Case Study of a Failed M&A—Concluding Thoughts on HP’s Acquisition of Autonomy

The Mergers and Acquisition Synergies Framework we developed includes measures from research on national culture by Geert Hofstede, Erin Meyer, and Sidney Gray. We used their data to show how cultural factors in cross-border mergers and acquisition can lead to success or failure. Our research is limited to national culture factors, yet as seen in a few instances above, corporate culture can be different from national culture. These differences can cause culture clashes of their own. Further research needs to be performed to explain the differences between national and corporate culture.

Even in the best of circumstances, M&A can be fraught with difficulties. Adding in the complexity of making deals across borders necessitates a greater level of diligence in every phase of the process. Whether the merger failed due to fraudulent accounting or incompetent management by HP,1 the HP Autonomy debacle shows how differences or even similarities in national culture can precipitate difficulties in the post-merger integration process. HP’s failure to properly integrate Autonomy exhibits how value can be destroyed when firms aren’t able to resolve cultural differences. Thus, we recommend that firms engaging in cross-border deal making include researching national culture’s potential impact on post-merger integration a part of the due diligence process.

Previous: Case Study of a Failed M&A-The Role of Accounting and Finance in HP’s Acquisition of Autonomy

Case Study of a Failed M&A—The Role of Accounting and Finance in HP’s Acquisition of Autonomy

Accounting Form

Just 14 months after the acquisition, HP wrote down 80 percent of Autonomy’s purchase price. Four years later, HP sold Autonomy for a fraction of what it paid to acquire the company.  The differences in the accounting standards used by each company allowed Autonomy to recognize revenue in a more aggressive way. Ultimately, HP accused Autonomy of fraud.

 Accounting Methodology

Accounting Standards. Generally, large merging companies hire auditors to provide a due diligence report based on a target company’s financial and accounting records. These due diligence reports include differences caused by differing reporting standards. One of the major problems in the merger between HP and Autonomy came from the different accounting standards used in the U.S. and U.K. The U.S. has more rules-based accounting rules compared to the international accounting standards used in the U.K. The idea of rules- versus principles-learning is seen in the difference in reporting standards, clearly summarized by Floyd Norris in the New York Times. Norris explains, “American rules, known as generally accepted accounting principles, or GAAP, are much more specific on how to decide the relative values, while international rules tend to state principles the company should apply and offer limited examples to guide the decision.”1

Specifically, Autonomy used International Financial Reporting Standards (IFRS), which allows sellers to recognize revenue for sales on value-added resellers if specific criteria are met, but company management must use their judgement to determine when the criteria are met. Under U.S. GAAP, there are specific guidelines for revenue recognition for software sales.2 This is clearly a difference between the principles-based method in the U.K. and rules-based method in the U.S. IFRS gives standards and lets companies apply those standards using their judgement while U.S. GAAP gives standards with examples of how to apply those standards. This difference in standards led to misinterpretations of Autonomy’s revenue growth which is discussed below under the subheading ‘valuation’. Even though HP hired a team to create a due diligence report, Apotheker and the board failed to read it which lead to problems that could have been avoided.3

Valuation. On October 3, 2011 HP announced the completion of its acquisition of Autonomy for over $11.7 billion – representing a premium in excess of 79 percent of Autonomy’s closing share value4. While companies are, generally, required to pay a premium when acquiring another company (i.e., control premium), HP’s premium payment for Autonomy was derided, even then. Generally, companies don’t pay a premium as high as HP paid unless they are a part of a bidding war. In the absence of a bidding war, premiums tend to be more modest. For example, the average premium paid in deals similar to Autonomy’s (technology deal with an enterprise value of $10 billion or more) is only 32 percent.5

In the deal-making world, paying a premium is normal. In fact, the only time firms don’t pay a premium is when they structure the deal as a “merger of equals” or when the target’s share price rises when a possible deal is leaked. The rationale behind paying a premium is that companies will be able to combine their resources and function at a level higher than what the individual companies could accomplish separately. This, seemingly hidden, value is referred to as synergies and represents a significant rationale for making deals.

