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

M&A Synergies Framework—Concluding Comments and the Mapping Mergers & Acquisitions Polar Grid Template™

Mergers and acquisitions are complicated by nature and, as shown, this is especially true with cross-border transactions where culture affects the areas of communication, behavior, management, environment, and accounting and finance. Cultural differences are not impossible to manage, rather, they require an awareness that they do exist and a willingness to set aside preconceived notions in order to find compromises and solutions as needed.

Mapping Mergers & Acquisitions Polar Grid Template™

The M&A Synergies Framework is useful in graphical form. Figure 5.1 The Mapping Mergers & Acquisitions Polar Grid Template™ allows management to view the factors that that lead to successful M&As in one place. The template shows where management should focus effort to ensure a successful blending of the acquisition. It is intended to be a source of reference for the international businessperson. It can help point to potential issues or misunderstandings and prepare the way for a culturally conscious transition. This graphic will help organizations manage successful mergers. Organizations should evaluate each area and determine key issues in the M&A.  Factors plotted in the outer ring are least important to a successful M&A while the inner ring are the most important.

Figure 5.1: Mapping Mergers & Acquisitions Polar Grid Template™

Culture is indeed relative and what matters is the way that cultures are positioned on dimension scales in relation to each other, not their absolute position. Additionally, the actual expression of expected cultural norms could certainly vary depending on the individual person, as well as according to each firm’s unique organizational culture. The views and examples presented and the associated dimension scales are intended only to inform the reader of the expected cultural differences. Examples of the occasional unexpected or even opposite cultural differences can also be found in literature. Additionally, like many other cultural studies, geographical country borders are loosely assumed to define the divisions of national culture, which may or may not be an accurate assumption depending on the country and the context of the M&A at hand. The examples provided might be applicable only to the facts of each individual M&A transaction and may not represent the cultures as a whole. We recommend spending additional time getting to know the specific counterpart culture of an anticipated merger or acquisition and conversing openly about expectations in order to find the most effective route to achieve the desired synergistic results.


Previous: M&A Synergies Framework—Accounting and Finance

M&A Synergies Framework—Accounting and Finance

Many potential problems arise in the accounting, IT, and finance areas when bringing together companies with different information systems and reporting regimes. Some are mechanical, but others involve cultural aspects encompassing philosophies and traditions. The accounting and finance cultural differences can be larger than many other cultural differences. A company with reporting practices that are grounded in secrecy, aggressive accounting, or require judgement and estimates will face significant challenges when merging with a company that has opposing practices. Many times, little thought is given when contemplating a merger to the differences in accounting and finance functions. Clashing cultural values in these areas can be difficult to overcome, particularly if they lead to reporting questions from regulatory bodies.

Accounting Methodology

Accounting Standards. Accounting standards vary from country to country. Some countries use their own unique national principles. Many use International Financial Reporting Standards (IFRS), by country regulation or by choice, especially when conducting business on an international level.

Accounting standards are typically one of two types: 1) Rules-based or 2) Principles-based. Rules-based systems tend to have clear, established rules with supporting literature and relevant examples. Principles-based systems (like IFRS) typically have more generalized guidelines—leaving room for interpretation—and often require more disclosure. 1  Research has found that there is a higher volume of M&A transactions between countries that have similar accounting standards, especially if the countries have strong enforcement.2 Unadjusted differences in accounting standards lead to financial misinterpretation. This could cause “non-comparable audit and financial statement results.”3 In order to successfully understand the financial situation of the target company, it is important to have resources to understand the method of accounting and properly translate between standards as needed. An M&A transaction will also, likely, require a decision regarding which standards and accounting policies will be used for reporting purposes for the merged company.

Even when typical cultural differences don’t seem remarkably noticeable, the accounting standards of another country might still be quite different, and these discrepancies should not be ignored. For instance, some U.S. investors remain ignorant of the fact that Canadian companies report financial information using IFRS: “‘I’ve been trying to alert investors in the U.S. to this,’ Mr. Rosen [a forensic accountant and analyst] said in an interview. ‘But there’s just that belief that Canada is following U.S. standards when it’s not.’” 4 That misunderstanding could lead U.S. investors to make incorrect assumptions and make misguided investments.

Beyond the required accounting standards, basic procedures of an accounting or finance department may need to be re-examined in order to obtain the best result in an M&A transaction. One example of this comes from a French company’s recent acquisition of a South African company: “As part of the South African management team, a key phrase in this stage was no holy cows, meaning that all processes and procedures were challenged so that only the best, either French or South African, was maintained or incorporated. This could be a key reason why the acquisition of the organisation was such a success.” 5 Because the team members on both sides were open to re-examining the reporting policies and processes of the financial department, rather than just blindly insistent on following habitual techniques, the combined company was able to carry on only the best from each culture. Companies should spend resources to pinpoint potential differences in accounting methods before an acquisition: this will allow them to value the target company more accurately.

