When Fire Meets Water: The Influence of Corporate Cultural Misfit on Innovation Performance in M&A

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When Fire Meets Water: The Influence of Corporate Cultural Misfit on

Innovation Performance in M&A

Skandar Sediqi1_{, supervised by Marvin Hanisch}2_{, co-assessed by Pasi Kuusela}2 1 _{University of Groningen, The Netherlands}

2 _{Department of Innovation Management & Strategy, University of Groningen, The} Netherlands

E-mail: s.sediqi@gmail.com

Word count: 12155 (excluding references and appendices) Final version: 22 June, 2020

Abstract

In many respects, mergers & acquisitions (M&As) are like a marriage between two companies. In this marriage, culture has been acknowledged as a pivotal element for success, according to numerous strategic management studies. Nevertheless, many M&As do not live up to the expectation. They either fail as a consequence of different cultures or because of wrong expectations. In this study, the focus is on the influence of a corporate cultural misfit on innovation performance in the context of M&As. We propose that, in the presence of a corporate cultural misfit, firms experience a high level of transaction costs, misunderstandings and ineffective collaboration which subsequently lowers innovation performance. Furthermore, we argue that this relationship is moderated by the level of M&A experience and cultural tolerance to the extent that having a high level of both, weakens the negative relationship between corporate cultural misfit and innovation performance. The goal of this study is to both examine the direct relationship between a corporate cultural misfit and innovation performance and the proposed boundary conditions that this relationship relies on. Based on a sample of 346 M&A contracts from November 1994 till August 2019, our empirical evidence provided no support for the predicted direct effects or for the proposed boundary conditions. The data did not show that previous M&A experience or cultural tolerance weakened the negative impact of corporate cultural misfit on innovation performance. By conducting this research, we aim to have a novel contribution to the cultural aspect of M&As.

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Acknowledgement

A special thanks for writing this thesis goes out to Marvin Hanisch for his guidance, positivity and for the pleasant (sometimes everlasting) sessions we had throughout the data collection process. Regardless of whether the result has been more than satisfactory, your help, but at the same time demanding vision, resulted in a constant search for a higher level than normally is expected.

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1. Introduction

For many firms in the business world, enhancing innovation performance has become one of the core reasons to engage in M&As (Dezi et al., 2017; Shahzad et al., 2017; Dallocchio et al., 2016; Lee et al., 2015). According to Drucker (1998), innovation is the most efficient way to attaining a competitive advantage, sustainable performance, and development of business in the market. However, in actively pursuing innovation through M&As, firms are set for one of the biggest challenges in M&As which is having two firms come together and “expecting them to blend into a single seamless entity” (Siegenthaler, 2009, p.13). To a certain extent, these challenges in M&As are comparable to cross-cultural marriages in which the married couple needs to adjust to new circumstances, such as a new home, new relatives, and new daily routines. Next to the daily challenges, the firms engaging in the M&As have to deal with different cultures and dissimilar languages. A key question here is: do these cultural differences harm the synergistic potentials of M&As such, that these differences might lead to firms having a lower innovation performance? And if so, how can this effect be mitigated?

An extensive stream of literature has examined the impact of cultural misfit on M&A performance (Bauer, Matzler & Wolff, 2014; Vaara et al., 2014; Bansal, 2015; Lupina-Wegener et al., 2011; Galpin & Herndon, 2014). Most of this research draws the same conclusion: cultural misfits tend to have a negative relationship with M&A performance. Differences in organizational systems and management styles have been recognized as hampering the post-innovation performance (Kunisch et al., 2010). Consequently, the costs of these “cultural misfits” may typically be as high as 25% to 30% of the performance of the acquired organization (Walter, 1985). Even though the aforementioned potential costs of failure are high, more than 790,000 M&A transactions have been announced worldwide with a known value of over 57 trillion USD since 2000 (IMAA, 2020).

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Therefore, the purpose of this study is to extend our understanding about the role of certain moderators that influence the relationship between corporate cultural misfit and innovation performance in M&As. In line with prior literature (Inkpen & Tsang, 2005; Elsass & Veiga, 1994; Covin et al., 1997; Cartwright & Cooper, 1993), we argue that there is a negative relationship between corporate cultural misfit and innovation performance. We state that as incompatibility grows, there are increased chances of misunderstandings and escalated conflicts which cause barriers for the exchange of knowledge and ideas necessary for innovation (Sarala, 2010; Inkpen & Tsang, 2005). However, apart from the predicted negative relationship between cultural misfit and innovation performance, we argue that there are two important boundary conditions upon which the relationship is contingent. We describe that previous M&A experience and cultural tolerance of firms can possibly moderate the relationship between corporate cultural misfit and innovation performance (Barkema & Schijven, 2008; Nelson & Winter, 1982; Chakrabarti et al., 2009; Haleblian & Finkelstein, 1999). Haleblian & Finkelstein (1999) state that the more experienced buyers are able to differentiate the challenges of different types of acquisitions whereas inexperienced buyers tend to inappropriately generalize from their limited experience. Lastly, the ability to be tolerant, and therefore accept and manage diversity, is seen as a primary contributor in gaining benefits from diversity as opposed to negative associations (Dass & Parker, 1996).

We test our hypotheses based on a sample of 346 M&A contracts from the U.S. biopharmaceutical industry. The dataset spans from November 1994 till August 2019. Surprisingly, our results turned out to be insignificant. Consequently, we found no support for our hypotheses. This implies that, based on our results, we cannot state that there is a negative relationship between corporate cultural misfit and innovation performance. Similarly, we cannot conclude that either previous M&A experience or cultural tolerance has a moderating effect on the relationship between corporate cultural misfit and innovation performance.

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2. Theory and hypotheses development

2.1 Innovation performance

Innovation has become one of the core pillars of achievement for many firms in the business world (Shahzad et al. (2017). Consequently, firms are frequently resorting to M&A’s to bridge the gap between their existing condition and what they would like to achieve with regard to their innovation performance (Cefis & Marsili, 2014). Moreover, M&As are formed to reduce R&D costs, overcome a lack of knowledge and to increase the potential number of products in a firm’s pipeline besides merely financial reasons (Ahuja & Katila, 2001; Ranft & Lord, 2002). The increased need for innovative activities, originating from shorter product-life cycles, fast-evolving technologies and higher rates of product development lead firms to constantly adapting to the changing needs and wants of customers (Shahzad et al., 2017).