In this case, HP reportedly valued Autonomy “at more than $17bn, including a standalone value of $9.5bn and $7.4bn in ‘revenue synergies.'”6 Oracle’s response to a pitch meeting (a meeting where a buyer or seller will pitch the opportunity to make a deal before engaging in more serious negotiations) illustrates the subjectivity inherent in the valuation process. After HP announced it would acquire Autonomy, Larry Ellison (CEO of Oracle) said, “Oracle refused to make an offer because Autonomy’s current market value of $6 billion was way too high.”7 The fact that HP bid an amount nearly double what Oracle balked at shows the level of subjectivity inherent in valuing a firm’s standalone value and its potential synergies.

Another potential level of complication in the valuation process stems from potential differences in accounting standards.  As noted in the accounting standards section, HP uses U.S. GAAP, which is rule-based, and Autonomy used IFRS, which is principle-based. HP’s valuation of Autonomy differed from reality, in part, because of differences in revenue recognition between these two standards. “Target [Autonomy] recognizes revenue for license sales upon sell-in to its VARs [resellers] rather than on a sell-through basis to end customers.”’ 8 Under this accounting method, IFRS allows Autonomy to recognize revenue earlier than U.S. GAAP. Even though HP accounted for the differences in accounting values correctly in the due diligence process, potentially, fraudulent activity caused HP to overvalue Autonomy.

HP’s failure to properly value Autonomy is evidenced in their write down of 80 percent9 of Autonomy’s value just 14 months after the acquisition, as well as the subsequent divestiture of Autonomy four years later. In the best of circumstances, valuation is an incredibly murky process. HP’s overvaluation is, likely, the result of a complicated process coupled with differing accounting standards and fraud. Still, HP’s overly myopic focus on anticipated synergies led to exaggerated expectations, and ultimately, a merger doomed to failure before the ink dried on the offer sheet.

Professional Behavior

Optimism. Sidney Gray, the father of national culture’s effect on accounting, lists the dichotomy between conservatism and optimism as one of the major cultural dimensions affecting the practice of accounting. In practice, conservatism leads accountants to defer the recognition of revenue and accelerate the recognition of expenses. Where conservatism leads to more cautious practice of accountancy, optimism has the opposite effect. Gray’s research identifies the US and the UK as two of the most optimistic countries on earth. This section will discuss how optimism effected Autonomy’s accounting practices, as well as, HP’s rationale for making the decision to acquire Autonomy despite fierce opposition from their own shareholders.


In the aftermath of the failed merger, accusations of serious accounting improprieties were levied against Autonomy. In reality, Autonomy was a publicly listed company and received audits, so the degree of financial misrepresentation HP accuses Autonomy of committing is likely overstated. The role of the auditor is to provide assurance that the information recorded in the financial statements is fairly represented and follows accepted accounting standards and practices. Autonomy’s management would have to formally state their accounting methods in the company’s financial statements, so we know that they at least received approval from their auditor. Unfortunately, we do not know to the degree to which Autonomy’s revenue was overstated.

It is possible that a portion of the, alleged, accounting discrepancies are driven by the cross-section of UK based accountants’ tendency towards optimism and the principles-based practice of IFRS. While US based accountants exhibit similar inclinations toward optimism, the rules-based GAAP provides an objective standard when recognizing revenue. While the US accounting standard setting body and the international accounting standard setting body have subsequently issued a converged revenue recognition standard, the applicable accounting standards (i.e., GAAP and IFRS) at the time of the merger did exhibit considerable variation.


