Corinthe Companies
Badenoch & Clark
The Evaluation of A Failed Cross – Border Acquisition
MSc Thesis
August 15, 2011
International Business & Management
Martijn Geleijnse
s1246763
Supervisor
Mr. W.W. Wijnbeek
This thesis provides a case study of the acquisition process between two companies from respectively The Netherlands and the UK in the labor market intermediation market. The objective is to find an explanation for the discontinuation of the activities of the acquired (Dutch) firm after the acquisition. This is done by describing the organizational contexts of both companies in the pre-, during and post-acquisition phase in order to determine the extent of strategic fit, cultural fit and structural fit in each phase. The results show that a low level of pre-acquisition fit between the acquiring and acquired firm resulted in post-acquisition turmoil and uncertainty among stakeholders. Furthermore, the choice of the acquiring firm to pursue a high level of integration, and grant a low level of autonomy for the acquired firm, increased the resistance against the acquisition among management and employees. Through drastic organizational restructures the acquiring firm managed to realize strategic, cultural and structural fit. This went however at the cost of destroyed value in the form of eliminated business units and lost human capital.
Keywords: cross-border, case study, acquisition, M&A, strategic fit, cultural fit, structural fit, assessment, evaluation, general strategy, core activities, organizational culture, national culture, structure
Acknowledgements
Chapter 1
Introduction - The Case
1
1.1
Initial Situation - Pre Acquisition (2005 - 2006)
1.2
Second Phase - During Acquisition (2006 - 2008)
1.3
Third Phase - Post acquisition (2008 - 2009)
1.4
Thesis Outline
Chapter 2
Research Framework
4
2.1
Research Objective & Research Questions
2.2
Research Motive
2.3
Research Approach
3.3
Conceptual Framework
Chapter 3
Theoretic Framework
8
3.1
Strategic Fit
3.2
Cultural Fit
3.3
Structural Fit
Chapter 4
Methodology
13
4.1
Research Method
4.2
Data Collection
4.3
Research Zero Measure and Time span
4.4
Data validity
4.5
Limitations
4.6
Measurement Tools
Chapter 5
Pre-Acquisition Phase (2005 – 2006)
21
5.1
Introduction
5.2
Company Profiles
Corinthe Companies
Company Background Key Drivers
Motive for International Expansion
Badenoch & Clark
Company Background Key Drivers
Motive for International Expansion
Formal Structures Production Structures Marketing Structures R&D Structures
5.6
Analysis
5.7
Sub-Conclusion
Chapter 6
During-Acquisition Phase (2006 – 2008)
43
6.1
Introduction
6.2
Background
6.3
Strategic Fit
General Strategies Core Activities6.4
Cultural Fit
Organizational Cultures6.5
Structural Fit
Formal Structures Production Structures Marketing Structures R&D Structures6.6
Analysis
6.7
Sub-Conclusion
Chapter 7
Post-Acquisition Phase (2008 – 2009)
53
6.1
Introduction
6.2
Background
6.3
Strategic Fit
General Strategies Core Activities6.4
Cultural Fit
Organizational Cultures6.5
Structural Fit
Formal Structures Production Structures Marketing Structures R&D Structures6.6
Analysis
6.7
Sub-Conclusion
Chapter 8
Analysis
62
Chapter 9
Conclusions & Suggestions for Further Research
64
References
66
Retainer-based fee
A form of compensation where the intermediation firm receives its service fee in multiple
installments (retainers) and thus gets paid an upfront fee without having to complete the assignment.
Contingency-based fee
A form of compensation in the labor market intermediary industry where the intermediation firm receives a fee only after successful completion of the assignment.
Corinthe Companies
The target firm or acquired firm. Dutch labor market intermediation company consisting of 4 subsidiaries.
Corinthe Executive Search
The executive search branch of Corinthe Companies.
Hey-Day
The interim management branch of Corinthe Companies.
30days
The permanent recruitment branch of Corinthe Companies.
Essential People
The temporary recruitment branch of Corinthe Companies.
Badenoch & Clark / Badenoch & Clark UK
The acquiring or parent firm. British labor market intermediation firm.
Badenoch & Clark International
The company that was the result of a restructuring of the former Corinthe Companies.
FaradayClark
The permanent recruitment branch of B&C International (former 30days).
Corinthe
The combined executive search and interim management branch of B&C International.
Badenoch & Clark Netherlands
“Corinthe Companies from Oegstgeest, part of Badenoch & Clark International, is moving up!
Last week the director of Corinthe Companies announced the companies’ international ambition: ‘After the acquisition by Badenoch & Clark in 2006, we have fully concentrated on further expansion, also outside our landslides. This year is starting very well with three new heavyweights on board!’”
Quote 2. Homepage Corinthe Companies, January 2010.
“Corinthe Companies, one of the Badenoch & Clark companies in Europe, will discontinue its business as per June 1st, 2009.
Chapter 1
Introduction -‐ The Case
I clearly remember the moments reading the quotes on the previous page. The first one was during my stay as an intern at Corinthe Companies, at that time one of the local heroes in the Dutch labor recruitment and executive search market. The second message I read not so long ago, while searching for input on the subject of my MSc Thesis. In order to find an explanation for the failed acquisition of Corinthe Companies, I decided to describe the two involved companies during different phases of the acquisition process. The result is a case study on the acquisition of Corinthe Companies by Badenoch & Clark.
The following section will give a brief overview of the case that is subject of this research in the pre-, during and post-acquisition phase. This will be followed by an outline of the remainder of the thesis.
1.1 Initial Situation – Pre Acquisition (2005 - 2006)
In 2005, two companies in the labor market intermediation industry1 decided the time was
ripe for an expansion of their business activities. One of these companies was Badenoch & Clark (B&C), one of UK’s leading labor recruitment firms. The other was Corinthe
Companies (Corinthe), one of the local heroes in the Dutch labor recruitment and executive search market.
B&C, founded in 1980 had built a very good reputation in the UK and at the time of
acquisition even been ranked 7th in the top-10 of best companies to work for in the UK.2
Corinthe, founded in 1989, grew from a small ‘éénpitter’ into a respected partner at boardroom level at many of the larger companies in the Netherlands. In the course of 2005, both companies developed plans for a European expansion, but were either lacking local knowledge, reputation and client base (B&C) or sufficient financial resources (Corinthe) to realize their international ambition.