Early literature on organizational innovation, both anecdotal and empirical, often stressed the role of culture as a major determinant in meeting these needs and thus facilitating innovation (Robertson & Wind, 1980; Feldman, 1988; Deshpande et al., 1993). For firms that aim to meet these fast-changing needs, a supportive culture that encourages employees to collaborate and take initiative is favored. The reason for this is that a supportive culture evokes idea generation and knowledge exchange which, in turn, unlocks the ability to express creativity necessary for innovation (Chen et al., 2018; Prajogo & Ahmed, 2006). Recent findings by Hislop (2018) state that organizational innovation and learning are affected by the organizational values, beliefs, work environment, knowledge sharing, and all the cultural doings in the organization. Furthermore, Dakhli & de Clercq (2004) state that a higher level of shared values and common culture are associated with higher levels of innovation performance. They argue that specific aspects such as a shared vision can be regarded as a mechanism favoring knowledge integration between firms which can become an important aspect in the innovation process. In line with this, Dhanaraj et al. (2004) also argue that understanding knowledge throughout an organization, is facilitated and fostered by having a shared set of values and norms. Together with a common approach to doing business, the aforementioned characteristics aid in the recognition and interpretation of valuable knowledge.

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with developing new products. As a result, the competitive position of the new firm will be stronger (Al-Laham et al., 2010). In the end, for both the acquirer and target, the benefits of knowledge transfer and capability integration have been viewed as critical for innovation performance besides having a shared economic interest only (Birkinshaw et al., 2002; Sarala, 2016).

However, the necessities for having a supportive culture in which knowledge transfer can take place, might be disrupted by a corporate cultural misfit (Sarala, 2010). In the context of M&As and cultural misfit, it becomes less likely to have the aforementioned shared values, norms or similar business approaches that can support successful innovation performance. It seldom occurs that two independent firms show exact similarity in the way they organize work processes and in their expectations of how their employees should behave or what they should strive for (Bijlsma-Frankema, 2001). Moreover, these differences in structure, ways of working and unclear task divisions lead to misunderstandings, fueled emotional reactions and escalated conflicts (Weber & Menipaz, 2003). Since organizational culture is learned and realized through employees, having misunderstandings and complexities in the M&A process as a consequence of a misfit, might lead to the innovation performance being negatively affected (Sharifirad & Ataei, 2011).

Therefore, as we will argue later on, it is important for the sake of M&A success to see what the exact implications of a cultural misfit are for the innovation performance. More importantly, we want to consider how certain factors might contribute to mitigate these consequences as much as possible.

2.2 Corporate cultural misfit

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Consequently, an emerging and increasing field of research has looked at the cultural dynamics in M&As (Bauer, Matzler & Wolff, 2014). In the context of M&As, cultural misfit or incompatibility is one of the most cited explanations for the low success rates of M&As (Cartwright & Schoenberg, 2006; Lodorfos & Boateng, 2006; Nguyen & Kleiner, 2003). In fact, cultural incompatibility is often seen as the cause for a lack of projected performance, the resignation of key executives and lengthy clashes (Bijlsma-Frankema, 2001). According to Pautler (2003), who conducted a survey about consultants working in transnational M&As, managing cultural differences is listed as central to the success of an M&A deal. Moreover, Sarala (2010) argues that when firms are faced with corporate cultural misfits, the chances of post-acquisition conflicts will increase. Consequently, the aforementioned supportive culture, which serves as a foundation for innovation performance, cannot be established without overcoming several obstacles first. Sarala (2010) continues to state that these corporate cultural misfits lead to inferior post-acquisition innovation performance. In addition to that, when goals and cultures are incongruent, misunderstandings and conflicts between parties arise which result in a restriction of information exchange hereby negatively affecting the innovation performance (Inkpen & Tsang, 2005).

Instead of the earlier-described necessary culture for innovation performance, a culture of fear, misinterpretation, and clashes will come to the foreground. This is expressed in an increased level of workforce uncertainty, stress, hostility and less commitment among employees (Elsass & Veiga, 1994; Covin et al., 1997). Moreover, a lack of interaction will follow between employees from different cultures, while interaction is seen as a necessary factor for collaborating and decision-making (Slangen, 2006). Consequently, a culture is established which is not in line with the innovative culture that requires participation and a shared responsibility of all members (Kenny & Reedy, 2006). These negative associations between corporate cultural misfit and M&A performance can be grouped under the “cultural clashes” theory in which two or more different cultures in terms of philosophies, values, and missions unavoidably will encounter cultural collisions during the post-acquisition period and hence, encounter problems in the integration and performance (Huntington, 1993). This is regarded as one of the most challenging factors when firms decide to merge (Bijlsma-Frankema, 2001). In other words, cultural differences can lead to “us versus them” situations between different corporate cultural groups.

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high innovation performance. Thus, corporate cultural misfits can in some cases be complementary and can therefore have a positive synergistic impact on innovation performance (Blackard & Gibson, 2002; Shenkar, 2012). For example, firms dealing with corporate cultural misfits have the benefit of being exposed and have access to new, diverse routines and repertoires that previously were not available to these firms (Page, 2008; Morosini et el., 1998). In addition to that, Gomez-Mejia & Palich (1997) emphasize that in an organization with high cultural distance, managers will take different perspectives, viewpoints and solutions to important business issues in consideration. The large incompatibility that is present in terms of culture, leads to better comprehensiveness regarding decision-making processes. Moreover, this comprehensiveness can be used by acquiring firms to get rid of certain rigidities and to develop new knowledge resources (Barkema & Vermeulen, 1998). In other words, under certain circumstances, disagreements or incompatibilities can assist in problem-solving, accessing new sources of knowledge and creating synergies which leads to a higher innovation performance.

