Master Thesis Laurine van Citters s2205203 E: laurinevancitters@gmail.com
T: 06-34930443 Date: June 20th 2016
Program: MSc. Change Management Supervisor: Prof. Dr. J. Surroca Second supervisor: Dr. H. C. Bruns
Word count: 11.144
Faculty of Economics and Business University of Groningen
How to prevent conflicts during M&A’s: the
interaction between cultural distance and an
ABSTRACT
Cultural distance is still a double-edged sword when it comes to its effects during M&A’s, despite the amount of research about this topic. To clarify the effects of cultural distance, this study focuses on the influence of leadership (CEO) origin and its interaction with cultural distance on post-merger
conflicts. The Leader-Member Exchange (LMX) theory and Social Identity Theory (SIT) support different effects of this relationship. Through a quantitative approach based on secondary data, the main-effects of cultural distance and an outsider as CEO on post-merger conflicts are tested, as well as their interaction. The results show that large cultural distance and an outsider as CEO separately increase post-merger conflicts, whereas the interaction between them decreases post-merger conflicts. These findings are not accounted for by one of the two theories, which means that the LMX theory and the SIT should both be nuanced, taking the findings of this study into account
.
TABLE OF CONTENT
1. Introduction ………... p. 3 – 5
2. Theoretical Background……… p. 5 – 9
2.1 Cultural distance and post-merger conflicts……… p. 5 – 6 2.2 Cultural distance and leadership……….. p. 6 – 7 2.3 The contrast between the LMX and the SIT……… p. 7 – 9
3. Methodology……… p. 9 – 14
3.1 Research design……… p. 9
3.2 Data collection……….. p. 10 – 11
3.3 The final sample………... p. 11
3.4 Measurements……….. p. 11 – 14
3.4.1 Dependent variable – Post-merger conflicts……… p. 11 – 12 3.4.2 Independent variables……….. p. 12 – 13 3.4.3 Control variables……….. p. 13 – 14 3.5 Statistical analyses……… p. 14 4. Results………... p. 14 – 17 4.1 Descriptive statistics………. p. 14 – 15 4.2 Regression analyses………. p. 16 – 17
5. Discussion & Conclusion……… p. 17 – 23 5.1 Theoretical implications – Similarity-attraction paradigm……….. p. 18 – 19 5.2 Theoretical implications – LMX and SIT……… p. 19 – 21 5.3 The interaction between cultural distance and an outsider CEO………….. p. 21 – 22 5.4 Managerial implications………... p. 22 5.5 Limitations and other future research directions……….. p. 22 – 23
6. References……… p. 23 – 27
1. INTRODUCTION
“Willingness to change is a strength, even if it means plunging part of the company into total confusion for a while.” – Jack Welch
As means for corporate development, mergers and acquisitions (M&A’s) have attracted the attention in the literature of many management disciplines (Cartwright & Schoenberg, 2006). Various factors affect the process and outcomes of such organizational changes. Nevertheless, the literature is divided about which success factors are most important (Cartwright & Schoenberg, 2006). The challenge is to choose the right actions that are in the power of an organization to generate success (Kavanagh & Ashkanasy, 2006). Taking this challenge, this study dives into an emerging field about success factors for post-merger performance: the research into the cultural dynamics, the integration processes and its management, during M&A’s. Although this field is already broadly developed, the exact influence of cultural dynamics on merger performance is still hard to determine (Cartwright & Schoenberg, 2006).
Culture can be defined as ‘the set of important assumptions, often unstated, that members of a community share in common’ (Sathe, 1985, p. 10). Hofstede (1983) argues that culture means the collective mental programming, the conditioning that members of groups share with each other. It affects actually all aspects of the way groups interact with each other (Chatterjee, 1992). A merger threatens the collective cultural identity of the organizational members in the firms, which means that cultural issues may be critical to merger success (Bligh, 2006). Confirming this finding, Weber (1996) discovered that the greater the cultural distance between the merging companies, the lower the
effectiveness of the integration process between the merging companies.