Valuation. Culture can impact the way an acquiring company values a target company. Research has shown that some companies in certain countries have a tendency to present higher offers for M&A. This may be due to an expectation of growing profits, as an incentive for the target to overcome difficult regulations, or a belief in the long-term importance of the investment.6 The concept of different timeline expectations is in part captured by Hofstede’s long-term orientation dimension and the GLOBE study’s future orientation. Both present the idea of decision-making differences and relative horizons. However, acceptance and application of these two values is mixed in the academic world.7 Here, we have narrowed and clarified the definition just to the financial aspect of horizon differences since it is one of the most prominent and measurable evidences of different decision-making mindsets.

Research suggests that companies in under-developed countries are inclined to offer higher bids, potentially out of a sense of accomplishment and national pride. 8 In particular, Asian countries tend to offer higher premiums. 9 Additionally, valuation discrepancies can be explained by differing valuation methods, accounting standards and professional behaviors.

One example of differing valuation is that of Japan’s Softbank. As of 2012, Softbank’s 70% stock acquisition of Sprint was the priciest ever from a Japanese company. This could, in large part, be explained by the very long-term horizon under which the Japanese managers are operating: “SoftBank Group Corp.’s Masayoshi Son has a 300-year plan, so if combining Sprint Corp. and T-Mobile US Inc. takes a few years longer than he hoped, that’s OK.” 10 This extreme example shows that high-value stock acquisitions can be attributed to the Asian market tendency to offer high premiums for acquisitions considered to be of long-term value. Merging companies should be aware of this practice to understand the reason behind valuation practices of their partnering company.

Professional Behavior

Professionalism vs. Statutory Control (Gray). The degree to which individual judgment is used is defined on a scale ranging from professionalism to statutory control. Professionalism refers to the degree of use of subjective appraisal of information by each individual accountant and by the general accounting profession. Countries that prefer more rigid statutory control and legal requirements delineating accounting decisions view the accounting profession as a career of rule- following are on the statutory control end of the spectrum.11 Cultures preferring professionalism typically use more disclosure to clarify judgments and interpretations of accounting standards.

One recent study of Russian accounting culture illustrates this cultural difference. Based on Russia’s categorizations under Hofstede’s studies, Russians demonstrate a strong preference for statutory control and view the accounting profession as focused on following rules. This proved accurate after extensive interviewing of Russian professionals: “[…] there was a unanimous consensus that having no choices in selecting various accounting treatments and having clear instructions would improve the standards considerably.” In addition,

”Moving on with the interview, accountants were asked if they were comfortable with exercising their own professional judgement. A large majority (75 percent) said ‘no’. A general consensus on that matter was that there is no need to make own judgements while preparing financial statements, as there are rules that need to be followed, otherwise ‘you can break the law’, was the response of many accountants.” 12

This is in contrast to the typical mindset of U.S. accountants, which argues that the educated judgment of a well-trained professional is more important than strict, prescriptive statutes. Recognizing the cultural preference of both companies in a merger will be of great value to each and help clarify differences in accounting mindsets and prepare each counterpart country for the variability in accounting and reporting across cultures. Figure 4.1 illustrates the spectrum of professionalism versus statutory control cultures.

Figure 4.1: Adapted from Gray 1988

Uniformity vs. Flexibility (Gray). Uniformity versus flexibility has been a long-debated topic amongst accountants. Uniformity refers to the preference for consistency in accounting practice and reporting between companies and across different time periods, while flexibility allows for the interpretation of rules and presentation to meet individual circumstances. 13 To accurately understand the past activity of a company and its possible future growth, it is key to understand a country’s preference towards uniformity or flexibility. A difference in preference leads to a difference in accounting for similar transactions, which may result in misinterpretation of a company’s financial statements. Research suggests that a uniform approach generally leads to better comparability. 14 Figure 4.2 illustrates the spectrum of flexibility versus uniformity cultures.

Figure 4.2: Adapted from Gray 1988

In the study of Russian accountants, the preference for uniformity was strongly expressed. The accountants mentioned that although the Russian Accounting Standards allowed for some diversions from certain rules in order to more accurately represent the full and fair financial situation of the company, none of the interviewees had departed from the rules but instead preferred a systematic approach.15 Accountants in Anglo countries, however, prefer adapting accounting standards according to individual circumstance. In Anglo countries (other than the U.S.), there exists the mindset and notion of “true and fair override,” which permits a company to deviate from accounting rules if an alternative provides a more accurate reflection of a company’s accounts. Since a difference in preference between uniformity and flexibility exists, companies should research accounting practices of their target nations to achieve a more comparable financial valuation.

Conservatism vs. Optimism (Gray)

Conservatism applies to a cautious measurement approach that tends to choose less aggressive, “worst-case scenario” accounting measurements. Optimism is the opposite, relating to an optimistic, risk-taking, “best-case scenario” approach to measurement. Identifying the disparity between the two accounting approaches is crucial to understanding the value of merging companies. For example, “one strain of research finds that conservatism causes companies’ income to be less persistent over time.”16 Additionally, “companies with conservative accounting are slow to assume that good things have happened, and quick to assume that bad things have happened. They show lower income and assets than companies with more optimistic accounting.”17 This advice serves as a warning to merging companies: confirm if a company’s accounting is conservative or optimistic to help determine what a company is worth. Figure 4.3 illustrates the spectrum of optimism versus conservatism cultures.

