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


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

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

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

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

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

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

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

Accounting Methodology

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

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

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

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

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

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

Professional Behavior

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

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

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

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

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

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

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

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

Next: Concluding Thoughts about the Lenovo-IBM Merger

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

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


Public Acceptance

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

Decision Making

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

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

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

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

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

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


Core Values

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

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

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

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

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

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


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

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

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

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

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

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


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

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

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

Lenovo management quickly learned that communication would be a key to successful integration. The combined company decided to make English the official language. Other communication issues, ranging from information availability to communication style, emerged as potential obstacles. The new management team recognized these issues and took proactive steps to help the entire organization learn and adapt to new communication styles and reduce misunderstandings.

Information Availability

 Openness. As Lenovo began its integration with IBM PC, early misunderstandings alerted leaders that clear communication would be critical to the acquisition’s success. The reality of integration required all workers to start at “ground zero,” meaning they were to avoid overvaluing past personal successes and instead focus on current issues.1 Thus, integration was purposefully set at a cautious pace.

Through this process, Lenovo placed priority on transparency and openness.  For example, Lenovo announced that compensation would continue as previously set and that there would be more opportunities for promotions. Clear and timely communication of this sort was intended to put employee concerns at ease.2 Other effective actions included encouraging senior vice presidents to communicate directly with the HR department—an unusual practice in the corporate world—as well as carry out executive retreats focused on open, sometimes brutally honest discussions of company issues.3

Language Barriers . Communication is severely inhibited in the presence of a language barrier. Lenovo set out to approach this difficulty head on. Soon after acquiring the IBM division, Lenovo established English as the official language of the whole company and encouraged employees at all locations to use it on a daily basis. The company began sponsoring English lessons at a training center to allow Chinese employees to improve their English abilities to better comply with this goal. As one Chinese executive said, “You know, our English was not very good at the beginning…then the company sponsored us to learn English at a training centre… now we can frequently deal with daily operations in English.”4 As time has passed, this language issue has been lessened at least to a degree, although it still causes some difficulties for non-proficient executives.5 In exchange, many English-speakers attempted to learn at least a few Chinese words. This is an act that demonstrates respect for foreign counterparts in any cross-boarder situation: “You do not have to learn an entire language. Phrases such as ‘hello’, ‘how are you’ and ‘please’ and ‘thank you’ are a real help in making the right impression.”6

However, it should be noted that even when both sides did understand the same words, there were still miscommunications based on different contextual meanings. One misunderstanding originated in the definition of “workers’ unions.” To the Chinese, the word simply meant workers’ councils that occasionally set up employee activities, while to the Americans, it meant strong political groups that had to be negotiated with.7 This definitional language barrier required patience and explanation when there were points of misunderstanding.

Communication Style

High Context vs. Low Context. High vs low context communication styles can be particularly troublesome between Chinese and U.S. employees since the two countries have very opposite styles. In fact, the U.S. is considered to be the lowest context culture in the world, meaning that communication is straightforward, literal, and repetitious. China is the opposite; the Chinese tend to use hidden meanings and contextual references.8

These contrasting communication techniques are taught in early childhood. Americans are often instructed that an effective presenter must “Tell them what you are going to tell them, then tell them, then tell them what you’ve told them.”9  On the other side of the world, Chinese children are taught to “read the air” of a conversation: “In Chinese culture, pang quao ce ji [beating around the bush] is a style that nurtures an implicit understanding. In Chinese culture, children are taught not to just hear the explicit words but also to focus on how something is said, and on what is not said.”10

Western Lenovo employees explained frustration with this difference: “When [the Chinese] say ‘yes’ they mean they understand, not that they agree.”11 This tendency confused Americans since to them, “yes” was understood as unambiguous agreement.

Principles Based vs. Applications Based. “Principles Based” cultures prefer to view situations first in a broad, “big picture” perspective. Alternatively, “Applications Based” cultures seek first to see ideas in action through specific examples.12 As Meyer phrases it, “Chinese people think from macro to micro, whereas Western people think from micro to macro” (111).

Lenovo management quickly realized this difference in perspective:

…Many Eastern colleagues [felt] that their Western counterparts were discussing only one case and not seeing the larger context, while many Westerners felt that the Easterners were less interested in solving the immediate problem. We started incorporating ways to do both: define the problem in a particular case and explain why it was important and relevant. Not only did this make collaboration much easier, it also helped both sides have a fuller and more detailed understanding of an issue, leading to better decision making for both the short and the long term.13

Lenovo’s understanding of this cultural differences allowed them to make the needed adjustments in order to proceed with intelligent decision making.

Direct vs. Indirect Negative Feedback. Although not nearly the most direct of the world’s countries, by comparison to China the U.S. is relatively more direct in its approach to negative feedback. To Chinese ears, a more straight-forward American approach could come off as harsh or insensitive.14 The Chinese prefer an indirect, softened communication style. For example, an American Lenovo executive described a Chinese employee beginning a conversation with many compliments, such as “you are a very nice person,” “you are kind,” and “your intentions are good,” before even beginning her actual purpose of breaking bad news regarding some human resource issues.15

It should be understood that “Using the word disagree comes across as too strong to the Chinese, and is also considered disrespectful. In general, when you don’t agree with someone, the matter must be handled with the utmost sensitivity. The Chinese call this ‘saving face.’”16 This means avoiding actions that could cause them to be embarrassed or dishonored. Gaining or losing “face” could occur through “their own actions, public knowledge of their actions, showing respect for others, compliments or criticism from third parties, mistakes (making them or avoiding them), experience, and age.”17 Thus, U.S. Lenovo employees had to learn the art of “saving face” in intercultural interactions.

It should be noted that language barriers complicate this element. As employee Gina Qiao stated, “While we Chinese can be sensitive about many things, sometimes we come across as a little too direct in translation. This stems partly from the structure of our language, which conveys information in fewer words, without all the preamble and poetry of English.”18 Thus, the distortions caused by translation must also be considered in order to communicate appropriately and avoid causing offense.

Mannerisms. The Chinese tend to use body language that can be hard for Westerners to comprehend: “Westerners sometimes have difficulty understanding this aspect of the Chinese culture, and may interpret nodding of the head as an affirmation, when in fact it is not […] Visitors would be wise to pay attention to key nonverbal clues such as the breaking of eye contact, looking down, or any hesitation to discuss an issue when a topic is brought up.”19

Lenovo employees experienced this variety of misunderstanding when initially beginning work between the American and Chinese cultures:

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.20

Silence for Chinese can mean thinking or doubt, while Americans are accustomed to interpreting the silence as either unanimous agreement or an awkward pause. Another Chinese manager complained: “I used to find it hard to get a word in on conference calls with American colleagues. … They’d say ‘I’m thinking out loud,’ but they aren’t thinking—they are speaking.” Lenovo encouraged workers to slow down the pace of meetings to allow for equal participation, as well as to seek first to understand and then be heard.21

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

Next: M&A Synergies Framework—The Role of Behavior in 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

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. 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