While HP was levying accusations of fraud against Autonomy, others were questioning the overall rationale of acquiring autonomy. In an interview with the Financial Times, one management researcher posited, “They are using this deflection tactic, but there is much more to this – the story is really the poor due diligence and the human aspects of why they would be motivated to make what we now know was a bad bet.”10

While the researcher quoted has the benefit of hindsight, there were indicators present, which should have discouraged the Autonomy deal.  First, upon announcing a deal to buy Autonomy, HP shares precipitously declined 12 percent and HP’s market capitalization tumbled $15 billion in reaction to the merger. Second, HP fired the CEO (Apotheker) who spearheaded the deal. Third, underscoring the untenability of HP’s pursuit of Autonomy is the fact that 70 to 90 percent of acquisitions fail.11 Finally, HP had a history of poor choice in acquisition targets – as evidenced in the following statement from the Financial Times:

As Meg Whitman, HP’s latest chief executive, disclosed a writedown of $8.8bn on the Autonomy deal, she made it sound like a unique scandal. But three months ago, she wrote down $8bn on its $13.9bn purchase of Electronic Data Systems in 2008. Not even that collapse matched Leo Apotheker, her predecessor, who wrote off more than the $1.2bn HP had paid for Palm in 2010…. With management and accounting like that, it is surprising HP has a balance sheet left.  This cascade took $20bn of goodwill and intangibles off its assets this year – almost matching its $23bn market capitalisation.12

So, in spite of ardent disapproval from its shareholders, firing its CEO, and its well-known failure in M&A, HP persisted. HP’s, seemingly illogical, persistence is described by the social psychology term “unrealistic optimism.”13 Unrealistic optimism is a tendency for individuals to rate “their own chances to be above average for positive events and below average for negative events.” Furthermore, Neil Weinstein, a social psychologist, lists the following as affecting one’s degree of unrealistic optimism: desirability, perceived probability, personal experience, and perceived controllability.14 HP’s desire to move into software and computing, combined with their belief that they could effectively manage and control integration led its management to behave with unjustifiably high levels of optimism.

The degree to which HP’s management team acted with unreasonable optimism manifests itself in the form of negligent leadership (i.e. failing to heed the Auditor’s due diligence report15 and ignoring concerns in relation to Autonomy’s accounting16), payment of an unjustifiably high premium, and refusal to walk away from an obviously unpopular acquisition.

Fraud/Earnings Management. A statement issued by HP says, “HP is extremely disappointed to find that some former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition by HP.”17 The statement accuses Autonomy of fraudulent accounting practices. An investigation by the SEC found:

The former CEO of Autonomy’s U.S.-based subsidiary in San Francisco, Calif., participated in an accounting scheme orchestrated by Autonomy’s U.K.-based senior-most executives to meet internal sales targets and analyst revenue expectations. Autonomy issued materially false and misleading financial reports that overstated revenues in 10 consecutive quarters. Autonomy’s executives also directed HP’s due diligence team to rely on these false filings in connection with HP’s acquisition.18

Part of the reason HP wrote down Autonomy is due to “inappropriate recognition of revenue on software sales to value added resellers.”19 Appropriate revenue recognition to value added resellers is allowed under IFRS but not under U.S. GAAP. However, as Jack T. Ciesielski noted, “Accounting standards can’t prevent the creation of false documents or backdated purchase orders. No set of rules, not even the new revenue recognition standard, can prevent mischief by managers expected to play by the rules.”20 The blame cannot all be placed on the difference in standards. In this case, it looks like Autonomy’s intention was to grow revenues and meet earnings expectations:

The bogus transactions were designed to look real and throw suspicious parties off the trail. Backdated documents don’t look different from ones that aren’t backdated; the cash paid from the round-trip transactions was arranged to make dummy receivables look real. That would likely satisfy auditors, if their suspicions were unaroused otherwise.21

Differences in accounting standards between corporation’s financial statements need to be scrutinized during the due diligence process, but there is always a chance of fraud going undetected on the target company’s books.