To conclude, some studies indeed found corporate cultural misfits to be negatively affecting different measures of M&A performance (Bijlsma-Frankema, 2001; Sarala, 2010; Inkpen & Tsang, 2005; Elsass & Veiga, 1994; Covin et al., 1997; Kenny & Reedy, 2006; Huntington, 1993), while others found that these differences are positively related to the success of M&A (Stahl & Voigt, 2004; Harris, 2004; Blackard & Gibson, 2002; Shenkar, 2012; Page, 2008; Morosoni et al., 1998; Gomez-Mejia & Palich, 1997; Barkema & Vermeulen, 1998). This makes it interesting since, as we will argue later on, these conflicting findings are a prime motivator for conducting our research. For our main hypothesis, we argue that firms that are culturally distant from each other experience a difference in organizational practices, conflict handling methods, and management styles. These differences lead to complications such as misunderstandings and misattributions of motives and intention between employees from distant cultures (Slangen, 2006). Moreover, these complications cause workforce uncertainty, stress, hostility and less commitment among employees. What follows is that firms are working in a culture that lacks employee support, trust and creativity which all are necessary for innovation (Chen et al., 2018; Prajogo & Ahmed, 2006; Hislop, 2018). The outcome is that the innovation performance is being impeded as a consequence of two incompatible cultures (Elsass & Veiga, 1994; Covin et al., 1997; Kenny & Reedy, 2006). Therefore, as a result of cultural misfit, these large transaction costs that first need to be resolved, lead to lower synergistic potentials and thus negatively affecting innovation performance in the context of M&A.

Hence, we argue the following:

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2.3 Boundary conditions

As we have seen, we have conflicting findings into play and we can reconcile those by looking at our moderators. These moderators are chosen based on disentangling the different and conflicting findings in the literature. We argue that certain boundary conditions can change the relationship we described in our first hypothesis. A relationship in which the negative association between corporate cultural misfit and innovation performance is weakened.

2.3.1 Previous M&A experience

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We argue that this accumulated experience results in firms knowing how an acquisition integration process unfolds and what is needed for the two firms to successfully collaborate in the new firm. This could mean that, in the presence of corporate cultural misfit, this experience can be used to minimalize the negative effects of incompatibilities on innovation performance. When firms have created the ability, through previous experiences, to adjust themselves to changing and demanding circumstances, future obstacles negatively influencing the M&A performance can be alleviated. Subsequently, the new firm can focus on its prime task which, in the case of innovation, is to develop new successful products and obtain patents.

Consequently, advancing the role of boundary factors in the process of corporate cultural misfit and M&As, we argue that this experience contributes to mitigate the negative effect of corporate cultural misfit on innovation performance.

Thus, we formulated the following hypothesis:

Hypothesis 2: M&A experience will moderate the relationship between corporate cultural misfit and innovation performance in M&A; that is, the relationship between corporate cultural misfit and innovation performance in M&A will be weaker when there is a high level of M&A experience between the partners.

2.3.2 Cultural tolerance

Besides expecting that the previous M&A experience of firms will moderate the relationship between corporate cultural misfit and innovation performance such that the negative association between a corporate cultural misfit and innovation performance will be weakened, we also believe that firms, who are culturally tolerant towards different cultures and people, will experience a weakened relationship between corporate cultural misfit and innovation performance in the context of M&A.

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In the context of M&A, this will mean that organizations that value plurality and diversity may have an easier acquisition integration process (Bellinger & Hillman, 2000). According to Bantel & Jackson (1989) and Cox et al. (1991), gender and ethnic diversity provides benefits in the form of increased creativity, better non-routine problem solving, more comprehensive consideration of alternatives and higher quality ideas (Triandis et al., 1994). Firms that have this diversity embedded in their culture, benefit from a greater ability to adjust to environmental changes (Cox & Blake, 1991). In responding to the increasing contemporary turbulent environment firms are facing, this ability provides firms with a critical asset to achieve firm success and survival (Prahalad & Hamel, 1994). On the contrary, diversity in gender and ethnicity may also lead to friction and dysfunctional or functional conflicts (Ilgen & Youtz, 1986; Triandis et al., 1994). However, Dass & Parker (1996) argue that tolerance or at least the ability to manage diversity can be regarded as the primary contributor to gaining benefits from diversity as opposed to negative associations.

We argue that as firms are culturally tolerant towards different cultures, the negative impact of corporate cultural misfit on innovation performance becomes less severe. Firms that value diversity and plurality, benefit from the post-integration process regardless of their differences. The reason for this is that the obstacle of incompatibility will no longer serve as the main issue. It can be overcome through the tolerance that is being expressed towards the different corporate culture. While in the absence of this tolerance, the two firms will experience the negative side of a misfit more severely. In other words, in a situation of cultural incompatibility between two firms, being culturally tolerant as a firm, aids in mitigating the negative effect of a corporate cultural misfit on innovation performance.

Therefore, we propose the following hypothesis:

Hypothesis 3: Cultural tolerance will moderate the relationship between corporate cultural misfit and innovation performance in M&A; that is, the relationship between corporate cultural misfit and innovation performance in M&A will be weaker when there is a high level of cultural tolerance between the partners.

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3. Methodology

In this section, we will describe the sample data that has been used for this study. Moreover, we will elaborate on how the data was collected and how the variables were constructed. Furthermore, the focus will be on the chosen analyses and on the methodological choices that have been made in this study.

3.1 Empirical setting

This study focuses on M&As in the U.S. biopharmaceutical industry. According to Shepherd (2018), biopharmaceutical companies have seen an enormous increase in M&A activity for pursuing innovation. In the past decade, there were so-called “mega-mergers” by, for example, Pfizer who bought Pharmacia for 60 billion US dollars or Roche who acquired Genentech for 46 billion US dollars (Goldsmith & Varela, 2017). These numbers, together with many other smaller deals that are closed by smaller firms, state the relevance and importance of M&As in the biopharmaceutical industry. The industry is regarded as a knowledge-intensive industry which corresponds with the prerequisites for achieving high innovation performance. Moreover, the biopharmaceutical industry has often been used to investigate the subject of innovation performance in M&As (Amir-Aslani & Chanel, 2016; Goldsmith & Varela, 2017). Besides merely financial motives, exploring new knowledge and the realization of synergies are also regarded as reasons to engage in M&As in the biopharmaceutical industry (Cefis & Marsili, 2014; Dezi et al., 2017; Shahzad et al., 2017; Dallocchio et al., 2016; Lee et al., 2015). Because of these reasons and the large number of M&A deals in the last decade (IMAA, 2020), we believe that this industry is an interesting and representative sector for studying the chosen variables in this paper.

