and productivity, the vocabularies which are consistent with a highly masculine culture. Security of employment which is highly valued by feminine cultures, is not [the] predominate situation in China now.”4 Feeding off the energy of both masculine, achievement-oriented cultures, Lenovo’s mindset is typically quite aggressive, as written by Yolanda Lee Conyers, the Chief Diversity Officer: “Being number one isn’t enough. [We] continue to seek new pillars of growth.”5 The company tends to be very focused on visible measures of success, a reflection of the masculinity of both national cultures.

Belief Systems. The theories of ancient Chinese philosopher Confucius still influence many East Asian societies today. Among other things, Confucianism defines the proper “ranks” within certain relationships. It is considered critical for one to know their relative rank and to behave accordingly. For instance, in the relationships Emperor to Subject, Father to Son, Husband to Wife, Older Brother to Younger Brother, and Senior Friends to Junior Friends, the first individual of each pair is expected to demonstrate protection, care, and obligation, and the second to offer loyalty, respect, and trust in return.6 Without a basic understanding of Confucian principles, a foreign businessperson could misunderstand—or even offend—a Chinese employee. These Confucian ideals were ingrained in the way that many Chinese Lenovo employees respected leadership, communicated with co-workers, and approached decision-making.

Rather than focusing on belief system differences, Lenovo took the approach of finding a unified identity that could be used to create a belief connection between the national cultures. Lenovo management analyzed the values and visions of the two firms and found a common ground of integrity and responsibility, which were eventually embodied in the firm’s statement, “We do what we say and we own what we do.”7 Compatible goals and a shared passion for intelligent growth helped unite workers from all cultural backgrounds. Former CEO Steve Ward spoke of this connection, saying, “How can you walk into a place that’s clearly in a different land, yet feel so much like you belong here? This may sound corny, but it feels like home.”8 Lenovo used these shared values to strengthen the company, capitalizing on a unified belief system.


Strong Uncertainty Avoidance vs. Weak Uncertainty Avoidance. The U.S. and China are both considered societies of weak uncertainty avoidance. Both tend to accept ambiguous situations and unknowable outcomes. This makes sense when considering the bold approach of both companies towards the M&A transaction. Chuan Zhi Liu, the original founder of Legend (Lenovo in its preliminary form), described the acquisition as “a snake swallowing an elephant,” which caught on with the media.9 This is a useful metaphor for what truly was a nearly insurmountable task that required quick adaptation and stretching. However, in this case, both sides accepted the risk.

Task-based vs. Relationship-based. The Chinese do business in the mindset of “friends now, business partners later,” while Americans tend to be exactly the opposite. “The Chinese generally value relationships that demonstrate mutual respect, an aversion to conflict, and the maintenance of proper demeanor, and these beliefs extend into the business world as well.”10 It is often impossible to break into the market without a proper introduction from a person of status.

Cultural trainings and activities were held to develop relationships among the employees and expose them to their counterpart culture. A middle manager indicated that leaders at the Chinese headquarters would, “…frequently invite foreign managers to China for training and team building… such as climbing the Great Wall… these activities are very useful… because culture exchanging is very hard to be improved in the conference room, but it is easier to get additional and deep understanding through team building and team work.”11 Such planned experiences can be helpful “…to broaden their outlooks as well as help nonnatives to familiarize themselves with unwritten as well as written rules — and to help establish connections across the two groups.”12 This met the social needs of the Chinese employees and encouraged the U.S. workers to take the time to build relationships with their counterparts.

Confrontational vs. Avoids Confrontation. The U.S. tends to be in the middle range between confrontational and confrontation avoidant, while the Chinese are much more likely to avoid conflicts. However, “avoids confrontation” is not to be understood as synonymous with weakly disciplined. As a middle manager pointed out, “…the discipline of Chinese firms is very strong, just like military administration. And there is no room for negotiation at all.”13 The Chinese workers tended to avoid conflict by remaining silent even if they disagreed with ideas of their U.S. counterparts, which resulted in dominance of Western decisions.14 It took Lenovo a while to address these differences in order to get more open, balanced feedback. However, as previously mentioned, once the Chinese began speaking up, there was once again a distortion of translation and their words came across “a little too direct.”15 This required more adjustment, including establishing rules that conflicts would remain between leadership members only in an effort to quell rumors of management discordance.16

Linear Time vs. Flexible Time. Global Road Warrior, a cultural research database, offers this insight into the Chinese culture: “Meetings will typically last all day, and you should expect interruptions and delays. Visitors who are accustomed to following agendas to the letter should be aware that in China, agendas are simply starting points for long discussions that include many speeches and presentations.”17

This value could be extrapolated to analyze the expected speed of the acquisition process itself. In contrast, Chinese companies tend to require a longer preparatory stage through the M&A auction process. According to J.P. Morgan, the majority of Asian businesses say they would need six months for the initial M&A processes, in contrast with the one or two months that is common for U.S. companies.18
However, it appears that Lenovo was stricter with time than the typical Chinese company, which may have made the transition easier. Before the M&A, Lenovo employees had been trained in the habit that “people who arrived late to meetings had to stand in front of the group to demonstrate the importance of being on time.”19 There is also no indication that the Chinese took any longer to prepare for the acquisition than their American counterparts.


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