Previous: Case Study of a Failed M&A: The Role of Environment in HP’s Acquisition of Autonomy

Next: Case Study of a Failed M&A: Concluding Thoughts on HP’s Acquisition of Autonomy

Case Study of a Failed M&A—Introduction to HP’s Acquisition of Autonomy

Shortly after Hewlett-Packard appointed Leo Apotheker to lead the company, the board approved the acquisition of the UK-based software company, Autonomy. Hewlett-Packard, well known for its computer hardware, thought the synergies it could have with Autonomy coupled with its brand recognition would give it a strong presence in the software market. This series explores management’s cultural misstep using the Mergers and Acquisitions Synergies Framework to examine how this acquisition ultimately lead to a failed merger.


On September 7, 2016 Hewlett Packard Enterprise Co. announced an $8.8 billion deal to sell the bulk of its software division to Micro Focus International PLC.  The deal represented the divestiture of Autonomy Corp—a software maker acquired in an $11.7 billion mega deal just five years prior. The marriage of the two firms was rocky from the onset, with HP’s shareholders decrying the 79 percent premium HP paid as abhorrently high.1 On November 20 of the following year, Hewlett-Packard announced an $8.8 billion write-down of its investment in Autonomy – citing “serious accounting improprieties… and outright misrepresentations.”2 The allegations of fraud were rebutted by Autonomy’s former CEO Michael Lynch and marked the beginning of a disastrously messy public relations battle fought by Autonomy’s ousted CEO and members of HP management.

In November 2010 Hewlett-Packard, a technology firm based in Palo Alto, California, brought in Leo Apotheker as its new CEO. Apotheker was expected to contribute to HP’s growth through completing value accretive acquisitions. Within a year of being hired, Apotheker spearheaded HP’s acquisition of Autonomy, a software company founded at the U.K.’s Cambridge University. The acquisition of Autonomy represented a marked shift in strategy for HP. While HP had demonstrated capability in the hardware market, they possessed very little prowess in software and computing. Thus, Apotheker attempted to catalyze HP’s entrance in the software market by buying an already well-established company.

Although HP claims that the write down was due to “accounting improprieties”3, there are other factors belying this failed merger. The remainder of this paper provides insight into the impact of cultural differences on the HP-Autonomy debacle, offers examples, and provides guidance about due diligence for cross-border mergers. This paper focuses on the cultural factors discussed in the M&A Synergies Framework: communication, behavior, management, environment, accounting and finance, optimism, and earnings management.

Next: Case Study of a Failed M&A—The Role of Communication in HP’s Acquisition of Autonomy

Case Study of a Failed M&A—Concluding Thoughts on Microsoft’s Acquisition of Nokia

The research conducted in this paper is based upon the Mergers & Acquisitions Synergies Framework, developed by combining outside findings by Geert Hofstede, Erin Meyer, and Sidney Gray.[1] It is limited to national culture factors, which play a different role in business than organizational culture. Further studies may need to be conducted to help distinguish differences between national and organizational cultures.

In reality, Microsoft’s acquisition of Nokia was doomed to fail. The deal was an exercise in futility, governed by the rationale that any attempt to compete with Apple and Google is better than none at all. Such rationale exhibits an astonishing lack of prudence, which is key in making any deal, let alone a cross-border deal. While Microsoft’s rationale for making the deal was poor, management’s lack of patience was worse. Cutting 25,000 employees only two and a half years after acquiring Nokia’s mobile unit effectively killed any chance Microsoft Mobile had of succeeding.

Microsoft Mobile is a study of how differences in national culture can add to already poor conditions. Though differences in national culture are not the primary reason Microsoft Mobile failed, they did add to the complexity inherent in the post-merger integration process. In fact, the differences were small and could have been easily reconciled. Had Microsoft exercised a greater level of patience, Microsoft could have realized many of the sought-after synergies which can arise when companies effectively execute cross-border deals. Microsoft Mobile could have prospered as employees from different cultures came together and cooperated.