In June 2006, B&C announced the acquisition of Corinthe Companies. The announcement of a marriage that would hardly make it into the bridal days.
1 For a brief introduction and elaboration and the nature and process of labor market intermediation see Appendix A.
1.2 Second Phase – During Acquisition (2006 – 2008)
Straight after the acquisition B&C started restructuring its European activities with the founding of B&C International. With a former B&C UK executive director as head of the European holding, three new companies were formed. First, the executive search and interim management activities were renamed Corinthe. Second, all permanent recruitment activities were brought under one single brand, FaradayClark. Finally, all temporary recruitment activities were rebranded into EssentialPeople. Soon after the restructuring, B&C started initiating integration programs, which consisted of seminars, workshops and European-wide social activities to familiarize Corinthe personnel with B&C and their way of working.
Through the acquisition, Corinthe gained the financial clout they needed to expand and enter the European market, starting with a German and Swiss subsidiary for its executive search branch, followed by a German subsidiary for EssentialPeople and FaradayClark. This resulted in the opening of a new office in Frankfurt in the beginning of 2007 and in Geneva the same year.
1.3 Third Phase – Post Acquisition (2008 - 2009)
Shortly after this expansion, the three ‘founding fathers’ of Corinthe Companies announced that they were leaving the company. Two other Corinthe directors that had been with the company for many years followed their paths. After a promising first year for the German and Swiss executive search subsidiaries, early summer 2008 B&C decided to ‘pull the plug’ from these activities in order to focus more on the company’s permanent and temporary recruitment activities. Results from the Dutch and Belgian permanent recruitment activities were however also disappointing which lead to extensive lay-offs in the late summer of 2008, followed by the resignation of the director of B&C International. The European activities came under direct supervision of the B&C UK board, which took drastic measures and decided to discontinue all executive search and interim management activities in the Netherlands.
1.4 Thesis Outline
The remainder of this thesis is structured as follows. In Chapter 2, the research objective, research questions and research approach will be discussed, followed by the research motive and the conceptual model. Chapter 3 will provide the theoretic framework for this thesis by discussing relevant literature on the variables in the conceptual model. In Chapter
4 the methodology used for this thesis will be elaborated on, together with the tools that
will be used to measure the variables presented in the conceptual model and described in the theoretical framework. Chapter 5 will present the research results for the
pre-acquisition phase. The during-pre-acquisition phase results will be presented in Chapter 6 followed by the results of the post-acquisition phase in Chapter 7. An analysis of and discussion on the full acquisition process will be provided in Chapter 8. Chapter 9 will present the author’s conclusions and recommendations for future researchers planning to engage into the assessment of cross-border acquisitions. The thesis outline is graphically represented in below figure.
Figure 1. Thesis Outline
Chapter 2
Research Framework
This chapter will present the research objective, research questions, research motive and research approach. Also, an attempt will be made to conceptualize the research problem and define a conceptual model.
2.1 Research Objective and Research Questions
The objective of this research is twofold. The primary aim is to find an explanation for the failure of the acquisition of Corinthe Companies by Badenoch & Clark. Secondly, with this research, the author aims to provide lessons for future companies planning to engage into cross-border M&A activities. The research objective will be achieved by answering the main research question:
“How have (dis-) similarities in the organizational contexts of both companies Influenced the acquisition process of Corinthe Companies by Badenoch & Clark?”
In order to answer this question, the following sub-questions will be addressed: 1. To what extent was there strategic fit, cultural fit and structural fit between
Corinthe Companies and Badenoch & Clark in the pre-acquisition phase? 2. To what extent was there strategic fit, cultural fit and structural fit between
Badenoch & Clark International and Badenoch & Clark UK in the during-acquisition phase?
3. To what extent was there strategic fit, cultural fit and structural fit between Badenoch & Clark Netherlands and Badenoch & Clark UK in the post-acquisition phase?
2.2
Research Motive
Personal
Theoretical
Besides a personal interest from the author, the failed acquisition case of Corinthe and B&C is also interesting from a theoretical point of view. Since the early 1970s Mergers &
Acquisitions have been a popular strategy for firms to expand their business. Traditionally the largest share of M&A’s took place between two companies from the same country. The rapid globalization of the world economy over the last 2 decades has however caused a high increase in firms engaging into cross-border M&A’s (Shimizu et al., 2004).
Scholars from disciplines ranging from strategic management, international business, human resource management and finance, have studied the field of cross-border M&A (Shimizu et al., 2004). One of the main findings in almost all these studies is that cross-border M&A’s bring many challenges for the involved firms, especially during the post-acquisition phase (a.o. Child et al., 2001). A study by KPMG even found that 53% of cross-border acquisitions destroyed shareholder value (Duncan and Mar, 2007).
Although many studies have touched on the subject of (cross-border) M&A, there is very limited research on the actual factors influencing the success and failure of M&A’s (Shimizu et al., 2004). The studies that do deal with M&A performance are mainly covering financial and economic performance indicators. When the aim is to explain the failure or success of an acquisition at firm-level, important factors such as synergy, strategy and culture also need to be examined (Shimizu et al., 2004).
2.3
Research approach
2.4 Conceptual Framework
This section will first provide the foundation of the conceptual model and a short discussion on the original framework. The conceptual model will be presented after, followed by a brief explanation on how the reader should interpret the model.
Foundation for Framework
Duncan and Mar (2007) were among the first to propose an evaluation framework for cross-border acquisitions, based on extensive literature research and tested through a case study of the entry (through acquisition) of UK’s largest Public Transport Provider into the US market (Duncan & Mar, 2007). This framework defines key determinants for a successful acquisition, but is also a useful tool to assess any cross-border acquisition process. According to Duncan and Mar (2007) four factors influence the success or failure of a cross-border acquisition: previous acquisition experience, strategic fit, cultural fit and the level of integration between the two firms. Although they come with interesting findings, their framework does not provide a sufficient starting point for this thesis. First of all, the ‘experience’ and ‘integration’ variables used by Duncan & Mtar cannot be operationalized in a consistent manner. Second, although they make notion of three acquisition phases, their framework does not describe the interaction of the variables over time and does therefore not take into account the dynamics of an acquisition.