Figure 4.3: Adapted from Gray 1988

One example of these different accounting tendencies was seen in the aftermath of British HSBC’s merger with Household, a U.S. subprime lending business. Both the U.S. and the U.K. are classified as “Anglo” cultures, which Gray theorized to be the most optimistic of all the culture groupings. HSBC’s overly optimistic accounting came to light during the global financial crisis:

”One of the major areas of concern is over the way HSBC accounts for Household’s assets. The bank carries Household’s loans at ‘book value’, an approach that looks at their worth over the course of the loan. Some analysts have said HSBC will come under pressure to use a harsher ‘fair value’, which could leave it with a large capital shortfall. HSBC has denied there is a problem.”18

Optimism is demonstrated in this case by the bank continuing to value the loans (assets, from the perspective of the lender) at historical values that were likely too high. Although optimism doesn’t always cause controversy and financial distress, it did in this case, and revealed a possible cultural tendency towards optimistic accounting.

Secrecy vs. Transparency (Gray)

Secrecy allows for confidentiality of information on a need-to-know basis while transparency provides a willingness to disclose information to the public. The concept of transparency is that a company discloses enough information so that others can fully understand its accounting and financial practices. Different countries tend to have inclinations for or against transparency. There are incentives for both tendencies. Author Daniel Tinkelman advises:

”[Management] may be afraid that their workers will ask for higher pay if they know the business can afford it, or that competitors will offer special deals to the company’s best customers and employees. If the business is doing poorly, the company may fear that its suppliers and banks will stop dealing with it. On the other hand, shareholders will not buy the company’s stock, and suppliers and lenders won’t deal with it, unless the company discloses enough information to make these outside parties comfortable.”19

Research also suggests that within accounting, “transparency is higher in countries with legal/judicial regimes characterized by a common law legal origin and high judicial efficiency. In contrast, financial transparency is higher in countries with low state ownership of enterprises, low state ownership of banks, and low risk of state expropriation of firms’ wealth.”20  Figure 4.4 illustrates the spectrum of transparency versus secrecy cultures.

Figure 4.4: Adapted from Gray 1988

After Dutch company Unilever acquired American’s Ben & Jerry’s, staff had to learn new accounting practices to comply with Unilever’s level of transparency.

“In guiding the integration, Couette and other senior managers at Ben & Jerry’s worked to establish a number of organizational processes and controls to assure financial transparency and ease of communication between Ben & Jerry’s and the whole of its parent company. Employees were required to learn new accounting and financial reporting procedure, to enter and retrieve data through new software and computer systems, to complete new intra-office forms, and so on.”21
The U.S. and the Netherlands reside on opposite sides of the optimism scale, with the U.S. exhibiting more optimistic tendencies than the Dutch.

In another M&A transaction, Cadbury, a UK company, emphasized transparency in its acquisition of the U.S. company Adams. Both cultures are considered to be Anglo and very transparent, according the theories of Sidney Gray. That conclusion is supported in the way that Cadbury insisted on transparent communication of synergy goals: “Cadbury’s synergy tracking and reporting system was built with full cooperation and input from the Cadbury CFO’s team, with occasional meetings between the PMO [Project Management Office] and the CFO’s office to ensure that the self-reported results were actually showing up in ‘official’ financial results and budgets.” 22  Knowing the typical level of optimism of a nation will give acquiring companies an idea of how much information a company provides to the public.

Fraud/Earnings Management. Managers have incentives to alter reported firm earnings to maximize company and personal wealth. These incentives can be either explicit, through contracts and compensation plans, or implicit, through customer and supplier expectations.23  Research suggests that earnings management, particularly earnings smoothing, is driven by culture. Cultures with higher uncertainty avoidance and greater collectivism are more likely to engage in earnings smoothing, the practice of manipulating the timeline of income streams to create a more conveniently consistent flow. 24  In addition, countries with weaker legal enforcement of investor protection and minority shareholder rights also experience more earnings management.25  Transparency International provides a Corruption Perception Index (CPI), which rates countries on the level of corruption of their public sectors. Transparency.org is regularly updated with the latest CPI to inform the public about transparency of governmental and economic actions, as well as corruption issues. Countries that are considered “less developed” tend to experience more corruption issues (see Figure 4.5), 26  which can carry through into the business and accounting realm. 27

Figure 4.5: Adapted from Transparency International

The practice of “earnings management” can easily be classified as fraud if companies intentionally misstate information. Both acquiring and target companies have a greater incentive to manage earnings before the merging process (often called “window dressing”). This practice is common since an increase in firm value can have a large monetary benefit, for example through larger manager buyouts or higher premium prices. Target companies and investors should be aware of the financial standing of the acquiring company because “empirical evidence…suggests that acquirers, particularly those financing the deal with the issue of shares, engage in income-increasing accrual manipulation in the period preceding the bid announcement in the hope of raising the market price of their stock, and therefore reducing the cost of buying the target.”28 Merging companies should be wary of earnings management practices, especially considering the ease of justifying accounting differences through reference to cultural misunderstanding.