Previous: Case Study of a Failed M&A—The Role of Accounting and Finance in Microsoft’s Acquisition of Nokia

Case Study of a Failed M&A—The Role of Accounting and Finance in Microsoft’s Acquisition of Nokia

Nokia provided financial reports using IFRS while Microsoft reported using US GAAP.  Differences in national culture combined with different reporting requirements creates accounting and finance cultural differences.  These differences can lead to financial reporting misunderstandings and possible valuation problems.  Though there is little public information surrounding the rationale behind Microsoft’s valuation of Nokia, a consensus is that Microsoft paid too much for a company that had not been profitable for several years.

Accounting Methodology

Very little information concerning cultural differences within the accounting and finance fields is publicly available for this merger. There may have been some cultural conflicts due to differences in reporting standards; however, during the time of the acquisition, both Microsoft and Nokia were operating as global corporations, so each company already worked with integrating financial information from one country to another. Differences in accounting approaches between the U.S. and Finland are described below to provide context of the differences that could arise between these two cultures in the accounting and finance.

The fact that Microsoft Mobile was headquartered in Finland meant that they would have to translate their earnings from euros into dollars for Microsoft to report its consolidated earnings. Additionally, Microsoft Mobile would have to record accounting entries in IFRS for national reporting purposes but then translate its financial statements to comply with US Generally Accepted Accounting Principles (GAAP). The complexity of accounting for differences in international taxes, accounting methods, and reporting requirements is a reality faced by any multi-national entity.

Accounting Standards. As a member of the European Union, Finland adopted the International Financing Reporting Standards (IFRS) in 2005.1 IFRS is principles-based in nature, leaving more room for management to use judgement in interpreting, recording, and reporting economic transactions. The U.S. follows GAAP, which, many consider to be more rules-based. Consequently, management tends to follow specific rules instead of looking at the economics of a single transaction.2 The U.S. has considered the idea of adopting IFRS, but the Securities and Exchange Committee has signaled that moving from GAAP to IFRS is unlikely to happen.3 The implication of the U.S. adopting IFRS would allow for easier preparation for financial statements for multi-national entities, such as Microsoft. The impacts of differing accounting method for deals akin to Microsoft’s acquisition of Nokia’s mobile phone unit are relatively muted. One area of concern for cross-border deal makers is how accounting is practiced. As GAAP is heavily rules-based, there is little room for professional judgement. In contrast, IFRS (used by Nokia) allows for considerable judgment. Room for professional judgment leads to a greater diversity of practice among accountants, which can lead to potential discrepancies.

Valuation. Microsoft saw Nokia as a gateway into the mobile phone industry. Because of this vision, Microsoft seemingly overvalued Nokia and subsequently overpaid for the acquired company. Since that time, Microsoft has written off most of the purchase price from the deal.

At the time the deal was announced, Microsoft proposed purchasing Nokia’s Devices and Services for EUR 3.79 billion and purchasing the license to use Nokia’s patents for EUR 1.65 billion, for a total purchase price of EUR 5.44 billion. (In U.S. dollars, this price equated to about $7.2 billion.)4 Along with other factors and fees associated with the acquisition, the entire purchase price grew from $7.2 billion to $9.4 billion. According to Microsoft’s annual 2015 report, the total price included: $7.1 billion purchase price plus Nokia’s repurchase of convertible notes of $2.1 billion plus liabilities assumed of $0.2 billion.5 What Microsoft didn’t fully realize at this point in the agreement was that Nokia had been losing revenue for the past few years and was failing. “By 2012, [Nokia] was actually a drag on [Finland’s] GDP. Taxes paid by Nokia went to zero. And recently, Samsung began outselling Nokia phones even in Finland.”