Conceptual Model
This thesis proposes an alternative conceptual framework that does take into account the above-mentioned aspects. The acquisition of Corinthe by B&C will be analyzed and examined by describing the organizational context, i.e. strategy, culture and structure (Pearce & Robinson, 2003) of Corinthe, B&C and the acquisition results in three phases: pre-acquisition, during acquisition and post-acquisition. By doing so, it should be possible to determine the extent of: a) strategic fit b) cultural fit and c) structural fit in the different phases of acquisition. This framework is graphically represented below in figure 2.
Explanation of the Conceptual Model
Figure 2. Conceptual Model
!
Pre Acquisition
! ! During Acquisition ! Post Acquisition
Corinthe
Companies & Clark UK Badenoch & Clark Int. Badenoch & Clark UK Badenoch & Clark Int. Badenoch & Clark UK Badenoch
Chapter 3
Theoretic Framework
In order to provide a theoretic framework for the variables presented in the previous chapter, this chapter will present a review of existing literature and previous research on the concepts of strategic fit, cultural fit and structural fit in the context of cross-border acquisitions.
3.1 Strategic Fit
Many scholars on the subject of M&A have indicated strategic fit as an important element of acquisition success (Haspeslagh & Jemison, 1991; Hitt et al, 1998; Harrison et al., 1991; King, 2004; Cartwright, 2006; Capron, 2006). Strategic fit between the acquiring and target firm is critical if the objective is to profit from mutual synergies (Hubbard, 2001). Strategic fit comprises two important elements: fit between general strategies and fit between core activities. Both elements will be explained in the following.
Fit between General Strategies
First, the acquisition target firm strategy must be in line with the overall strategy of the acquiring firm (Duncan & Mtar, 2007). Haspelagh & Jemison (1987) argue that ‘ensuring consistency of the acquisition with the firm’s current strategic direction’ is one of the four most important managerial challenges in the acquisition process. Also the extent to which the ideas and mindsets of the top management teams of both firms are aligned should be taken into the analysis. This can include ‘the business philosophies of the two entities (e.g. return on investment versus market share), the timeframe for achieving these goals (e.g. long-term versus short-term) and the ways in which assets are utilized’ (Hubbard, 2001).
Fit between Core Activities
3.2 Cultural Fit
In many studies culture has been indicated as an important issue in the acquisition process. In a study by Norburn and Schoenberg (Child et al., 2001) it was found that no less than 65 percent of those acquirers who had experienced serious problems with post-acquisition integration said that these difficulties had been due to cultural differences. The complexity of post-acquisition management increases when ‘the acquiring and acquired firm have different values, beliefs and management philosophies’ (Barkema, et al., 1996). These differences can be ‘sources of conflict resulting in the benefits of the merger not being fully realized’ (Calori et al, 1994). This holds even more in cross-border mergers and acquisitions where besides two organizational cultures, also two national cultures need to be aligned.
Some researchers argue that in cross-border acquisitions members of one culture often try to dominate members of the other (Berry, 1980). This can create a situation in which employees of the acquired firm may experience a ‘loss of control and autonomy’
(Schweiger & Goulet, 2002). Research on M&A integration indicates furthermore that ‘the cultures of merging firms have to be compatible in order to integrate successfully’ (Stahl & Voigt, 2004).
In recent research it is argued that organizational culture has a more vital role in acquisition success than national culture (Schweiger & Goulet, 2002). Whereas national culture is country specific and relates primarily to deep-seated values and beliefs of members of a society (Sirmon & Lane, 2004), organizational culture is firm specific, relates to shared beliefs in organizational practices and processes (Hofstede, 1993) and is strongly influenced by the firms’ history (Duncan & Mtar, 2007). Moreover, differences in national cultures can manifest themselves in differences in organizational cultures and, national culture is associated with ‘attitudes that affect professional activities’ (Sirmon & Lane, 2004).
Fit between Organizational Cultures
There are many definitions of organizational culture. Verbeke et al. (1998) even found 54 different definitions of organizational culture between 1960 and 1993 (Sirmon and Lane, 2004). In this research the definition of Schein (1986) will be used, because it explains both how organizational culture is developed and how it influences the behavior of
organization’s members. Schein defines organizational culture as ‘a) a pattern of basic assumptions that b) a group has invented, discovered or developed in learning to cope with its problems of external adaptation and internal integration, that has c) worked well enough to be considered valid, and, d) therefore to be taught to new members to perceive, think and feel in relation to those problems’.
Accordingly, if an organizational culture determines or at least influences the way people in an organization perceive, think and feel, organizational cultural differences between two companies in an acquisition process can be a major source of post-acquisition conflict. According to Sarala (2010), when the organizational cultures of the acquiring and acquired firm differ, two problems can occur. First, organization members of both firms do not understand each other in terms of the way they deal with certain situations. Second, there might be uncertainty about the dominant culture and the feeling of members they do not fit in that culture.
Weber et al. (1996) furthermore found that differing organizational cultures between acquiring and acquired firm decreased top managers' cooperation and increased negative attitudes toward the acquisition. Finally, partners with dissimilar organizational cultures will be less likely to ‘effectively achieve the alliance's primary value-creating activities, even when the necessary resources are present’ (Sirmon and Lane, 2004).
Fit between National Cultures
Cultural difficulties in cross-border mergers or acquisitions are believed to increase with higher levels of national cultural distance between the involved firms. The cultural distance concept holds that ‘the difficulties, costs, and risks associated with cross-cultural contact increase with growing cultural differences between two individuals, groups, or
organizations’ (Stahl & Voigt, 2004). Research has shown that in general, the larger the cultural differences between firms, the more their organizational and managerial practices
differ and the greater the amount of ‘acculturative stress’3 (Slangen, 2006).
However, national culture cannot be approached solely from the cultural distance point of view, where countries of origin are compared on the four culture dimensions: individualism, power distance, masculinity and risk avoidance (Hofstede, 1993). In his study on the merger between British Steel and Hoogovens, Van Os (2008) provides some valid arguments why Hofstede’s approach alone might not be sufficient for research into the performance of
3 Acculturative stress is the “disruptive tension that is felt by members of a culture when they are required to
Dutch-UK mergers or acquisitions. In order to get a complete view, also what Shimizu et al. (2004) refer to as ‘institutional distance’ should be taken into consideration.
Institutional Distance
Calori et al. (1994) suggested that, at a national level, social and political institutions form the context in which managerial practices develop and are applied. Thus, differences in institutions across diverse countries can result in different managerial practices.