3.2 Data collection and sample

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Some examples of variables that have a large number of missing values are cultural misfit and cultural tolerance. In our data collection process, the measurement of these two variables was constructed by analyzing mission statements and “about us” sections based on two dictionaries that were pre-defined in order to indicate misfit or tolerance. However, a large number of firms are either private or have incomplete annual reports for specific years which limits the possibility to derive the level of cultural misfit and cultural tolerance for each firm. Another example of a variable that has missing values which is on the high side, is deal size. In essence, the same explanation can be applied here since we were not able to find all the deal values of each M&A contract. Subsequently, this leads to missing values in the calculation of deal size. We will elaborate on the measurement and operationalization of our variables in the following section so that the explanation of the missing values make more sense.

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Lastly, we have collected a broad set of CEO characteristics for both the acquirer and target firm. We derived the information about the CEO’s from several sources. Examples of sources are: the BoardEx database that contained extensive information regarding a CEO’s position in a firm, his or her age, their nationality and also their tenure. For a large number of cases, the Bloomberg website which provided overviews of executives’ careers, and personal LinkedIn pages from which we were able to derive a CEO’s educational background, were also very helpful.

3.3 Measurements

The following section will provide an extensive overview of the variables and the measurements that have been used in this study. All our variables, except our dependent variable, have been standardized to be able to make comparisons on the same scale.

3.3.1 Dependent variable

Post-Innovation Performance. According to Zollo & Meier (2008), M&A performance is a multifaceted construct which means that there is not specifically a single way of measuring it. In order to set up a construct that does allow this variable to be measured, we chose to focus on the post-innovation performance measured by the number of patents granted after the M&A. To measure post-innovation performance, we took the 3-year average number of patents granted to the acquirer after the M&A deal.

3.3.2 Independent variable

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similarity, we have put a -1 in front of the cultural fit variable within Stata in order to calculate the cultural misfit variable.

3.3.3 Moderating variables

Previous M&A Experience Acquirer. The previous experience of firms is likely to influence future M&A deals (Barkema & Schijven, 2008; Nelson & Winter, 1982; Chakrabarti et al., 2009; Haleblian & Finkelstein, 1999; Amburgey et al., 1990; Al-Laham et al., 2010). For measuring the previous M&A experience, the number of past M&A involvements for both the acquirer and the target will be looked at. We did this by clustering all firms and give them a unique cluster ID. Subsequently, we connected these cluster ID’s to the contract date to generate two new variables that captured the previous experiences of both firms: “suma”, the sum of previous experiences for the acquirer, and “sumt” the sum of previous experiences for the target. Our focus in the regression and moderation analysis was on the acquirer while we took the past experience of the target as a control variable.

Cultural Tolerance. In terms of measuring cultural tolerance, we used the same approach as for the corporate cultural misfit measurement. However, for cultural tolerance, we looked at the ‘’breadth’’ of a mission statement in terms of the variety of value-related words used. We developed a dictionary that included 75 synonyms of “tolerance” and words that more or less captured the same meaning as the word “tolerance” (Appendix B). Subsequently, this dictionary was analyzed by using computer-aided content analysis. This analysis gave us an overview of whether firms used one of the words in the dictionary for their mission statements. Consequently, we were able to make inferences, based on our method, about the cultural tolerance level of the firms in our sample.

3.3.4 Control variables

Prior research has stated the importance of control variables in order to determine to what extent our independent variables behave as predicted (Nielsen & Raswant, 2018). In this study, we control for several confounding factors on the individual level, firm level and deal level.

Individual level:

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transformational period like an M&A due to his or her founder status. This, in turn, reduces the aforementioned battles and conflicts that normally may arise (Fischer & Pollock, 2004). We operationalized this control variable by indicating a “0” for non-founder CEO and a “1” for founder-CEO.

CEO Tenure. CEO’s are a seen as critical determinants of the innovation process as they are the primary decision-makers thereby influencing the inputs and outputs of the innovation funnel (Koo, 2019; Wong et al., 2017; Wu, 2014). However, according to several scholars, CEO’s that just start have a knowledge and power deficit (Hambrick & Fukutomi, 1991; McClelland, Liang & Barker, 2010). As time progresses, CEO’s tend to avoid risky and long-term innovation activities due to a narrower set of information. This set of information and their limited knowledge base results from their “complacent with prior success”. Moreover, they develop a belief of the possession of sufficient expertise which causes them to lose their connection with the external environment (Miller, 1991).

Firm level:

Firm Size. In the M&A literature, there seems to be a large disunity regarding the impact of firm size on innovation. According to Ahuja (2000), the size of the firm impacts the extent to which firms collaborate with other firms. Moreover, firm size can cause scale effects which, in turn, affect the innovation performance of a firm (Lahiri & Narayanan, 2013). Furthermore, in the innovation process, the assimilation of new knowledge is pivotal. Consequently, Dong & Yang (2016) state that size influences a firm’s ability to assimilate external generated knowledge. However, according to Phene & Almeida (2008), size can also lead to loss of managerial control or to the attenuation of incentives of individual scientists in larger firms, which leads to inefficiencies and less innovation. We followed previous works and operationalized firm size by taking the natural logarithm of total assets one year prior to the deal.

Previous M&A Experience Target. As mentioned in our theory part, several researchers have theoretically argued and empirically proven that the previous experience of firms affect their future endeavors. They develop routines and accumulate knowledge which they can use and apply to new circumstances in future M&A deals. We therefore take into account the previous experience of the acquirer as a moderator while we control for the previous experience of the target.