One reason that Microsoft overpaid for Nokia is that they were in a scarce market. Microsoft was feeling pressure from Apple and Samsung and feared being left behind. To compete in the market, Microsoft was left with the choice to build a mobile phone unit from scratch or acquire a well-established company. Microsoft made the decision to buy one of the few already established firms. Amazon shows what could have happened had Microsoft entered the mobile phone industry without an established partner. In 2014, Amazon released its own smart phone, the Amazon Fire. Amazon’s attempt to enter the mobile phone industry also fared poorly, as indicated by the $170 million write-down they took relating to the Amazon Fire at the end of 2014.6

Microsoft’s failure to value Nokia’s mobile phone division led to truly disastrous results. Given what we know of Nokia’s rocky financial foundation, the deal was doomed to fail. The amount that Microsoft paid for Nokia has slowly been written off each year since the acquisition finalized. In 2016, Deutsche Welle (Germany’s international broadcaster) stated, “Nadella has already written off most of the Nokia deal struck by his predecessor Steve Ballmer in 2014. Earlier this month, it agreed to sell its feature phone business to a new Finnish company HMD Global and Foxconn Technology Group from Taiwan for $350 million.”7

Professional Behavior

In terms of behavior, both the U.S. and Finland have established professional associations where accountants are accredited to provide assurance services regarding a company’s financial position. Having an established accounting association adds to the professional practice of judgment rather than one reliant on statutory control.8 While both U.S. and Finnish accountants are flexible in practice, Finnish accountants tend to display a greater amount of uniformity with regard to professional practice than Americans.9

In the accounting profession, optimism refers to a societies’ method of valuing assets and recognizing revenue and expenditures. Accountants in countries displaying stronger inclinations toward optimism are more likely to recognize revenue early and value assets at a higher level than accountants in countries where conservatism is practiced. In both cultures, asset measurements and profit reports are more optimistic than conservative indicating that both cultures lean on the side of risk-taking. Still, American accountants tend to be even more optimistic than their Finnish counterparts.10

Another key aspect in the practice of accounting is the dichotomy between secrecy and transparency.  Both Finland and the U.S. are transparent in financial reporting, with the United States being more transparent in how companies report and disclose financial information. Interestingly, societies demonstrating greater amounts of transparency in accounting culture are “societies where more emphasis is given to the quality of life, people, and the environment, will tend to be more open.”11

Fraud and Earnings Management. According to Transparency International, a global group that measures national corruption, fraud is very low in Finland compared to the U.S. Each year, Transparency International creates a Corruption Perception Index, where countries around the world are rated in terms of corruption and inequality. In 2013 when the Microsoft-Nokia merger was announced, Finland was given a rating of 89/100, whereas the United States was rated as 73/100.12 Scores approaching 100 indicate that a country is “very clean.”

Historically, Finland has had very little to no corruption. Since Microsoft acquired Nokia there has been no report of fraud or of earnings management on either side.

Previous: Case Study of a Failed M&A—The Role of Environment in Microsoft’s Acquisition of Nokia

Next: Concluding Thoughts about the Microsoft-Nokia Merger

Case Study of a Failed M&A— Introduction to Microsoft’s Acquisition of Nokia

On September 3, 2013, Microsoft announced that it would acquire Nokia’s mobile phone division for $7.2 billion. Through a series of missteps, many of them cultural mismanagement, Microsoft informed the public in May 2016, of its intention to write off most of the $7.2 billion it paid for Nokia and agreed to sell the mobile devices unit to HMD Global and Foxconn Technology for just $350 million. This series uses the Mergers and Acquisitions Synergies Framework to explore the cultural issues that lead to Microsoft’s failed merger with a highly regarded mobile phone company.


During the 1990’s and early 2000’s, one company dominated the mobile industry: Nokia. Established in 1871, the Finnish-born company gained a worldwide reputation for producing reliable, standard mobile phones that were internet-enabled and programmed with an array of multimedia features. Eventually, competition in the mobile phone sector rose in 2007 when Apple introduced the iPhone, and Nokia soon found its market share rapidly decreasing.1 Initially, Nokia predicted the smart phone craze would die out and consumers would return to standard mobile phones, but smart phones proved to be more than a passing trend. Nokia’s management failed to understand the wave of radical innovation that revolutionized the mobile industry—as Samsung and Apple produced and sold touch-screen phones. Nokia’s failure to react to the changing competitive climate is reflected in the precipitous fall in its share price from the iPhone’s introduction to Nokia’s own smartphone introduction: its market share faltered, losing almost 10 percent.2