Industrial relations, professional training and education, access to financial resources through financial institutions, and the participation rights of employees all contribute to the institutional infrastructure (Shimizu et al., 2004). Where the institutional distance (difference) between two countries is high, conflict between managers and employees of the two firms is likely to increase.
Hall & Soskice (2008) make a distinction between liberal market economies (LME) and coordinated market economies (CME). An important difference between CME and LME firms can be found in the way in which both labor markets function. Because in an LME labor markets are fluid, it is relative easy to lay off personnel. LME firms tend to 'hire and fire' personnel in order to quickly respond to movements in the market. When profits are decreasing, a common response for LME firms is therefore cutting in staff. The LME system thus makes it less attractive for firms to 'pursue strategies based on promises of long-term employment' (Hall & Soskice, 2008).
In contrast, in CMEs employees are protected by strict labor laws and have a high social security. Because of the high costs associated with laying off personnel, CME firms will pursue more long-term employment strategies and will try to increase productivity in times of economic downfall instead of cutting directly in personnel costs.
Hall & Soskice state that the UK is an archetypal LME and Germany a clear example of a CME. Historian J. Touwen made an attempt to describe how the Dutch economy relates to these two types (Van Os, 2008). He found that although from the 1950s to the 1980s The Netherlands were a typical CME, the last two decades the system has shifted more towards
an LME, but still has some clear CME characteristics4. Hall & Soskice (2008) also classify The
Netherlands as a CME. This might thus be a potential influence on the acquisition process and will be taken into account in this research.
4 In this thesis, only those aspects for which the UK and The Netherlands are dissimilar will be taken into account.
3.3 Structural Fit
A final critical success determinant is the level of structural integration or structural fit. An organizational structure determines for a large part how tasks and responsibilities are divided and coordinated among an organization’s members. In case of a merger or acquisition, to a larger or lesser extent, a collision of two or more structures will be necessary.
The level of integration of an acquired company into the structure of the acquiring
company is for a large part dependent on the strategic objective of the acquisition (Bower, 2001). If the strategic objective demands high interaction and a merge between business units, (brand) identities, routines or management practices between acquired and acquiring firm, there is a high risk of culture-related conflicts to occur (Slangen, 2006). This risk increases with increasing national cultural distance and is thus likelier to occur in cross-border acquisitions. When the need for integration of business activities is low, the risk of conflict between members of both organizations will also be low.
Structural fit thus deals with two aspects of integration. First, the extent to which the formal structures of both firms are integrated and second, the way in which the integration of the formal structures is managed. The greater the integration, the closer the
Chapter 4
Methodology
4.1 Research method
In line with Yin (1994) this research will be done through an explanatory case study
approach. Yin states that ‘using a case study is of strategic advantage when the objective is to examine a process where there is no need or possibility for the researchers to exercise control over the behavioral events and process’.
Duncan and Mtar (2007) note that instead of testing any specific hypotheses, using a case study makes it possible to gain a good insight into the organizations involved and the overall process of acquisition. Moreover, a case study approach enables examining how key factors in the acquisition process interact over time.
In order to determine how the acquisition by Badenoch & Clark has influenced the
discontinuation of Corinthe Companies, an in-depth analysis of the acquisition process will be conducted.
4.2 Data Collection
In order to construct the case study, a combination was made of 1) semi-structured
interviews with key players in the acquisition process; 2) company documents; 3) secondary data and 4) personal observation.
1. Interviews with key actors in the acquisition process
a. Founder of Corinthe Companies and leader of the Corinthe project team responsible for managing the acquisition
b. Managing Director of Corinthe Companies and part of the project team c. Managing Director of Corinthe Companies Deutschland from 2007 – 2008 and
part of the project team.
d. European Manager Badenoch & Clark, responsible for the integration process of the acquisition and chairman of the project team.
e. HR Manager Badenoch & Clark
The interviews were semi-structured and lasted 1 hour on average. This set-up allowed for extensive and detailed answers and anecdotes and gave room for exploring relevant points in more detail. All interviewees were asked the same questions around the same themes: previous acquisition experience, strategic fit, cultural fit and the integration process. Of course depending on their role in the acquisition process the knowledge or interest in specific themes differed per interviewee.
2. Company Documents
a. Business Plans (Corinthe)
b. Strategic Outlooks (Corinthe, B&C) c. Financial Planning (Corinthe)
d. Internal company presentations (Corinthe, B&C) e. Annual Reports (B&C)
3. Secondary Data a. Company websites b. Press Releases c. Newspaper articles d. Market Reports 4. Personal Observation
4.3 Research zero measure and time span
The zero measure5 (baseline) of the period investigated is one year before the acquisition
announcement in June 2006. This provides the opportunity to take into account any important events leading up to the acquisition and describing the state of the companies before they engaged into the acquisition. The total period of the acquisition process investigated is 4 years, from the year prior to the acquisition announcement in 2006 to the announcement that the activities of Corinthe Companies would be terminated in 2009. In order to provide a complete view of the firms, there will however be a brief description of both company’s histories.
4.4 Data Validity
According to Golafshani (2003) validity determines whether the research truly measures that which it was intended to measure or how truthful the research results are. Validity consists of two aspects: internal validity and external validity.
Internal validity refers to the extent to which a found relation may be causally interpreted. Like many (explanatory) case studies, this was also a concern for this thesis. This concern
has been dealt with by making (as much as possible) use of ‘pattern-matching’6. For each
key variable analyzed, a tested and validated measurement tool has been used. Furthermore, using multiple sources of evidence has increased the internal validity. Extern validity refers to the generalizability of the results found in the research. This is another concern in case studies in general and single case studies in specific. The
conceptual model and research construct used in this thesis are well replicable and can be applied in any case study analyzing a cross-border acquisition. The results of this thesis will also in general hold for UK based service firms acquiring a Dutch target firm. However, the results might vary due to differences in culture, economic conditions, personal
characteristics of stakeholders and other circumstances.
4.5 Limitations
This research has several limitations. First Badenoch & Clark did not provide access to the company archives, except for what was already publicly available online. Second, I was not allowed to contact any current employees or staff. Third, most of the stakeholders in the acquisition process were no longer working for both companies, which made it difficult to trace them. Finally, due to time limitations and the specific interest in this acquisition, this thesis is a single-case study. It might have been interesting to study multiple cases in order to determine whether the findings of this thesis also occur in similar cases.