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the Fortune website a year before the M&A, then the firm would be marked with a “1”. If not, we used a “0” to indicate that the firm was not listed on the Fortune website.

Return on Assets (ROA). In line with prior works in the M&A literature, we also accounted for the previous financial performance of the acquiring firm by looking at the return on assets of the acquiring firm (Salvi et al., 2018; Das & Kapil, 2012). We believe that this is relevant, since a firm’s previous financial performance could indicate to which extent a firm can allocate its money to different departments like R&D, and thus innovation (Greve, 2003). We operationalized this control variable by dividing income with total assets in the year prior to the M&A deal.

Pre-Innovation Performance. In order to make comparisons between pre-M&A and post-M&A, we control for the pre-innovation performance of the acquirer. We took the 3-year average number of patents granted to the acquirer before the M&A deal.

Dyadic/deal level:

Acquisition Method. During the data collection process, we also saved all press releases that were released for each M&A deal. In these press releases, we paid attention to whether the deal was a hostile takeover or an agreement that was finalized in mutual consent. For our analysis, we want to control for this as we believe that the “how” question in the process of closing a deal affects the subsequent culture and performance of firms. According to numerous researchers, hostile takeovers might stifle innovation and are often formed due to disciplinary motives (Atanassov, 2013; Jensen, 2003), while friendly takeovers are most likely pursued because of synergistic reasons (Jensen, 2003). However, Seru (2014) argues that hostile takeovers results in increased incentives for firms creating valuable innovations. We operationalized this variable by indicating a “0” for a friendly takeover and a “1” for a hostile takeover.

Contract Length (deal complexity). We believe that the contract length of a deal reflects the overall complexity of a transaction. If firms have a very complex transaction, the probability of firms having a longer contract will be larger. Moreover, according to Luypaert & De Maeseneire (2015), as there is more deal complexity, the process of completing a deal will take much more time. The consequences of possible disagreements in this process between firms and its stakeholders, might complicate the collaboration process which, in turn, can affect the subsequent innovation performance. Therefore, we believe that contract length (deal complexity) takes a relevant position in the M&A process. This is measured by the number of words in a contract.

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integration challenges that shift firms’ focus away from their primary goals. We measured deal size by taking the logarithm of deal value.

Deal Type. We controlled for deal type in order to distinguish between the different types of M&A and their corresponding effects.

Year effects:

Year fixed effects. We included year dummies for each year to control for year fixed effects. In the end, Stata omitted year dummies that had collinearity.

3.4 Analysis

We analyzed our data using the statistical software Stata (version 16.1). We have used an Ordinary Least Squares (OLS) regression to test our hypotheses. However, we first performed several tests in order to find out whether our variables and data corresponded with the well-known OLS assumptions. After performing these tests, we found out that we were dealing with heteroscedasticity (Appendix C). In order to obtain unbiased standard errors under heteroscedasticity, we used robust standard errors in our OLS regression.

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4. Results

In this section we will present the results from our study. We will start with an overview of the descriptive statistics after which the correlations between the variables will be described. Subsequently, the results of our OLS regression will be shown in order to evaluate our hypotheses.

4.1 Descriptive statistics and correlations

In table 1, we can see a summary of the descriptive statistics together with a correlation matrix. From this overview, we can derive the mean value, standard deviation, the minimum (min) and maximum (max), and the correlations between the variables.

As mentioned earlier in our data collection and sample section, 346 observations were left for our final sample. As we can see from the descriptive statistics, our dependent variable, post-innovation performance, has a large standard deviation (87.53). This means that the number of patents granted to firms might take a large range of values. In other words, the data has large deviations from the mean value which results in high variability. This is supported by looking at the differences between the minimum (0) and maximum (787) values. If we compare this to pre-innovation performance, we see more or less similar values. Regarding our independent variable, cultural misfit, we see that the mean value is low (0.73) as well as the standard deviation (0.14). This implies that the values of cultural misfit are close to the mean and do not vary to a large extent. This is confirmed by the minimum (0.40) and maximum (1) values. Another extreme example is contract length which has a very large variability. This can be explained by the number of words that are used in each contract. Some contracts are very detailed and extensive while others are not. This is indicated by the number of words and, thus, the difference in the minimum and maximum can be justified.

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Figure 2: The total number of previous M&A experience of all acquiring firms

Figure 3: The total number of tolerance synonyms used by acquirers in their mission statements

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First of all, we found a negative significant correlation between corporate cultural misfit and post-innovation performance (r = -0.17, p < 0.01). Based on this result, we can state that as corporate cultural misfit increases, the post-innovation performance of a firm decreases. However, despite of the variables having the predicted relationship and being statistically significant, the association between the two variables is weak. Furthermore, we can derive that firm size (r = 0.40, p < 0.01), reputation (r = 0.47, p < 0.01), deal size (r = 0.20, p < 0.01), and pre-innovation performance (r = 0.90, p< 0.01) are statistically significant and positively correlated with post-innovation performance. In the case of firm size this implies that as firm size increases, the post-post-innovation performance of the acquirer also increases. As mentioned earlier, size influences a firm’s ability to assimilate external generated knowledge (Dong & Yang, 2016). The positive and significant correlation between reputation and post-innovation performance can be explained since a strong reputation can be seen as a pivotal driver of innovation performance (Kalaignanam et al., 2007).

On the other hand, firm size has a statistically significant and negative correlation with corporate cultural misfit (r = -0.31, p < 0.01) which implies that as firm size increases, corporate cultural misfit decreases. We can conclude the same relationship for deal size and corporate cultural misfit (r = -0.35, p < 0.01). This indicates that with increasing M&A deal size, corporate cultural misfit decreases. Moreover, firm size and deal size have a moderate to strong correlation (r = 0.69, p < 0.01). This might imply that larger firms are often associated with larger M&A deals. In addition, there is a moderate relationship between the reputation of the acquirer and firm size (r = 0.52, p < 0.01) which indicates that as firm size increases, their reputation also increases. In addition to that, reputation and innovation performance have a significant and positive correlation (r = 0.51, p < 0.01). As an acquirer’s pre-innovation performance increases, the reputation of the acquirer increases too. Another interesting finding is that CEO founder is positively correlated with CEO tenure. From this outcome, we can conclude that when a CEO is also a founder of the firm, his or her tenure at that firm in that specific role increases. Lastly, we see that as the deal size of an M&A transaction increases, the amount of words that are used in a contract also increases (r = 0.32, p < 0.01). In other words, deal size and contract length (deal complexity) have a positive and significant correlation. This implies that larger M&A transactions need more words to write down all the agreements and special clauses. Therefore, this correlation can be seen as a justified and logical one.