On 10 September 2010, Nokia parted ways with its CEO (Kallasvuo) and hired Microsoft executive Stephen Elop. Hiring Elop was a significant move for a few reasons: he was the first non-Finn CEO in company history, and analysts predicted that hiring Elop would lead to closer cooperation between Microsoft and Nokia3.  Elop pledged to “reverse the company’s market share losses by ‘regaining [Nokia’s] smartphone leadership, reinforcing [Nokia’s] mobile device platform and realizing [Nokia’s] investments in the future.’”4

True to analysts’ expectations, it did not take long for a partnership to arise between Microsoft and Nokia.  On 11 February 2011 Nokia announced a “broad strategic partnership” with Microsoft. The partnership made a lot of strategic sense considering Microsoft’s dominance in software and Nokia’s in hardware – namely the production of mobile phones. The partnership was heralded by the media: “The deal makes Microsoft a key contender and gets Nokia back to the forefront of the smartphone revolution.”5 Despite optimism from analysts, the announced partnership was met with met displeasure among Finns, and Nokia’s share price tumbled 10 percent.6

In 2012 Nokia released its new smartphone, the Lumia, which ran on Window’s newly released OS – Windows 8. Initially, the release of the Lumia led to increasing, albeit tepid, sales for Nokia. Two years after announcing the partnership, Nokia was still losing market share to Apple and Samsung.  Microsoft’s performance during the period didn’t fare much better than Nokia’s. Microsoft’s poor performance was primarily caused by vehement resistance of Windows 8 from PC users, who detested its optimization for mobile devices. With both companies struggling to keep up in the fast-paced smartphone market, they were left to search for a more drastic solution than mere partnership.

On 3 September 2013, Microsoft CEO Steve Ballmer announced that Microsoft would acquire Nokia’s mobile phone division for $7.2 billion.7 Microsoft had been looking for a way to enter the mobile phone industry to better compete with Apple and Google. In acquiring Nokia’s services and devices unit, Microsoft took control of Nokia’s mobile phones and smart devices, design team, licensing agreements, and approximately 32,000 new employees. Given Microsoft’s prowess in software and Nokia’s in devices, the acquisition was anticipated to be a smooth, successful transaction. Furthermore, both CEOs (Ballmer and Elop) acknowledged the acquisition as something that would build upon the existing Nokia-Microsoft partnership.8 In a press release in 2013, Elop told reporters,

“‘Building on our successful partnership, we can now bring together the best of Microsoft’s software engineering with the best of Nokia’s product engineering, award-winning design, and global sales, marketing, and manufacturing. With this combination of talented people, we have the opportunity to accelerate the current momentum and cutting-edge innovation of both our smart devices and mobile phone products.’”9

February 2014 marked the beginning of the newly formed Microsoft Mobile (a subsidiary of Microsoft). Later, in October 2014, Microsoft Mobile announced that Microsoft Lumia would replace the iconic Nokia on the smartphones.10

Despite Microsoft Mobile’s best efforts, the union proved to be tenuous at best, with job cuts of 12,500 and 7,800 occurring in July 201411 and July 201512 respectively.  Finally, on 18 May 2016, Microsoft informed the public of its intention to write off most of the $7.2 billion Nokia deal and an agreement to sell the mobile devices unit to HMD Global and Foxconn Technology for just $350 million.13 The company also announced that it would no longer produce new phones. What had seemed to be a promising venture had feebly wilted.

Differences in national culture severely affected Microsoft’s deal with Nokia. The M&A Synergies Framework identifies the relevant cultural aspects of the Nokia-Microsoft merger and offers insight into what caused the acquisition to fail. These insights point us to things to consider when preparing for cross-border deals between American and Finnish companies.