6 Campbell (1975) described "pattern-matching" as a useful technique for linking data to research questions.
4.6 Measurement Tools
In order to analyze the influence of the separate determinants, several models and tools will be used. These will be presented and explained below.
Strategic fit
In order to determine if there is a strategic fit between the acquiring and acquired firm, there has to be an analysis on two levels, representing two of the main strategic challenges in the acquisition process: 1) ‘Fit of overall strategy’ i.e. ‘maintaining consistency with the acquiring company’s strategy’ (Haspelagh and Jemison, 1991); 2) ‘Fit between core
activities’ i.e. ‘aligning the acquired company with the strategic objective of the acquirer’ (Hubbard, 2000).
Overall Strategy
Although there are multiple models to describe and typify a company’s overall strategy (Tyndale, 2002), this research will make use of the Competing Values Framework of Treacy and Wiersema (1997). The framework consists of three generic strategies (or value
disciplines) through which companies can create value for their clients and distinguish themselves from competitors. The three strategies are displayed in below table.
Overall Strategy Business Orientation Key Features
Operational Excellence
Provide the client with reliable products or services at competitive prices, deliver with minimal difficulty or inconvenience
Speed, cost, process-oriented, quality, simple, dynamic
Client Intimacy Selling the client a total solution, not just a product or service
Personal, client relation, balance, high quality, professional, modern, human, long-term
Product Leadership Providing products/services that continually redefine the state of art
Quality, future oriented, passion, dynamic, thorough, craftsmanship, modern
Questionnaire
A questionnaire was filled in by each of the respondents interviewed for this thesis. Each respondent was asked to give points to a set of twelve questions on the organizations’ a) processes b) operational structure c) management systems and d) culture. Each question is linked to one of the overall strategies, which results in a clear insight into what strategy was pursued prior to the acquisition according to the leaders of the organization. The results are displayed and graphically represented in chapter 5.3.
Core Activities
The fit between the core activities of both companies will be examined by making use of a model proposed by Shelton (1988). This model determines the degree of diversification by assessing the acquisition on two dimensions: 1) extent of adding new products and 2) extent of serving new clients. In this way, acquisitions can be classified into four possible strategic fits, which are displayed in the figure below (see figure 3).
Cultural
fitThis thesis will determine the extent of cultural fit by describing and measuring a) the national cultures and institutional context of the countries of origin of both firms and b) their organizational cultures.
National Culture
The level of national cultural difference between an acquiring and acquired firm can be determined by comparing the scores of the two countries of origin on each of Hofstede’s (1993) intercultural dimensions, i.e. power distance, individualism, uncertainty avoidance and masculinity. However, in his research on potential cultural differences in the merger process of Royal Dutch Shell Group, Van Os (2008) points out that The Netherlands and The UK score rather similar on power distance and individualism. This thesis will thus only take those dimensions into consideration that might have had an influence on the acquisition process, i.e. uncertainty avoidance and masculinity.
Uncertainty avoidance relates to how society members feel and react when they are placed in uncertain or unknown situations. This can reflect in the extent to which countries or firms create procedures, rules and laws in order to deal with environmental uncertainty.
Related Complementary new service similar clients Unrelated new service new clients Similar similar service similar clients Related Supplementary similar service new clients Addi ng new s er vi ces
Serving new clients
Masculinity relates to how much a society values traditional male and female qualities. In masculine cultures, people will be more driven by ambition and display competitive behavior. Remuneration in these cultures is often linked to an employee’s individual performance. Feminine cultures will place more emphasis on teamwork and creating consensus. Reward systems in feminine cultures will be more related to the performance of the collective.
Institutional Context
A useful tool to operationalize the influence of the institutional context of the two companies is Hall & Soskice’s ‘Varieties of Capitalism’ concept (Van Os, 2008). Hall & Soskice defined two types of market economies: a) Liberal Market Economies (LMEs) in which companies coordinate their activities mainly through hierarchies and markets and b) Coordinated Market Economies (CMEs) in which companies coordinate their activities mainly through non-market related networks.
They provide a model through which it can be determined what type of market economy best resembles a country’s (institutional) characteristics (see table 2). This thesis will use this model as a starting point to determine to what extent both companies have elements of an LME and CME and to what extent this causes institutional distance.
Institutional Factor LME CME
Labor Markets Short-term labor contracts and low social security
Long-term labor contracts and high social security
Access to Financial Resources Dependant on capital markets and
value on stock market Non-dependant on capital market
Shareholder vs. Stakeholder
Approach Shareholder approach Stakeholder approach
Organizational Culture
The organizational cultures of both B&C and Corinthe will be described with the
Organizational Culture Assessment Instrument (OCAI). The OCAI is developed by Cameron & Quinn (Sarala, 2010) and is a validated research method to map organizational cultures. The OCAI is based on the Competing Values Framework of Quinn and Rohrbaugh (1983) who discovered two dimensions of organizational effectiveness with each two competing values: a) flexibility and change versus stability and control and b) internal orientation versus external orientation.
In the OCAI, these four competing values correspond with four organizational culture archetypes, which are described in table 3 and graphically represented in figure 4.
Type of Culture Indicators
open, friendly, family-like work environment
heads of organization are mentors or father figures
strong loyalty and tradition, high level of involvement Family Culture
focus on long-term client relations and development of human resources
dynamic, entrepreneurial and creative work environment
heads of organization are innovators and risk takers
important values are freedom, initiative and innovative leadership Adhocracy Culture
focus on long-term growth and accessing new resources
results oriented, competitive and demanding work environment
heads of organization are motivators and winners
important values are reputation and success Market Culture
focus on market share, market leadership, competitive pricing
formalized, structured work environment
heads of organization are skilled coordinators and organizers
many formal rules, procedures and strict planning Hierarchy Culture
focus on stability, predictability, efficiency, low-cost
Human relations model
Family Culture
Human oriented
Open systems model
Adhocracy Culture
Innovation oriented
Internal process model
Hierarchy Culture
Control oriented
Rational goal model
Market Culture Results oriented High Low External Internal
Orientation
Fl
exi
bi
li
ty
Figure 4. Competitive Values Framework by Cameron & Quinn Table 3. Four Organizational Culture Types (Quinn & Rohrbaugh, 1983)
Questionnaire
In order to determine to what extent the organizational cultures of Corinthe and B&C are a
mix of these four culture types, respondents have been asked to fill in questionnaires7. In
these questionnaires, respondents had to allocate 100 points to a number of statements (Appendix B) corresponding with one of the four culture types. The following factors of an organization are assessed: a) dominant characteristics; b) leadership style; c) binding; d) criteria for success and e) personnell management.