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Variable Mean S.D. Min Max (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

(1) Post-Innovation Performance Acquirer 31.56 87.53 0.00 787.00 1.00

(2) Cultural Misfit 0.73 0.14 0.40 1.00 -0.17** 1.00

(3) Previous M&A Experience Acquirer 1.55 1.95 0.00 11.00 0.10 -0.18** 1.00

(4) Cultural Tolerance 2.76 4.07 0.00 48.00 0.10 -0.09 0.17** 1.00

(5) CEO Founder Acquirer 0.16 0.37 0.00 1.00 -0.11* 0.08 -0.08 -0.05 1.00

(6) CEO Tenure Acquirer 72.28 69.60 1.00 386.00 -0.09 0.06 0.07 0.13** 0.43** 1.00

(7) Firm Size 20.72 2.54 12.73 25.84 0.40** -0.31** 0.43** 0.15** -0.24** 0.00 1.00

(8) Previous M&A Experience Target 0.32 1.04 0.00 7.00 0.03 -0.20** 0.10 0.12* -0.12* 0.07 0.22** 1.00

(9) Reputation Acquirer 0.12 0.33 0.00 1.00 0.47** -0.17** 0.28** 0.06 -0.14** -0.00 0.52** 0.01 1.00

(10) Return on Assets -1.25 20.29 -376.83 1.63 0.02 0.04 -0.01 0.03 -0.13** -0.01 0.19** 0.02 0.02 1.00

(11) Acquisition Method 0.01 0.11 0.00 1.00 0.06 -0.11* -0.00 -0.00 -0.05 -0.08 0.13* 0.04 0.04 0.01 1.00

(12) Contract Length 40015.32 14211.72 2963.00 116942.00 -0.03 -0.14** 0.06 0.03 -0.11* 0.00 0.13* 0.11* 0.01 -0.08 0.09 1.00

(13) Deal Size 19.26 2.20 13.12 25.17 0.20** -0.35** 0.28** 0.10 -0.14** 0.02 0.69** 0.31** 0.35** 0.01 0.16** 0.32** 1.00

(14) Pre-Innovation Performance Acquirer 35.13 96.63 0.00 949.33 0.90** -0.19** 0.10 0.07 -0.12* -0.07 0.43** 0.05 0.51** 0.02 0.04 -0.03 0.24** 1.00

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4.2 Regression and hypothesis testing

In table 2, the results of the hypothesis testing are shown. We used an Ordinary Least Squares (OLS) regression in order to test our hypotheses. As mentioned earlier, we performed some necessary steps to decide whether our model equals the OLS assumptions for using OLS as a test method. Subsequently, we performed regression analyses and developed three models. Overall, our three models have a strong R2_{that improves from model 1 (R}2_{= 0.83) to}

model 3 (R2 _{= 0.84). Moreover, the log likelihood, which can be used to compare the fit of different coefficients, of}

model 1 (LL: -1727), model 2 (-1725) and model 3 (-1723) confirms that our models have improved sequentially. Our first model, model 1, is the base model in which the dependent variable, post-innovation performance, and all our control variables are included to measure the impact on post-innovation performance. CEO founder shows positive and statistically significant results (b = 7.90, p < 0.1). This means that when firms have a CEO founder instead of CEO non-founder, the number of patents granted by a firm will increase with 7.90. As mentioned earlier, CEO’s who are also founder of the company they work for, support and foster growth by capitalizing on new opportunities through the formulation and implementation of strategic initiatives (Finkle, 1998; Jayaraman et al., 2000). On the other hand, CEO tenure acquirer (b = -6.37, p < 0.1) and return on assets (b = -2.30, p < 0.05) have a negative and statistically significant relationship with post-innovation performance. This implies that as a CEO’s tenure increases, the innovation performance of the company decreases. Moreover, firms having a one unit increase in their return on assets, subsequently, see a decrease of 2.30 patents granted and therefore experience a lower post-innovation performance. Lastly, pre-post-innovation performance has a positive relationship with post-post-innovation performance and is statistically highly significant (b = 79.08, p < 0.001). If the number of patents granted to the acquirer before the M&A increases by 1, the number of patents granted to the acquirer after M&A increases with 79. As the result is highly significant, we can conclude that pre-innovation performance is a very good predictor for post-innovation performance.

In our second model, model 2, we have included all our independent variables, cultural misfit, previous M&A experience acquirer and cultural tolerance together with our control variables and dependent variable. In this model, we tested our main and direct effects. In line with our previous model, the same control variables, except acquisition method, remain to have a statistically significant relationship with our dependent variable, post-innovation performance. However, as we can see, our independent variables seem to have no statistically significant relationship with our dependent variable, post-innovation performance. This means that, according to our results, we do not find support for our first hypothesis in which we predicted that cultural misfit has a negative relationship with post-innovation performance. Consequently, we reject Hypothesis 1.

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acquirer or cultural tolerance. However, the interaction terms, cultural misfit x previous M&A experience acquirer and cultural misfit x cultural tolerance show statistically insignificant relationships with our dependent variable, post-innovation performance. This indicates that, based on our results, we do not find support for our moderation hypotheses. Moreover, we already did not find support for our direct effect in in model 2. In other words, we cannot conclude that our moderators weaken the negative relationship between corporate cultural misfit and post-innovation performance. Therefore, Hypothesis 2 and 3 are rejected.