M&A Synergies Framework

The M&A Synergies Framework was created to analyze culture’s effect on cross-border deal making. Differences in national culture can lead to increased creativity within companies; however, they can also incite bitter conflict. The framework directs dealmakers to better understand how culture can affect their ability to realize synergies, which are the primary rationale for deal making. The framework elaborates on the following cultural elements: communication, behavior, management, environment, and accounting and finance. The M&A Synergies Framework is discussed fully in another series that can be found on This case studies uses the Framework as the basis to understand the cultural reasons why Microsoft’s acquisition of Nokia was not successful.

Next: M&A Synergies Framework—The Role of Communication in the Microsoft-Nokia Merger

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—Introduction to Lenovo’s Acquisition of IBM PC

Lenovo Laptop Keyboard

The relatively unknown Chinese computer manufacturer, Lenovo, set its sights high: acquire the legendary IBM PC division. Though there were many who thought this merger would fail, it became one of the most successful Chinese acquisitions in history. This series uses the Mergers and Acquisitions Synergies Framework to explore the careful way Lenovo managed cultural integration with IBM to become a world leader in computer sales.


Chinese merger and acquisition transactions with U.S. targets are now more common than ever before, peaking in 2016 with 163 unique announced deals totaling an expected value of $78.6 billion USD.1 Arguably, one of the most successful and well-known outbound Chinese M&A deals in recent history was that of China-based Lenovo’s 2005 acquisition of the PC division of U.S. technology giant IBM for a total price of $1.75 billion USD: $1.25 billion in cash, plus debt assumption of $500 million.

Fig. 1 Trends show a dramatic increase in both the number of transactions and the dollar value of out-bound Chinese M&A with U.S. targets.










Lenovo began in Beijing in 1984 as the “New Technology Development Center,” a start-up of the Chinese Academy of Sciences. The practice of government organizations arranging commercial businesses was quite common at the time and was called “guoyou minying,” meaning “state-owned, people-managed.” The Academy hoped it would be a source of income to make up for government budgeting shortfalls.2

In 1988, the start-up company expanded its operations into Hong Kong and adopted the name “Legend Computer Group Co.” Over the next decade, Legend adapted to a role distributing American- and Japanese-made computers and learning trade strategies by partnering with companies such as Intel and HP. Eventually, the company introduced its own self-branded PC, which, with the help of favorable market conditions and government benevolence, began to dominate the Chinese PC market. However, the company sought global expansion. The company name was changed to “Lenovo” since “Legend” was a name already claimed on the international market. In 2004, Lenovo seized the opportunity to purchase IBM’s PC division.3 This was a critical expansionary step allowing Lenovo to eventually obtain the largest share of the international PC market.

As one global business director at Lenovo reported, “We believed that through this acquisition, Lenovo can reach the designated position at one step…and we can benefit from this acquisition in three areas: global market, valuable brand and advanced technology.”4 However, the acquisition came with risks. Lenovo, a much smaller company, had only a fourth of the capital that IBM had at the time and the popularity of the Lenovo brand was limited to China.

Beyond the logistical challenges, the business anticipated difficult culture clashes. As one Chinese consultant stated, “The cultural challenges are going to be big. […] Lenovo hasn’t had a particularly successful track record of partnerships with foreign companies.”5

Culture clashes indeed proved difficult to manage as the two companies combined operations. However, with time and effort, Lenovo was able to achieve cultural synergy and is regarded today as an integration success story.6

This analysis follows the M&A Synergies Framework, developed from careful research of cross-border M&A cases and existing social psychology theories. 7 The framework, as utilized in this application capacity, outlines important considerations when approaching cross-border mergers and acquisitions, especially between U.S. and Chinese counterparts. This analysis addresses communication, behavior, management, environment, and accounting and finance in the context of the Lenovo-IBM integration and provides insights that can apply to future similar transactions.

Next: M&A Synergies Framework—The Role of Communication in the Lenovo-IBM Merger



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