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

Next: M&A Synergies Framework—Concluding Comments




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]

Previous: M&A Synergies Framework—Management

Next: M&A Synergies Framework—Accounting and Finance

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


Previous: M&A Synergies Framework—Behavior

Next: M&A Synergies Framework—Environment

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.

Previous: M&A Synergies Framework—Communication

Next: M&A Synergies Framework—Management

M&A Synergies Framework—Communication

Clear communication between merging companies is critical to M&A success. Communication extends far beyond agreements and meetings with top-level management. Communication involves planning and determining effective ways to help all levels of employees learn about and understand the changes taking place. One main goal of effective and clear communication is to reduce uncertainty.

 Information Availability

Openness. Openness refers to the transparency of communication from both companies involved in an M&A transaction. In the business world, “…clear communication far too often gets buried in favor of more controllable formal processes, manuals, and procedures.” 1 However, open discussion is critical to establishing trust:

”Communication should happen as soon as possible for those concerned, with reassuring frequency to inhibit speculation that results from ignorance…. Speculation is also painfully slow to correct, as well as unpredictable in outcome…. It is critical that every stakeholder in the transition process has clear access to as much real information as strategically possible.”2

In the face of change and cultural adaptation, a lack of openness can intensify negative reactions. “Research shows that acquisition announcements – especially in combination with poor handling of the communication – increase uncertainty, stress, and absenteeism, while reducing job satisfaction, commitment, the intent to remain in the new organization, and perceptions about organization’s trustworthiness.”3

One example of failed information openness occurred in the Duracell (currently a subsidiary of Berkshire Hathaway) acquisition of Nanfu, a successful Chinese battery company. During the transition process, “the lack of sufficient communication between Duracell and Nanfu in post-acquisition integration, created much misunderstanding and operational conflict between the two companies for many years.”4 The closed-off communication resulted in poor management choices and lack of trust between the companies, which may have been prevented if there had been an open exchange of information and feedback. The knowledge provided to stakeholders through use of open communication prevents unnecessary stress due to uncertainty of the future direction of the new entity.

Language Barriers. Cross-border mergers may result in the combining of nationalities with different primary languages. The inability for employees to communicate directly in the same language can make integrating and working together very difficult. For instance, the merger between Age Engineering (England) and Nouvelle Compagnie (France) ran into difficulties due to language differences. The merged company decided to hold meetings in the language of the country of the meeting location. Since most meetings were in France, they were carried out in French. However, this proved to be quite difficult for the British:

”Most of their managers, and all but one of their directors, had an engineering background, and so might be expected to have generally poor linguistic aptitudes.  Those interviewees who had attended meetings conducted in French admitted that communication was a slow and laborious process, in which they frequently had to resort to drawing diagrams. At times this was extremely frustrating, particularly because their French counterparts, most of whom were professional managers, were more linguistically competent in English than they were in French.”5

Translation services may not have resolved the communication issues. Oftentimes with translation, subtleties and nuances are difficult to convey and time delays cause inconveniences or stifle the flow of collaboration.

Even when counterparts can speak the same language, there are still contextual differences and cultural nuances that can alter the relative definitions of certain words. For example, one American accountant, while in a business meeting in the U.K., used a term that in the U.S. is innocent in meaning, but is actually very offensive in the U.K. The awkward result in that meeting was the direct effect of a language barrier within the same tongue.

In addition, company-specific terms or slang can also prove to be a type of “language barrier”:

 ”A cross-border merger or an acquisition may also introduce a new ‘company speak’. For example, the American-based corporation, General Electric, acquired the Finnish company, Instrumentarium, in 2003. Not only did the employees of the Finnish unit need to activate their skills in English, but they also had to quickly pick up the codes and abbreviations widely used in communications within General Electric.”6

Absent proper explanation, company-specific terms could alienate new employees. Implementing a company-wide, primary language will help facilitate overall company communication during each phase in the cross-border M&A process.

Communication Style

High-Context vs. Low-Context (Meyer). In a merger between U.S. Gillette and Chinese Nanfu, “Liu, a 38-year-old researcher at Nanfu said: ‘I think that Americans are more open than us. It is easy to communicate with Americans because they are direct. They will tell you either they agree with you or disagree with you frankly.’ James, a 42-year-old manager from Nanfu agreed: ‘I think Americans are very straightforward. There are fewer mind games going on.’”7

In this example, the Chinese Nanfu employees noticed a cultural difference referred to as high- and low-context. High-context and low-context refer to the amount of information that is explicitly communicated as opposed to implied messages. In a high-context culture, information is transmitted with high levels of nuance. The intended message is often interpreted only through layers of nuance and sophistication. In contrast, the U.S. is considered one of the lowest context cultures in the world. U.S. nationals are more likely to express themselves in a straightforward manner and interpret communication at its face value.8 Figure 1.1 illustrates the spectrum of low versus high context countries.Figure 1.1: Adapted from Meyer 2014

This difference in context can cause misunderstandings between cultures. An American may not pick up on high-context cues common in countries such as India. One researcher suggested that if an American inquired about the progress of certain project, an Indian coworker might reply with statements like, “It turned out to be quite a big job, didn’t it?” and “When are they expecting to see the new application?” The Indian co-worker—likely knowing exactly when the application is due—is hinting that the project will not be done by the deadline. However, the American is not likely to recognize the Indian’s concealed message.9 U.S. businesspeople should be aware that when communicating with other cultures, it is best to be on the lookout for hidden meanings beyond word choice.