Structural Fit
The structural fit of the companies in the different phases of acquisition will be determined by describing and analyzing the companies' organizational structures. Information will be gathered from company doc*uments, interviews and the organizational charts. The organizational chart will acts as a blueprint and starting point for analysis. As Besanko et al. (2005) point out, an organizational chart can reveal important insights into the inner workings of the firm. For the purpose of this thesis the focus will be on the formal, production, marketing and R&D structures.
7 Respondents were asked to fill in an online questionnaire, developed and validated by Cameron & Quinn. For
Chapter 5
Pre Acquisition Phase (2005 – 2006)
5.1 Introduction
This chapter will describe the organizational contexts of Corinthe Companies and Badenoch & Clark in the phase prior to the acquisition. The objective of this chapter is to answer the first research sub-question:
“To what extent was there strategic fit, cultural fit and structural fit between Corinthe Companies and Badenoch & Clark in the pre-acquisition phase?”
This question will be answered by analyzing the (dis-) similarities in both firms’ strategies, cultures and structures in the pre-acquisition phase.
This chapter is structured as follows. Section 5.2 will provide the company profiles of Corinthe and B&C and describe the companies’ backgrounds, key drivers and motivations for international expansion. Section 5.3 will describe the strategies of both firms on overall and business unit level. Section 5.4 will describe the national and organizational cultures followed by a description of both companies’ structures. This chapter will end with an analysis of the pre-acquisition phase and a conclusion in which the first sub-question will be answered.
5.2 Company Profiles
In order to get a good understanding of both companies, first a brief overview of the background, structure and business model of Corinthe and B&C will be provided.
Corinthe Companies
Company Background
Corinthe was a specialized player in the field of labor market intermediation of higher educated (HBO) and academic (WO) human capital. Founded in 1989 by Jan Rapmund, CES was the oldest subsidiary of Corinthe Companies. The first assignment of Jan Rapmund was
the search and recruitment of an actuary8 for Aegon, a large Dutch insurance company. A
rather difficult assignment, considering that at that time there were not more than hundred actuaries actively employed in the labor market. Jan Rapmund fulfilled the assignment successfully and due to this success he acquired several follow-up assignments.
8 An actuary is a business professional who deals with the financial impact of risk and uncertainty. Actuaries
provide expert assessments of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms.
After Aegon, other insurance companies and pension funds became client of Corinthe and the network even expanded into the banking and asset management industry. Ever since these early years the client-focus of Corinthe has been on the financial services industry. Besides a constant growth of the executive search activities, Corinthe also diversified its business by applying a ‘multi-label’ strategy. It formulated the potential needs for its key clients and formed subsidiaries (labels) that each could provide a specific service with a specific approach to a client. With 30days it delivered recruitment services on a lower level (30days) with candidate annual salaries ranging from EUR 40k to EUR 80k. Hey-Day provided higher-level interim managers for large change projects for which it could charge around EUR 750 to EUR 1450 per day. With Essential People Corinthe provided in the need for temporary higher educated professionals. In this way Corinthe Companies became a full-service supplier. In 2001 Corinthe moved to an old but renovated and characteristic monastery in an up class neighborhood in Oegstgeest to expose a level of exclusivity towards it clients and candidates.
By 2006, Corinthe acted as a partner of its client firms in the search and selection for senior managers, directors and executives. Corinthe worked on a retainer-base, which means that a client compensates for the service in the form of a fee. This fee is based on the gross first years income of the placed candidate and is usually 35 percent of this income. The fee is paid in three installments (retainers), the first at the start of the assignment, the second on production of a short-list of candidates and the third when the candidate is successfully placed.
With the extensive network of Corinthe it provided clients access to higher educated and academic employees in The Netherlands. It did so in a wide variety of industries, although 75% of revenues were realized within the financial services industry (banking, insurances) in The Netherlands.
Key Drivers
Motive for International Expansion
Corinthe had a strong ambition to be a full-service provider for its key clients. It had already done so by establishing multiple companies for each specific labor recruitment need. In the course of the first years of the new millennium, the belief grew that the key industry in which it had a strong foothold, the financial services industry, would become more and more European.
“At that time we saw our key clients pursuing a strategy that was focusing less local and more and more European. Given that situation we identified two options: becoming a European player with a wide international presence, able to service our clients in multiple countries or focus on a specific local niche. Driven by new communication technologies and the thorough understanding of our client’s and candidates’ needs, we chose for the first.” (former director Corinthe Companies).
Badenoch & Clark
Company Background
Founded in 1980 by Alexander Badenoch and Headquartered in London, Badenoch & Clark has been providing temporary and permanent recruitment solutions in a wide range of professional disciplines and market sectors in the United Kingdom. The company has focused on and expanded into the accounting, financial services, banking, legal, insurance, property, public sector and human resource disciplines.
B&C worked on a non-exclusive, contingency base, which means that client firms could give the assignment for a job vacancy to multiple intermediary agencies (non-exclusivity) and that the client only has to pay a fee after a successful placement of a candidate.
Prior to the acquisition of Corinthe Companies in 2006, Badenoch & Clark had experienced a period of organizational change. B&C had been a subject of an international acquisition and was fully taken over in 1996 by Accustaff (currently MPS Group), a leading US provider of staffing services and listed on the NYSE. After a period of intensive acquisition in the US, for Accustaff, B&C was the ideal hub to the UK and mainland Europe. According to the official press release:”[Accustaff] … would continue to selectively look for opportunities in Europe and especially the UK, while proceeding an aggressive acquisition strategy in the US”9.
This acquisition was the starting point for a further expansion into the UK. Between 1980 and 1996 B&C had opened 6 new offices throughout the UK and had seen revenues increase up to nearly GBP 50 million. By 2006 B&C had over 700 employees spread over 15 offices in the UK. B&C was a preferred supplier for a significant proportion of FTSE 250 companies (industry and financial services), the top 200 UK law firms and key public sector agencies across the UK. Revenues in 2006 were estimated around GBP 350 million.