The integration process of the cultures is of importance during a merger, because it influences the eventual fit of the merging companies: poor cultural fit has been identified as one of the reasons for merger-failure (Cartwright & Schoenberg, 2006). Hofstede (1983) has widely investigated the influence of cultural distance on management and he found that distance has become one of the most crucial issues for the management of multicultural organizations, especially during management of international mergers. The national differences between merging companies are important for political, sociological and psychological reasons. Employees’ thinking is influenced by the symbolic value of the national culture. The managing of organizations and their cultures is affected by the distance between companies created by national cultures (Hofstede, 1980). In accordance to these findings, Cartwright and Cooper (1993) argue that the cost of cultural clashes that result from poor integration form about thirty percent of the performance of the acquired or merged firm(s).
the merger experience a lot of conflict during the post-merger phase, which results in higher personnel turnover (Buono et al., 1985). In their study, Weber and Camerer (2003) found that cultural conflicts play a large role in merger failure due to misunderstandings between members of the two firms of different nationalities, which is corresponding with the findings on the influence of cultural distance mentioned earlier in this study. In other words, the management of the cultural distance between merging firms is of great importance to prevent conflicts in the merged firm. It could be one of the influential factors to achieve success with merger implementation. This is the main issue that this paper tries to address: it aims to find the effective success factors for the management of cultural distance, to overcome problems due to cultural incompatibility.
To specify this issue, I zoom in on one of the most influential factors regarding the
management of cultural distance during a merger: leadership. Schein (1992) found that leaders are a key source of influence on the culture of an organization. Kavanaugh and Fishman (1989) state that the culture of an organization and the employees’ response to change are shaped by the behaviours of the leader of the organization, the Chief Executive Officer (CEO). According to Mumford, Scott, Gaddis and Strange (2002), such leaders in the organization have control over the collective social construction that is the organizational culture. Because of the importance of national cultural distance during a merger and the influence of leaders over cultural aspects, the CEO of the newly merged firm is essential to its success.
The CEO of the newly merged firm can originate from one of the merging firms (internally originated), or he can be chosen from outside the merging firms (externally originated). Most often, the CEO originates from one of the merging firms, which is the more common ‘rule’, but they can also be chosen -outside of the merging firms, which happened in roughly 25% of the cases in the study of Dalton and Kesner (1985). This an important choice for a merged firm because it is argued that experiences and success of the newly merged firm differ due to the external or internal origin of the CEO (Harris & Helfat, 1997). For instance, Kotter (1982) found that leaders who were chosen from inside one of the merging firms can be successful in achieving merger performance because of their expertise, which they obtained in their earlier career within the company. Insiders have more knowledge about products, competitors, inside structures and - employees. They find themselves central in the social network of the merged firm, which provides the new CEO with necessary information for good management (Kotter, 1982). On the other hand, Karaevli (2007) argued that externally chosen CEO’s perform better in managing a merging process, due to their experiences that are useful for the organization and due to their fresh insights that enhance firm performance. In other words: there are differences in qualities of leaders due to their origin, which could be very important during the cultural management of mergers, which forms a literary inconclusive gap.
influences the amount of conflicts in the post-merger phase. Firstly, I assess the influence of cultural distance on conflicts and the influence of CEO origin on conflicts individually. Hereafter, I compare these findings this with the interaction effect of these factors on conflicts. This is based on a quantitative statistical approach. The findings will contribute to three theoretical fields: the field on industrial- and organizational psychology, the literary field about cultural dynamics during a merger and the theoretical field on leadership influence on merger success. More specifically, the findings of this study will contribute to three specific theories. These are the Similarity-Attraction Paradigm, Leader-Member Exchange theory and the Social Identity Theory, which are more elaborated on in the next section with theoretical background. These theories form the bases on which the hypotheses of this study are built. The practical relevance of this study lies in the approach of achieving post-merger integration and success: this study could reveal which CEO is the better choice in a merger that involves large cultural differences. With a quantitative approach, the findings of this study will bring the research field a step closer to discovering how to achieve merger success.