To minimize the chance of earnings management, research found that firms with no fraud had a higher number of outsiders on the company’s board of directors. The reason for this is because “the inclusion of outside members on the board of director increases the board’s effectiveness at monitoring management for the prevention of financial statement fraud.”29 Additionally, “high-quality auditing acts as an effective deterrent to earnings management because management’s reputation is likely to be damaged and firm value reduced if misreporting is detected and revealed.”30  Again, the Corruption Perceptions Index may provide useful information in determining which countries have a greater likelihood to experience some degree of corrupting influences in the corporate sphere.

“The failure to identify alleged corrupt activity in the course of a corporate transaction can have an even more dramatic impact on a company.”31 There is a thin line between earnings management and fraud.  There should be “a clear conceptual distinction between fraudulent accounting practices (that clearly demonstrate intent to deceive) and those judgments and estimates that fall within accounting standards and which may comprise earnings management depending on managerial intent.”32

Recent literature and news sources provide modern-day examples of earnings management and fraud. For example, when Caterpillar Inc. acquired ERA Mining Machinery Ltd., goodwill was written down soon after the merger took place. “The U.S. equipment maker said last week that it would write off $580 million of the about $700 million it paid in June to buy ERA Mining Machinery Ltd., a Chinese maker of mine-safety equipment. Caterpillar alleged “accounting misconduct” at ERA, including overstatements of its profit in the years before the acquisition. It didn’t name anyone it suspected of the alleged misconduct.”33  This earnings management scenario ended up causing a large loss for the acquiring company.

Previous: M&A Synergies Framework—Environment

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M&A Synergies Framework—Environment

Merging with a company in a different country requires an understanding of the regulatory environment, logistics and infrastructure.  However, one often overlooked obstacle to overcome for a successful merger is gaining the public’s acceptance. Negative publicity or opposition to the merger diverts attention and effort from core business concerns.

Public Acceptance

Foreign Relations. In any cross-border merger, the relationship between the merging companies’ home countries can impact the merger, especially “if a target is owned by government or state, [since] it may raise more political and public concerns.”1  Merging companies should become informed about their country’s current relationship—as well as past history—with the country of their target company. This will allow for a better chance of success because “…political connections may play an important role in many of the world’s largest and most important economies.”2

In the merger between American company GE and Hungarian corporation Tungsram, disapproval from the Hungarian government caused problems for GE in the integration process:

”Prior to GE’s involvement, an Austrian bank and the Hungarian government had jointly owned Tungsram. GE purchased the bank’s share and formed the joint venture with an ownership of 51%, which gave GE managerial control. Management at GE was confident that with this control they could make and implement decisions, which included cutting the workforce. GE did not expect the government to oppose its decisions, especially publicly, which caused a strain on the relationship.”3

The Hungarian government’s opposition demonstrated that majority ownership alone was not enough to allow the controlling entity to make decisions; foreign relations play a role as well.

It is not always the target company’s government that opposes a transaction; opposition can and does come from the U.S. government. For example, the high bid from Chinese National Offshore Oil Corporation (CNOOC) for takeover of the U.S. company Unocol was considered very controversial, due to the Chinese government having ultimate control of CNOOC as well as allowing it to have advantageous, below-market interest rates. Resistance came from the U.S. Congress and even the Bush administration, eventually forcing CNOOC to withdraw its offer. 4 Such resistance is typically more common with countries that under scrutiny by the U.S. government. Government policies, views, and potential interventions can diminish the appeal of M&A transactions. Companies looking to acquire should research the relationship their home country has with that of the target company to better understand the larger impact their merger may have on their home countries.

Public Perception. Public perception refers to the reaction of the general public to the cross-border merger and its implications. The opinions of the media and members of the public can be a warning or a helpful guide to merging companies. Many of the public’s frustrations come because they do not recognize the intended synergies, may be concerned about the economic impact, or may view the action as a national statement. If this is the case, the merging companies should take heed to the general opinion and focus on creating value and sharing information accordingly. There may also be positive responses to the M&A, which could indicate a promising opportunity or a growing market. It is important to realize that “how the investment communities react to the announcement of a merger or an acquisition may differ significantly from the reactions of employees or customers – if for no other reason than the interests of these constituencies are different, and sometimes at odds.”5  However, these differing opinions can be useful in deciding the direction of the merged company.

In some instances, customers and the general public might actually have the same reaction, which could strongly indicate the future result of the transaction. For example, Finnish consumers and the general public were upset by Microsoft’s acquisition of the “their” company, Nokia. The public reaction to the acquisition was emotional for Finnish people, since they were strongly attached to Nokia’s iconic brand. As one customer was quoted, “‘Nokia is one of Finland’s main brands and it’s what I tell people abroad—that Nokia phones are from Finland,’ she said. ‘Now I can’t say that anymore.’ Her thoughts? She might buy a Samsung phone next.” 6 This type of response was widespread throughout Finland and preceded the eventual write-offs that Microsoft was forced to take, as well as the job cuts and discontinued products. Overall, the transaction is considered a failure, which was foreshadowed early on by the public’s response to the merger. Companies engaging in cross-border deal making should take public reaction seriously and make changes accordingly.