Key drivers
As a hundred percent subsidiary of the MPS Group, a NYSE listed company, the main aim of Badenoch & Clark (B&C) was creating shareholder value. Other key business drivers were realizing quarterly growth, both in turnover, employees and profit margin; becoming market leader in the UK and commence a European roll-out of its activities.
Motive for International Expansion
The main reason for B&C to expand their activities into Europe was to increase turnover and realize market-share growth. Being part of a stock market listed company, B&C had a strong focus on realizing turnover and profit growth and increasing market-share. It recognized that the opportunities for growth in the UK market were declining for its most profitable activity, the recruitment of temporary professionals. In Europe, and especially in The Netherlands, this market was growing and provided a welcome opportunity for B&C to increase both turnover and market-share.
"The Netherlands was one of Europe's largest users of temporary professionals. We believed the conditions were right for us to continue to expand our professional staffing business outside the UK. We also noticed that higher educated professionals became less bound to their country of origin and worked more and more abroad. Europe was becoming one big marketplace and we wanted to be the best in servicing this market" (former director of B&C).
5.3 Strategic Fit
This section will describe the strategies of Corinthe and B&C on a general and core activities level in order to determine to what extent there was a pre-acquisition strategic fit between the two companies.
General Strategies
In order to determine whether there was a strategic fit prior to the acquisition between acquiring firm B&C and target firm Corinthe, this section will make an attempt to describe and compare the general (or generic) strategies of both firms.
Below table holds the results for the general strategy questionnaire (Appendix A), followed by a graphical representation of the results.
General Strategy B&C Score (out of 20) Corinthe score (out of 20)
Operational Excellence 17 6
Client Intimacy 10.5 18
Product Leadership 4.5 7.5
Badenoch & Clark
The general strategy of B&C could best be described as one of ‘Operational Excellence’. The company had strict processes and procedures in order to secure profit margins. Job interviews had fixed lengths, response times for client or candidate calls were formalized and conversion rates of client and candidate leads were closely monitored. Since B&C worked with contingency fee levels, it could charge no more than about 10%-20% of a placed candidate’s annual salary. With expensive staff as most important resource there was a constant pressure on margins and a need to work efficiently without sacrificing quality. For B&C such an input driven and results oriented approach was the only way to meet its clients’ needs and high standards and outperform its peers in a highly competitive market.
Corinthe Companies
Corinthe pursued a strategy that best fits the description of ‘Client Intimacy’. Even in a networking industry as that of labor market intermediation, the personal approach of Corinthe towards its clients and candidates was widely recognized amongst friend and foe. It was believed that in order to find a suitable candidate for a vacant position, there should not only be a match on paper, but also a match with the culture, people and general mindset at the clients company. To establish this, consultants took as much time as needed in order to get to know the candidate, both professionally as personal.
On the clients’ side, much effort was put into organizing client events, personal lunches and diners with key clients in order to function as a ‘sparring partner’ on both a
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Figure 5. Graphical representation general strategy scores Badenoch & Clark and Corinthe Companies
pre-acquisition phase
operational excellence
professional and personal level. In this way Corinthe did not offer merely a ‘pool of candidates’ but more a complete service package. For this it could charge a higher rate than most of its competitors. Fees ranged from 25%-33% of a candidates annual income and salary levels of assignments ranged from EUR 40k at 30days level to over EUR 200k at CES level. Because the average fees are higher than at e.g. B&C, consultants at Corinthe were able to have a smaller assignment portfolio to realize the same turnover. Therefore Corinthe consultants could focus more on quality than on quantity.
Fit Between Core Activities
This section will examine the degree of diversification from the perspective of the acquiring firm Badenoch & Clark in order to determine to what extent there was a fit between the core activities of both firms.
Determining to what extent the activities of Corinthe Companies were a diversification from the core activities of B&C is rather complex, looking at the ways in which both companies were structured. Corinthe was a collection of four companies, each providing a different type of service, with differing branding strategies to different client and
candidate segments. B&C on the other hand, although also providing multiple services, had one brand and one uniform way of communicating this to their target market. In the table below, the core activities of each of the Corinthe Companies are compared to the core-activities of B&C and assessed on the degree of diversification in terms of similarity of services provided and clients serviced (see table 6).
As the table shows, when looking at the core activities of each of the Corinthe Companies, the services provided by 30days (permanent recruitment) and EssentialPeople (temporary recruitment) were similar to the services B&C provided in the UK. B&C had no experience with the services provided by Hey-Day (interim management) and CES (executive search). Although B&C had clients in similar industries and functional areas in the UK, the clients of Corinthe were all new to B&C.
Company Core business Service Clients Type of Fit with B&C
30days Permanent recruitment similar new Related Supplementary
Essential People Temporary recruitment similar new Related Supplementary
Hey-Day Executive Interim Management new new Unrelated
CES Executive Search new new Unrelated
5.4 Cultural Fit
In this part, first the organizational cultures of B&C and Corinthe prior to the acquisition will be described and compared. After, the national cultures of both companies will be described. The objective is to find out whether there was a cultural fit between the two organizations in the pre-acquisition phase, and what role the presence or absence of this fit has played in the acquisition process.
Organizational Culture
The organizational cultures of both B&C and Corinthe will be described with the
Organizational Culture Assessment Instrument (OCAI) in order to determine to what extent the organizational cultures of Corinthe and B&C, prior to the acquisition, were a mix of the following four culture types: a) family culture b) adhocracy culture c) market culture and d) hierarchy culture. The score results are provided in below table 8 and graphically represented in figure 6.
Organizational Culture Type B&C Score (out of 100) Corinthe score (out of 100)
Family Culture 25 63
Adhocracy Culture 4 23
Market Culture 48 10
Hierarchy Culture 23 4
Table 6. OCAI scores Badenoch & Clark and Corinthe Companies in the pre-acquisition phase
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Corinthe Companies
Corinthe scores low on hierarchy culture (4 out of 100) and market culture (10 out of 100) and average on adhocracy culture (23 out of 100). With 68 points out of 100 the dominant organizational culture of Corinthe was the Family Culture. As in other family cultures, also at Corinthe, the leaders of the organization had the role of mentor and culture guardian. At Corinthe, the leaders were the three original company founders. Since the foundation of Corinthe in 1998, anybody that had been hired has had the final job interview with one of the owners.