Although the American style of straightforward directions and opinions may be appreciated—as by the Nanfu workers mentioned above—it could also cause inadvertent offense. The U.S. tendency to repeat key points may come across as a sign of distrust of the other party. Best practices in cross-border deal making involve understanding the degree of context one’s audience uses in communicating, explaining personal communication styles, maintaining patience, and seeking understanding when needed.

Principles-Based vs. Applications-Based (Meyer). Principles- vs. Applications-Based learning refers to the different approaches required to teach and persuade various cultures.10 A principles-based culture prefers to have the “why” explained first. Persuasion using over-arching principles and high-level reasoning will be most effective. Application based cultures prefer to root their understanding of specific applications by using specific examples. They will respond best to an example of how the concept works. To achieve the best results, companies should tailor their communication style to that of the target company; this will lead to better results in the deal-making process.

Regardless of the quality of the presentation, an idea could be rejected simply because the order of its presentation does not meet the needs of the audience culture. For example, one American engineer (an applications-first culture) presented her findings to a German firm (a principles-first culture). She began with clearly presenting her recommendations, as an American audience would prefer. However, the Germans instantly expressed confusion at her reasoning and methodology, ignoring her results. Her German audience would have responded more openly had she began her presentation with her methodology and building thereon. The engineer’s proposal was rejected after this presentation, not because her ideas were unreasonable, but because she had been unaware of how to best present them to her German counterparts.11When planning meetings and presentations with a target company of a different culture, remember to consider that the way they best receive the message is not necessarily the manner in which you are most adept in communicating. Figure 1.2 illustrates the spectrum of principles versus application first countries.

Figure 1.2: Adapted from Meyer 2014

 Direct vs. Indirect Negative Feedback (Meyer). Direct negative feedback refers to the preference to receive bad news in a straightforward manner. Indirect negative feedback is the preference to “sugarcoat” criticism, cushioning the feedback with compliments and euphemisms. When giving and receiving feedback, it is important to adjust one’s delivery style or interpretation accordingly in order to convey the true message. Additionally, the understanding cultural setting is important; in direct feedback cultures, it is often fitting to give feedback to an individual in front of a group while indirect feedback cultures consider that offensive.

Meyer’s research suggests caution when trying to match feedback styles of another culture: “Don’t try to do it like them. Even in direct cultures, it is possible to be too direct and if you try to switch to their style you risk making things worse.”12 Instead, it may be most beneficial to start by clarifying one’s style of feedback by stating something along the lines of, “I am going to give you both positive and negative feedback, but all my points are equally important.” Leadership in merging companies should be highly aware of the feedback style of the other company’s culture in order to convey their message of needed improvements and praises to employees. Figure 1.3 illustrates the spectrum of direct versus indirect negative feedback countries.

Figure 1.3: Adapted from Meyer 2014

Mannerisms. The phrase “actions speak louder than words” is especially applicable to cross-cultural mergers and acquisitions. Although its implications are somewhat disputed, a famous study by Albert Mehrabian claims that over 50% of a communicated message is nonverbal.13 Body language and habits are often learned and interpreted since childhood and are likely to vary from culture to culture. If nonverbal communication methods are misunderstood, erroneous conclusions are likely to be made.

For instance, tensions arose subsequent to Lenovo’s (Chinese) acquisition of IBM’s PC division (American) due to misunderstandings related to differing views on the meaning of silence:

”In the meetings, the American staffs like to express their ideas, especially when decisions need to be made…while the Chinese employees always keep silence… In American culture, if you don’t express your idea, people assume you agree with the decision, and the proposal would be passed…. However, in Chinese culture, if you keep silence, that means you don’t agree… so at the beginning, we have made a few wrong decisions in joint meetings due to cultural differences.”14

This misunderstanding is just one of many that could occur based on mannerism differences, such as habits, hand gestures, or greeting styles. It may be useful to recruit the help of a native to navigate these complexities as well as to develop an awareness of one’s own cultural idiosyncrasies. Compromises or adjustments may be needed to facilitate clear communication.

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M&A Synergies Framework—Introduction

Companies pursue mergers and acquisitions (M&A) in hopes of realizing synergies from the successful combination of two or more business organizations. Synergies are the advantages resulting from M&A that make the combined organizations more effective than the sum of their separate parts. Typically, synergy refers to measurable financial results—for instance, higher profits or lower costs—in the combined whole company post M&A than the individual companies achieved independently. In essence, synergy is an attempt to make the equation, “1 + 1 = 3,” become true.

Developing the Mergers and Acquisitions Synergies Framework

Continue reading “M&A Synergies Framework—Introduction”