Location. The physical location and time zones of merging companies can influence the reality of achieving synergies. Cross border M&A requires determining a headquarter location for the newly merged firm. In addition, “a firm’s physical location (i.e., urban or rural areas), which determinates the easiness of transportation, can play an additional role in enhancing or hindering accessibility.”7 Merging with a target company located in a rural area or a politically unstable area creates physical access issues, particularly with transportation for both employees and supply chain. Research also suggests that, “Physical proximity enables informal relationships to develop between staff in the merging organizations, which should facilitate the flow of information.”8 In mergers where headquartered companies do not allow for easy travel by employees, informal relationships cannot form and a divide often remains between the two company’s employees.

In the Upjohn Pharmacia merger, the decision to maintain three physically separate headquarters (Michigan, Milan, and Stockholm) created problems for communication.

”The headquarters compromise created an inefficient bureaucracy whereby managers in London were directing autonomous operations in Michigan, Stockholm, and Milan from afar. Not only did the headquarters decision add to overhead costs, it also resulted in other unexpected costs. Information systems between the three centers were not consistent and thus many reporting functions were problematic and led to delays in applications for new drugs and unexpected currency risk exposure.”9

Merging companies should carefully weigh the pros and cons of location decisions before determining a permanent headquarter.

Regulatory Differences. Differing statutes, legal requirements, due diligence processes, disclosure obligations and litigation issues may create unforeseen problems for merging companies. 10 These different systems require complete adherence. Compliance could prove to be a costly, and perhaps confusing, hurdle for companies. Knowledge of the target company’s country’s regulatory rules and requirements can provide a considerable advantage to the acquiring company. As a loose guide, “There tend to be more written rules, regulations, and stress in high uncertainty avoidance cultures.”11 If the target company is considered to be in a high uncertainty avoidance culture, it is important to know they may have more regulatory requirements. Although the U.S. is not a particularly uncertainty avoidant culture, regulations can still prove onerous. Attorney checklists are often helpful in preparing for the legal hurdles that U.S. companies must clear.12

American Dreyer’s and Swiss Nestlé felt the pains of getting merger approval from the United State’s Federal Trade Commission (FTC). Since Dreyer’s was considered a competitor in the premium and superpremium ice cream market, the FTC forced the company to sell product lines and restricted Dreyer’s expansion into certain markets so the company did not gain major control of the ice cream market. This meant they had to sell assets quickly to continue with the merger. “…Dreyer’s lost its ‘Dreamery,’ Whole Fruits, and Godiva brands to Integrated Brands. The NICC [Nestlé Ice Cream Company, LLC] lost many assets to Eskimo Pie Frozen Distribution. Furthermore, they did so at what many would consider a substantial discount. Because Dreyer’s and Nestlé were forced to give up assets, they were not in a position to bargain for a good price. This was definitely a downside of the merger.”[13]

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M&A Synergies Framework—Management

A merger leads to many difficult management decisions. Successfully leading an organization through a transition requires management to understand that cultural preferences dictate which leadership styles will be most effective. A merger has more chance for success when management will take time to understand the leadership styles that employees expect and best respond to.


Leadership Turnover. “Executives from acquired firms are an intrinsic component of the acquired firm’s resource base and […] their retention is an important determinant of post-acquisition performance.”1 Leadership turnover refers to any changes in top management within an organization. Because of the business combination, there may be a redundancy in leadership and the acquiring company will face decisions about which executives to maintain and which to let go. Additionally, some executives could elect to leave of their own accord. A research study on management turnover revealed that, “…executives were more likely to stay when they were offered challenging positions with greater status and when they viewed the long-term effects of the combination to be positive.”2

“The clashes of the differences of the management styles in M&A deals can be the biggest reason of the deal failure,” and high leadership turnover is often indicative of trouble within a merger.[3] Top management could leave for many reasons, but if they leave because they are unhappy with the merger, it is likely that employees will follow. Employees tend to follow the example of top leaders in their company. Keeping executives visible to employees will teach employees how to act under their changing circumstances. Companies should make a concerted effort to keep communication lines between the corporations the same pre- and post-merger to have a smooth integration.

It is important to plan out management turnover beyond just the CEO position; other management positions may be just as important and may make or break a deal. For instance, in the attempted merger between marketing firms Omnicom (USA) and Publicis (France), the companies made a provision for CEO responsibilities yet failed to articulate other leadership positions. This caused tensions later when Omnicon’s CEO wanted to fill other positions with his own CFO and general counsel. Ultimately, this deal was called off, citing tax and regulatory issues as the primary reasons. Still, the tensions which arose due to disagreements surrounding leadership turnover precipitated the other cited reasons.3 Merging companies should focus on retaining the top management of both companies to improve employee morale and give employees an example of how to act in a different cultural environment.

Employee Turnover. Employee turnover refers to the decisions to retain or release employees in the case of M&A, as well as employees that voluntarily leave due to the merger. “Employees’ organisational commitment appears in many ways to be critical to the success of an acquisition.”4 Both employees of the target company and employees of the acquiring company generally see mergers and acquisitions as a threat to their job security since there is often a redundancy of positions. Management must carefully employees about organizational direction if they are to be retained. Gaining loyalty may be a strategic goal: “[…] securing the commitment of acquired employees will enhance the attainment of the operational and strategic objectives of the acquisitions, and commitment to organisational changes.”5

In fact, retaining the target company’s employees, as well as their knowledge and skills, can be as important—or even more so—than that of retaining upper leadership.