‘I had to be sure that someone was not only qualified on paper, but also fitted in our team and shared our values. I am convinced that this was one of the ways through which we have managed to preserve our unique culture through the years.’ (former owner Corinthe).
Furthermore, the organization had a very personal character and a high level of loyalty, commitment and mutual trust amongst employees. Each company was characterized by a very informal approach towards both upper as lower level staff. Corinthe’s open door policy was even mentioned as being a key factor in sharing knowledge about clients and
candidates. The equality between management and staff furthermore showed from the fact that everybody used first names, even for the owners/directors.
Badenoch & Clark
B&C scored low on adhocracy culture (4 out of 100) and average on family culture (25 out of 100) and hierarchy culture (23 out of 100). With 48 out of 100 points, the dominant culture at B&C was the Market Culture.
B&C had a very results-driven culture, with a high workload per consultant, high competition among employees and a strong drive to become market leader in the UK recruitment industry. The clear leader of the organization was the companies managing director who had been with the company over 8 years in 2006. Although he had a strong drive to outperform its peers in the market and run a highly efficient operation, he was not the aggressive, highly competitive leader one might expect in a market culture.
National Culture
The level of national cultural difference between an acquiring and acquired firm can be determined by comparing the scores of the two countries of origin on each of Hofstede’s (1993) intercultural dimensions, i.e. power distance, individualism, uncertainty avoidance masculinity and long-term vs. short-term. Table 7 provides an overview of the scores of the UK and The Netherlands on each of Hofstede’s dimensions.
NL UK
Index score Rank Index score Rank
Power distance 38 27/39 35 30/39
Individualism/collectivism 80 5/39 89 3/39
Uncertainty avoidance 52 25/39 35 34/39
Masculinity/Femininity 14 37/39 66 8/39
As mentioned, for the purpose of this research, only the two dimensions on which the UK and The Netherlands have significant different scores, i.e. uncertainty avoidance and masculinity/femininity, will be taken into account. The following sections will describe to what extent these dimensions were present in the two firms.
Uncertainty Avoidance
Uncertainty avoidance relates to how society members feel and react when they are placed in uncertain or unknown situations. On an organizational level uncertainty can reflect in a strong presence of formal rules in e.g. negotiation processes, strict procedures and centralized tasks (Hofstede et al., 2010). Although The Netherlands score 52 on this dimension, which is relatively low, with 35 the UK scores even lower.
B&C
Recruitment is a people business and most of the added value comes from human
interaction and communication. In job interviews and client sales pitches, consultants have to rely on their gained experience and intuition. At B&C however, all the processes
supportive of the front-end were highly standardized: response times for returning phone calls or emails; fixed length of job interviews; the number of candidates to approach for one placement and the way interview notes were processed. For B&C, an efficient operation with standardized (back-office) processes was a key competitive advantage.
Corinthe
only been a uniform way of writing job offerings for a couple of months. Even content and layout of contracts varied between companies and consultants. For many years, consultants not only had the freedom to conduct a job interview or client intake as they wished, but also had freedom to organize their work (-processes) the way that suited them best.
Masculinity
Masculinity relates to how much a society values traditional male and female qualities (Hofstede, 1993). The UK scores 66 on this dimension, which is relatively high whereas The Netherlands scores 14, which is rather low. On a national level this implies that British culture highly values masculine characteristics as competitiveness, assertiveness and ambition. In The Netherlands feminine features as modesty, service and solidarity are valued higher.
B&C
Competitiveness was high at B&C. In the external environment, B&C strived to be a market leader and B&C had an extensive incentive program in order to encourage staff to reach their monthly targets. If targets were reached, staff members could get rewards in form of team commission, nights out, weekends away, promotions and month-end ‘Champagne Fridays’.
‘We had a big whiteboard where all individual scores of consultants were marked and ranked. With every new assignment or successful placement of a candidate, the consultant had to hit the special gong next to the whiteboard, once it hit, all consultanst stood up and cheered.’ (former B&C Director)
Corinthe
At Corinthe, 65% of the employees and 3 out of 6 directors were women. This number alone is an indication that Corinthe had more feminine than masculine features. Although every daughter company and every fee-earning consultant had a revenue target, there was no sign of internal rivalry or competitiveness. The company was even build on working together and actively stimulated cross-company meetings and events to share the network and knowledge among consultants. There was also a high degree of modesty and a ‘doe
maar normaal dan doe je al gek genoeg’10 mentality.
‘We had a special button in our recruitment software program you had to hit in order to complete an assignment. When the button was pressed, an applause sound went through the speakers, which was a little bit embarrassing.’ (former Corinthe staff-member)
‘When someone had a successful placement we had an old school-bell you had to ring, but to be honest: in the two years I have worked there I have heard the bell twice. Not because there have not been any placements, but because most of the people found it embarrassing or not-done to celebrate their success.’ (former Corinthe director)
Institutional Distance
This section will assess to what extent key characteristics of a CME and LME are reflected on a business level at Corinthe and B&C in the pre-acquisition phase. In this way it can be determined whether any differences in the institutional settings of the countries of origin of both firms had an influence on their business practice and might thus have had an influence on the acquisition process. The results are presented in table 8.
Institutional Factor Business System Feature B&C Corinthe Short-term labor contracts and low
social security
•
Labor Markets
Long-term labor contracts and high
social security
•
Dependant on capital markets and
value on stock market
•
Access to Financial Resources
Non-dependant on capital market
•
Shareholder approach
•
Shareholder vs. Stakeholder Approach
Stakeholder approach
•
Labor Markets
At Corinthe, employees were by default offered permanent, non-periodic determined contracts. B&C on the other hand, maintained short-term contracts, which enabled them to respond quickly to environmental and economic influences, e.g. when after a disappointing quarter in 2008, eight percent of its UK workforce was laid off.
"A sharp decline in profit over the last quarter of 2008 had affected the flow of business. It was a necessary step to ensure the business remained strong for the future" (former B&C director). Access to Financial Resources
Badenoch & Clark was heavily dependant on the capital markets for their access to
financial resources. As 100 percent daughter of a NYSE listed company, the main driver for the terms on which it could gain financial resources was its market value. Corinthe on the contrary was funded mainly with the private capital of the owners.