Table 2: OLS regression results for innovation performance

VARIABLES Model 1 Model 2 Model 3

Cultural Misfit -1.19 -1.29

(1.82) (1.93)

Previous M&A Experience Acquirer 0.37 0.40

(2.52) (2.31)

Cultural Tolerance 4.03 4.87

(3.26) (3.70)

Cultural Misfit x Previous M&A Experience Acquirer -0.44

(1.44)

Cultural Misfit x Cultural Tolerance -4.51

(3.14)

CEO Founder Acquirer 7.90+ 8.92+ 9.00+

(4.66) (4.80) (4.90)

CEO Tenure Acquirer -6.37+ -6.93+ -7.42+

(3.77) (3.89) (4.01)

Firm Size 7.01 6.92 6.99

(5.74) (6.71) (6.60)

Previous M&A Experience Target 0.41 0.14 0.10

(1.34) (1.38) (1.36) Reputation Acquirer -6.06 -7.09 -7.63 (13.34) (13.01) (13.23) Return on Assets -2.30* -2.24+ -2.57* (1.10) (1.21) (1.27) Acquisition Method 11.33+ 10.43 11.73* (6.58) (6.83) (5.70) Contract Length 3.67 3.84 3.12 (2.96) (3.01) (2.77) Deal Size -4.11 -4.28 -4.06 (3.77) (3.93) (3.87)

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(4.14) (3.91) (3.85)

Year Fixed Effects Yes Yes Yes

Deal Type: Acquisition 0.00 0.00 0.00

(.) (.) (.)

Deal Type: All Stock Transaction -5.34 -3.29 -5.29

(5.35) (7.14) (5.56)

Deal Type: Majority Stock Purchase 28.18* 26.81* 25.93*

(11.22) (11.51) (12.04)

Deal Type: Merger -8.81 -8.41 -7.76

(6.73) (6.85) (6.89)

Deal Type: Minority Stock Purchase -3.90 -4.51 -5.53

(5.87) (5.42) (5.60)

Deal Type: Reverse Merger 0.27 -0.02 2.42

(4.47) (4.52) (5.86)

Deal Type: Stock for Stock 3.26 3.61 3.20

(9.22) (9.19) (9.89)

Deal Type: Stock for Stock Merger -6.26 -1.86 -5.07

(13.58) (14.36) (14.05)

R-squared 0.83 0.84 0.84

AIC 3522 3524 3524

BIC 3653 3666 3674

log-likelihood -1727 -1725 -1723

Robust standard errors in parentheses *** p<0.001, ** p<0.01, * p<0.05, + p<0.1

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4.3 Additional analyses

As we derived from the regression output, we could not find support for hypothesis 1. We examined the marginal effect of corporate cultural misfit on different percentile levels for post-innovation performance. In figure 4, we can see the marginal effects at the 1st_{, 5}th_{, 10}th_{, 25}th_{, 50}th_{, 75}th_{, 90}th_{, 95}th_{and 99}th_{percentile levels. If we look at the} marginal effects of our direct effect (Appendix E), we see that these are significant at every percentile except on the 1st_{. This implies that the point estimate of our regression is highly likely not equal to zero, this is supported by the} coefficient which is negative and smaller than 0. Since the test of the significance of our direct effect is based on our regression outputs, we cannot conclude that corporate cultural misfit has a significant negative relationship with post-innovation performance. In other words, the statistically insignificant outcomes from our regression output tells us that we cannot be certain whether the average effect is negative, positive or zero.

Figure 4: Marginal effect of Cultural Misfit on Innovation Performance

In order to further investigate the moderating results of our regression model, we have used additional analyses. In

figure 5 and 6, we can see the marginal effects of cultural tolerance and previous M&A experience at the 1st_{, 5}th_,

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Figure 5: Moderation margins plot for cultural misfit and previous M&A experience

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5. Discussion

In this section, we will discuss our previous findings in the context of our hypotheses. The predictions we have made in the beginning of this study will be interpreted to find out what the theoretical and managerial takeaways are from this research. Lastly, we will describe the limitations of this study in order to provide suggestions for future research.

5.1 Theoretical implications

This study focused on answering the question: does a corporate cultural misfit lead to lower innovation performance in the context of M&A? So far, the topic of M&As and cultural misfit has already been widely researched (Bijlsma-Frankema, 2001; Sarala, 2010; Inkpen & Tsang, 2005; Elsass & Veiga, 1994; Covin et al., 1997; Kenny & Reedy, 2006; Huntington, 1993). However, various researchers have emphasized that our understanding about the factors that could possibly mitigate the negative impact of corporate cultural misfit on innovation performance is limited (Gomes et al., 2013; Rottig & Reus, 2018; Rottig, 2017; Stahl & Voigt, 2008). These factors could moderate the relationship between corporate cultural misfit and innovation performance such that the negative impact of a misfit becomes less severe. Therefore, in this study, we aimed to contribute to the M&A literature by proposing important boundary conditions to the relationship between corporate cultural misfit and innovation performance.

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Apart from the fact that a negative and statistically significant correlation exists between corporate cultural misfit and innovation performance, this association is considered weak based on our study.

As we are dealing with insignificant results, it is challenging and uncertain to state whether incomplete data, insufficient robustness or a lack of a relationship altogether can explain these outcomes. According to previous literature, corporate cultural misfit almost always has an impact on M&A performance, whether it is negative or positive (Bijlsma-Frankema, 2001; Sarala, 2010; Inkpen & Tsang, 2005; Elsass & Veiga, 1994; Covin et al., 1997; Kenny & Reedy, 2006; Huntington, 1993; Stahl & Voigt, 2004; Harris, 2004; Blackard & Gibson, 2002; Shenkar, 2012; Page, 2008; Morosoni et al., 1998; Gomez-Mejia & Palich, 1997; Barkema & Vermeulen, 1998). Based on our study, we see that the coefficient of corporate cultural misfit is negative. This is in line with our prediction, however we do not have a significant effect.