”It is often helpful to keep employees of the target company, especially if the target was purchased for their unique talent or culture. […] Not only are effective managers required to operate the autonomous units within a firm, but the transfer of valuable, knowledge-based resources that are tacit and embedded in the firm’s social system may be dependent on the retention of certain employees throughout the organization, rather than simply senior executives.”6

In some cases, obtaining skilled employees may be the most important motivation for the transaction, and the transaction price might include a premium for this talent. For instance, in 2000, Broadcom acquired SiByte, a chip making company, for an amount that was considered “paying $18 million for each of SiByte’s 113 engineers,” a price tag not unusual “when there’s a shortage of this kind of talent.”7

Employees may choose to walk away from a company following an acquisition, but tendencies may vary depending on culture. For example, the Japanese CEO of Suntory, a whiskey company, admitted to the press that there were difficulties with retaining U.S. employees after acquiring the company Jim Beam: “Niinami said that while Japanese employees generally don’t leave a company, Americans have a three-to-five-year horizon, and will leave if they can’t find a better job within the company after that. ‘I don’t have solution yet in my hand, but at first definitely we have to recognize differences like that,’ he said.”8 As human capital represents one of a company’s most valuable assets, merging companies should concentrate much of their efforts and attention on retaining talent. This will lead to optimal results in the short- and long-term.

Large Power Distance vs. Small Power Distance (Hofstede). The power distance dimension refers to one’s toleration towards unequal distributions of power between lower – and higher-ranking members of society.9 A culture tolerating large power distance accepts a hierarchy in which everyone has a place, status is important, and inequality is normal. Small power distance cultures prefer an egalitarian structure where organizations are flat, inequality is considered undesirable, and direct communication between boss and subordinate is appropriate. The merger of Daimler-Benz and Chrysler exhibits the importance of knowing each culture’s preference in order to act and communicate properly between ranks. The conflict between large and small power distance was evident in the Daimler-Chrysler merger:

”Daimler embraced formality, hierarchy and structured decision making, while Chrysler promoted cross-functional teams and free form discussion. German executives spoke English while none of the Americans spoke German. Moreover, the organizational structure was an issue as Chrysler operated as a strategic business unit while Daimler had a traditional structure with autonomy of its 23 business units.”10

Chrysler, an American company, practiced small power distance by maintaining cross-functional teams while Daimler Benz, a German company, worked in hierarchical chains. This was one of many conflicts, which eventually resulted in the merger failing. Management and employees of both companies in an acquisition should learn the power distance preferences of the opposing company to know the best form of communication between managers and subordinates. Figure 3.1 illustrates the spectrum of high versus low power distance countries.

Figure 3.1: Adapted from Hofstede 2001

Decision Making

Consensual vs. Top-down (Meyer). The consensual vs. top-down value focuses on who makes decisions and how decisions are made. In a consensual decision culture, “decisions are made in groups through unanimous agreement.”11 In consensual cultures, it is important that everyone’s opinion is heard. In contrast, top-down decision cultures operate with authoritative leaders acting as the primary decision-makers. Management should understand the decision-making process of the target company to correctly make and communicate decisions with the target’s management and subordinates.

When Ford acquired Volvo, employees noticed the difference in decision making between the American and Swedish organizations:

”As perceived by employees from both organisations, Volvo is a decentralised firm and teamwork oriented. The participatory style of management prevails in the Volvo corporate culture. Volvo’s decision making process happens at the lower levels of the organisational structure. ‘That is the Scandinavian way of working together, there is no hierarchy…you get credibility due to the knowledge you have and to your contribution to the company. It has nothing to do with ranking.’…By contrast with the Swedish organisation, Ford is perceived as a structured and hierarchical American operation.”12

Because culture is relative, successfully navigating the decision-making process requires companies to understand where their counterparts fall on the scale. This will precipitate enhanced collaboration at every level of the combined company and enhance the company’s global mindset. Figure 3.2 illustrates the spectrum of consensual versus top-down countries.

Figure 3.2: Adapted from Meyer 2014


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M&A Synergies Framework—Behavior

The way people react to their company merging with another company depends on personal characteristics and values.  Significant resistance and opposition can occur simply because of change and the way the change is viewed or introduced. Companies can successfully bring about change by being aware of the reasons for behavior and managing the change accordingly.

 Core Values

Individualism vs. Collectivism (Hofstede). Individualism vs. Collectivism in Hofstede’s framework provides guidance on a culture’s inclination towards a personally-focused mentality versus a group-focused mentality. Individualist societies typically have weaker ties between individuals and each person is expected to care for oneself and immediate family. On a business level, this often translates to a greater focus on individual promotion, self-recognition, and self-preservation. Collectivistic societies tend to view persons from individualistic cultures as impersonal and self-serving, as collectivists place a higher value on communal well-being.1 This is often characterized by personal sacrifice in the name of the company and demonstrations of loyalty, perhaps through long work hours or suppressed personal opinions or needs. Figure 2.1 illustrates the spectrum of individualism versus collectivism countries.

Figure 2.1: Adapted from Hofstede 2001

Often—especially in cross-border deal making—the preferences of individuals on the spectrum can come into conflict. For example, Lenovo experienced conflict regarding individualism after its acquisition of IBM’s PC division. The Chinese workers complained about the Americans’ “less human” approach with their focus on individual achievement and self-focused pursuits.2 While the Americans viewed the Chinese as not flexible enough to allow individual achievement and overly focused on long workdays and a demanding, fast-paced culture. Company training was required to help workers understand the perspective of their counterpart and to find a middle ground between their goals. Understanding country preferences for individualism and collectivism will help leaders create goals and manage teams to best motivate workers.

 Masculinity vs. Femininity (Hofstede). Not to be confused with social gender roles, masculinity vs. femininity focuses on the characteristics or motivations that a society considers acceptable. Masculinity refers to the societal preference for characteristics related with goal-orientation: assertiveness, heroism, achievement, and material success. On the other hand, a feminine society prefers characteristics associated with relationship building: modesty, quality of life, and caring for others.3

Geert Hofstede’s studies rank many European countries, especially the Nordic countries, as relatively more feminine than the United States. This leads to differing societal preferences: “The American Dream puts an emphasis on economic growth, personal wealth, and independence. The new European Dream focuses more on sustainable development, quality of life, and interdependence.”4 The core differences between masculine and feminine cultures is adeptly articulated in stating Americans ‘live to work’ while Europeans ‘work to live.’ Masculine and feminine cultural approaches provide strengths and limitations; when balanced, these differing perspectives can bestow increased synergy.  Figure 2.2 illustrates the spectrum of masculine versus feminine countries.

Figure 2.2: Adapted from Hofstede 2001

Belief Systems. “Culture and religion unite where beliefs move from internal values to external actions.”5 Belief systems refer to any societal value—religion being just one example—that influences the way someone might think or act. This could be any influential belief, such as elements of a predominant religion (e.g. Hinduism or Catholicism) or influential ideas or cultural beliefs (e.g. the caste system or superstitions). These ideals are often underlying motivations in a society and thus affect the workplace.

 Although varying belief systems may seem insignificant, they can actually have a significant impact on the financial success of a product or company. For example, one study found that Chinese companies in the initial public offering (IPO) process tended to avoid any listing using the number 4, which is considered unlucky, and instead tried to obtain listing numbers including lucky numbers, such as the number 8. Those with listing codes with lucky numbers tend to trade at a higher-than-expected premium, at least until initial concerns about the firms’ performance are resolved.6

Another example is the influence of Islam on the accounting and the bank industries. The Qurān, the Islamic book of religious text, includes the forbidding of “ribāwhich is interpreted as usury or interest. This has caused ongoing discussion among members of the Islamic faith. While some interpret the meaning as a complete rejection of any form or substitute for interest, some allow modifications such as substituted fees, while others accept interest as a necessary reality of the global economy today.7 It is important to be aware of how cultural or religious beliefs such as these might influence the suitability of cross-border deals.


Strong Uncertainty Avoidance vs. Weak Uncertainty Avoidance (Hofstede). Hofstede defined uncertainty avoidance as a measure of a particular society’s acceptance of ambiguity and the unknown:

”This feeling leads them to beliefs promising certainty and to maintaining institutions protecting conformity. Strong Uncertainty Avoidance societies maintain rigid codes of belief and behaviour and are intolerant towards deviant persons and ideas. Weak Uncertainty Avoidance societies maintain a more relaxed atmosphere in which practice counts more than principles and deviance is more easily tolerated.”8

Strong uncertainty avoidance does not necessarily equate risk avoidance; a society with higher degrees of uncertainty avoidance may have behavior just as risky—or more so—than another. The central issue is whether a particular society prefers certain, knowable situations rather than those that are more ambiguous.9 Research shows that cultures with high uncertainty avoidance are less inclined to pursue cross border M&A, and when they do, they prefer deals with high returns, not just low but positive returns. Additionally, in transactions formed as stock acquisitions, they tend to acquire larger ownership stakes than they do in domestic acquisitions.10 Figure 2.3 illustrates the spectrum of high versus low uncertainty avoidance countries.

Figure 2.3: Adapted from Hofstede 2001

Preferences on uncertainty avoidance can influence day-to-day management decisions. For instance, some cultures are more accepting of financial and production risks, while others avoid them at all costs:

Project managers in more uncertainty-tolerant cultures like the United States often employ a triage-like risk management concept, categorizing risks as either unacceptable, manageable, or as irrelevant.  The latter is often a judgment call: if a risk has a low probability of occurring while common wisdom or past experience say that it will likely not cause a problem, project leaders may choose (sometimes without any further analysis) to assume that the risk can safely be ignored.