Nevertheless, as we and other scholars have already theorized, the negative relationship between corporate cultural misfit and innovation performance has many facets (Gomes et al., 2013; Rottig & Reus, 2018; Rottig, 2017; Stahl & Voigt, 2008). In our case, we delineated these facets and predicted that this negative relationship was set to be weakened in the presence of previous M&A experience or firms being culturally tolerant towards divergent corporate cultures (Hypothesis 2 and 3). However, based on our results, we did not find statistical support for this relationship which might indicate, again, that there are several alternative factors that need to be considered in this relationship.

Although our predicted boundary conditions showed no moderating relationship with our main hypothesis, this does not necessarily mean that these conditions are unimportant. Firms can still choose to focus on being tolerant towards diverse cultures and build up experience so that they enrich themselves with different capabilities. Our study does not provide support for the constructed hypotheses, however tolerance and experience are concepts that, by itself, can provide firms with advantages as we described earlier. As Walzer (1997) stated, “tolerance makes differences possible, and differences make tolerance necessary”. Bases on our results, it might imply that the concept of tolerance on its own is not a sufficient moderator in the relationship between corporate cultural misfit and innovation performance. However, since our direct effect is not significant, we cannot make an univocal claim regarding this prediction.

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effective as we predicted. Consequently, instead of weakening the negative impact of a corporate cultural misfit on innovation performance, it might mean that the previous experience of a firm does not weaken the relationship at all.

Moreover, acquisitions from the past might be inappropriately applied to situations that seem superficially similar but, in fact, are completely different (Zollo & Singh, 2004; Gick & Holyoak, 1987). All these effects might, in the end, cancel each other out. However, based on our results, we cannot draw univocal conclusions about the moderating effect of previous M&A experience and cultural tolerance. Regardless of these alternative explanations, our study has taken novel approaches and measures to investigate the variables that, according to many scholars, have a relevant position in the M&A literature. Despite our results, corporate cultural misfit, previous M&A experience and cultural tolerance should remain to be researched in the context of M&A and innovation as there are still undiscovered patterns in these relationships.

Lastly, we will discuss some interesting and relevant additional findings. First of all, firm size seems to have no significant effect on innovation performance. To a certain extent, this finding contradicts previous works that have discussed the impact of firm size on innovation performance (Ahuja, 2000; Lahiri & Narayanan, 2013; Dong & Yang, 2016; Phene & Almeida, 2008). Nevertheless, this result remains interesting as Dong & Yang (2016) predicted that size would influence a firm’s ability to assimilate external generated knowledge. Moreover, the size of a firm represents the availability of resources that can be used in the innovation process (Beyene et al., 2016). Additionally, Andries & Faems (2013) argue that firm size affects the patenting activity of firms engaged in the innovation process. Therefore, our result regarding firm size is surprising and might serve as a suggestion for further research.

Second, based on our study, hostile takeovers (acquisition method) seem to have a positive significant impact on innovation performance. This finding is in line with Seru (2011) who states that as the threat of hostile takeovers is reduced, firms and especially executive managers will innovate less and waste more money, and therefore come up with inferior innovations. On the other hand, when the threat is high, firms and managers are more inclined to create valuable innovations due to pressures from external stakeholders. They theorize that according to the moral hazard theory, managers perform less well when they are not monitored or pressured.

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5.2 Managerial implications

The implications of our findings indicate that the challenges and ambiguity regarding the relationship between corporate cultural misfit and innovation performance in the M&A sector still persist. For firms, CEO’s and future research, the insignificant and inconsistent role of corporate cultural misfit in innovation are reasons to pay attention to alternative explanations that may affect their firm in the context of M&A. We cannot conclude that corporate cultural misfit should be entirely neglected. In fact, our findings imply that the need for firms to consider their own M&A process and evaluate their way of working during such processes persists to be as relevant as before. In order to grow as a firm, and avoid repetitive mistakes that will lead to missed chances of synergy creation, more general concepts as evaluations and reflections might contribute to this process. In the end, based on our study, cultural misfit does not necessarily have to be run away from. However, the exact impact of cultural misfit on post-innovation performance remains ambiguous.

5.3 Limitations and future research

As with any research, there are several limitations that provide the basis for scholars to conduct future research in this field. First of all, our study was carried out in the biopharmaceutical industry that largely consisted of American companies. As a consequence, our results are limited to our chosen sample. Future research might conduct similar analyses while extending the scope of the industry.

Second, the calculation of our dependent variable, post-innovation performance was based on the number of patents granted by the USPTO which is only limited to the United States. Scholars might consider the European Patent Office (EPO) to extend the reach of future research besides merely focusing on the USPTO.

Third, corporate cultural misfit has been measured in a novel and alternative way by using a dictionary in which inductively identified dimensions and associated words in “about us” sections were categorized into five dimensions (Hanisch et al., 2018). Based on our results, we could not find a statistically significant relationship with innovation performance. Despite this result, we still acknowledge and support the important role culture has in the context of M&As. However, we do suggest that future researchers take a look at different methods for measuring corporate cultural misfit. Not necessarily because of the insignificant findings, but also due to the complex construct of culture that is not captured by one single measure alone.

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consider to what previous experience exactly constitutes. In other words, what knowledge is being transferred from one M&A to another? And, to what extent can this knowledge be used for future deals? The heterogeneity and homogeneity of experience might play an important part in this.

Additionally, as described earlier, firms might express their tolerance towards divergent cultures in alternative ways. Future researchers might pay attention to measuring cultural tolerance in a different and more generic way. They might also use a different base word for measuring the concept of tolerance. Moreover, future scholars might consider to use the concept of diversity instead of tolerance to come to a broader understanding.

The generalizability of our findings is only limited to the sample and industry that was used for this study. Since our sample consisted of 346 deals, future scholars might consider repeating a similar study with a larger sample, in order to produce broad generalizability.

6. Conclusion

The purpose of our study was to investigate the relationship between corporate cultural misfit and innovation performance which we predicted to have important boundary conditions that would affect the existing association between the two variables. Based on a sample of 346 M&A contracts, we tested our hypotheses. However, apart from the theoretical relevance and the data that was used for this study, we could not statistically find support for our either of our hypotheses.

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When Fire Meets Water: The Influence of Corporate Cultural Misfit on Innovation Performance in M&A