This concept is foreign to the Japanese who will not tolerate any “assumed non-risks”.  All risk factors, no matter how large or small, will have to be identified, assessed, and managed throughout a product’s lifetime in Japan.  This approach naturally enforces a much more systematic risk assessment and tracking process, promoting superior product quality and reliability.11

In this case, a native of the United States might not see eye-to-eye with a Japanese counterpart if the mindset towards uncertainty is not well understood. These differing approaches are important to understand when working with counterparts from another culture because they may offer a differing perspective of the future.

Task-based vs. Relationship-based (Meyer). Meyer’ task-based vs. relationship-based value addresses developing trust and forming relationships in ways that avoid culture clashes between merged companies. A task-based culture develops relationships based on cognitive-trust: the trust built from another’s skills and accomplishments. Relationship-based cultures exist on the opposite end of the spectrum and develop relationships based on affective trust: the trust built on friendship or emotional closeness.12 For example, a task-based culture focuses on completing the agenda during a meeting while a relationship-based culture needs to develop a rapport with the other party before engaging in business. However, friendliness doesn’t always signify friendship. A culture that tends to smile and chat more isn’t necessarily a relationship-based culture, nor is an initially cold and distant welcome, necessarily, an indicator of a task-based culture. Meyer gives the example of an American businessman who engaged in conversation with a Russian during a long flight. The Russian was surprised at the personal level of conversation, but slowly warmed to the contact. As the flight ended, the Russian fully expected contact information to be exchanged in order to maintain a continuing friendship. He was shocked when instead the American cheerfully wished him farewell, deplaned, and went on his way.13  These different interaction habits could not have been predicted based simply on friendliness. In reality, Americans are highly task-based while Russians are relationship-based. Correctly understanding these distinctions may require consultation with a native insider. Understanding and using the target’s preference for relationship development will help build strong connections between acquirer and target companies. Figure 2.4 illustrates the spectrum of task versus relationship based countries.

Figure 2.4: Adapted from Meyer 2014

Confrontational vs. Avoids Confrontation (Meyer).  In some cultures, disputes and disagreement are necessary in the decision-making process, while other cultures view open disagreement as offensive. This difference is explained by Erin Meyer’s confrontation scale. In confrontational cultures, open opposition is positive for a team and will not negatively impact relationships. On the opposite end of the spectrum, cultures that avoid confrontation react adversely to conflict, and debating would lead to disharmony among groups. Knowing where a company lies relative to one’s own on the spectrum facilitates effective conflict resolution. However, “emotional expressiveness is not the same thing as comfort in expressing open disagreement.”14 Just because a culture seems animated in its manner of expression doesn’t automatically mean that it is confrontational. It requires care and understanding to realize that a dynamic culture is necessarily a confrontational one. Paying attention to how natives deal with disagreement and how it affects subsequent interactions can provide useful insight regarding their preferred method of resolving interpersonal discord. Figure 2.5 illustrates the spectrum of confrontational versus avoiding confrontation countries.

Figure 2.5: Adapted from Meyer 2014

Responding correctly to a certain culture could require stifling the reaction people would normally have in their own culture. In one example, a Western entrepreneur noticed that the Chinese supplier manufacturing bicycles had some faulty bikes with rattling parts. Rather than directly confronting the Chinese manager about the issue as he would have in his own culture, he suggested that they take some bikes for a quick ride in the countryside. Afterwards, he mentioned to the Chinese manager that he thought he had noticed some rattling with his bike. The subtlety worked: “because he was attuned to East-West variation in approaches to conflict, he knew that a direct confrontation could cause loss of face and retaliation might very well result in a shipment of rattling bikes. The plant manager apparently picked up on the entrepreneur’s culturally sensitive cues and assumed ownership of the problem….”15 The bikes were fixed and confrontation was avoided. Both the customer and the supplier were satisfied. Merging companies can avoid potentially disastrous situations when they the time to understand the confrontational preferences of the other culture.

Linear Time vs. Flexible Time (Meyer). When scheduling meetings with other cultures, it is important to recognize that, “Let’s meet at 9:00 am,” or, “We need a long-term plan,” has different meanings across the world. Diverse cultures perceive time and scheduling differently which may cause hiccups in the integration process. Cultures that are based in “linear time” view scheduling as inflexible, deadlines as fixed, tardiness as rude, and agendas as required. People in these cultures often think about budgeting and saving time. On the other hand, those that are considered to run on “flexible time” treat schedules as malleable, and they may complete tasks in their own time frame. People in these cultures manipulate and stretch scheduling to accomplish their tasks. Figure 2.6 illustrates the spectrum of linear versus flexible time countries.

Figure 2.6: Adapted from Meyer 2014

Although many U.S.-based intuitions struggle with the concept of flexible time, it is advantageous to recognize that there may be unforeseen benefits to this approach. As an American working in China said, “…now that I’ve become a bit Chinese myself, I’ve learned…if I’m traveling in Guangzhou and I have thirty minutes to spare, I just make a quick call from a taxi and visit someone working in the area. I’ve come to see this system as highly flexible and efficient…. Once you understand that the Chinese are extremely flexible, everything works fine if you just do the same.”16 In cross-border M&A, learning how the other company views time will help managers set expectations around meeting times and deadlines, which will help employees effectively collaborate across cultures.

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