2. THEORETICAL BACKGROUND 2.1 Cultural distance and post-merger conflicts
Differences between organizational members within a firm are a possible source of tension. The diversity between employees keeps the work environment interesting, but it can also have a negative influence on effectiveness of an organization. Due to the different approaches of diverse employees and their different ways of thinking, negative social processes or communication can take place (Milliken & Martins, 1996). This is a cause of lower job satisfaction and higher turnover and conflict, especially in the case of those employees who are different from the majority (Milliken & Martins, 1996).
In a merger, differences between the merging firms are of great importance for post-merger success. Especially cultural distance between merging firms can form the cause of post-merger conflicts between employees (Weber & Camerer, 2003). This is clearly applicable in international mergers, with the national cultural distance between merging firms. Stahl and Voigt (2008) stated that the risk of failure in implementation of a merger is greater when there is large cultural distance between the firms, due to the potential conflict in the integration period. Cultural differences are most easily found in the nationalities of merging firms: national characters are clearly recognizable for organizational members, and nationality is important for firms due to the political, sociological and psychological aspects of culture (Hofstede, 1983). Buono and Bowditch (1989) found that
by the “similarity-attraction paradigm” (Byrne, 1971). This is the natural tendency of employees to be more comfortable working with people who are “like themselves”, as well in appearance as in attitude or work approaches (Landy & Conte, 2010). It means that the less similar employees perceive other groups of employees, the less they prefer to work together: employees are generally happier and more committed when they get to work with colleagues who are “like them”, according to Landy and Conte (2010). People who are more similar in their socioeconomic status and their attitudes are more
attracted to each other at the first impression. This is for the reason that they share similar
backgrounds, thus similar values, experiences or histories. This explains that cultural distance causes tensions and conflicts (Milliken & Martins, 1996). Because individuals prefer homogeneity to diversity in their groups, they seek similarities in others. They try to avoid conflicting values and interests, things that characterize a diverse work floor (Landy & Conte, 2010). Therefore, the dissimilarities between cultures in a merger can cause conflict between dissimilar employees in the post-merger phase. The explanation of the increasing influence of cultural distance on conflicts by the similarity-attraction paradigm led to the first hypothesis of this research:
Hypothesis 1: the larger the cultural distance between the merging firms, the more post-merger conflicts will occur.
2.2 Cultural distance and leadership
It is clarified in the introduction that leadership affects the post-merger success, as leaders manage the cultural integration (Mumford et al., 2002). Moreover, the survey of Booz and Hamilton (1985) including 200 CEO’s as respondents showed that the CEO’s capability to form cultural integration is more important to merger success than any other financial or strategic factor. Management helps to define the new organizational identity, therefore management is a powerful symbolic means to build organizational commitment, motivate personnel and facilitate socialization (Olie, 1994; Schein, 1992). Intergroup cooperation and the common goal setting initiated by higher management transforms the separate groups ‘us and them’ into the larger new whole ‘we’ (Gaertner, Mann, Murell & Dovidio, 1989). Therefore, it can be stated that the CEO and his/her origin is very important for merging firms, to achieve success.
organization that has to turnaround (Dalton & Kesner, 1985). So, the simple question is: which CEO makes the merged firm perform better, the insider or the outsider? Two theories argue for two different answers, as is explained hereafter.
2.3 The contrast between the Leader-Member Exchange theory and the Social Identity Theory The Leader-Member Exchange theory (LMX), which originates from the theoretical field on
industrial- and organization psychology, states that leaders create distinguishable relationships with their subordinates (Landy & Conte, 2010). Leaders behave differently facing various groups of employees. The LMX argues that the more a leader “exchanges” with organizational members, the better the relationship between the leader and the members becomes (Landy & Conte, 2010). The behaviour-patterns of a leader influence the quality of the leader-member relationship. The different behaviours a leader adopts regarding various groups of employees cause the development of two separate groups of employees: the in-group and the out-group (Landy & Conte, 2010).
The in-group members have a good relationship with their leader, they have had frequent contact with him/her, and the out-group members have a low quality relationship with their leader, in which the leader makes more use of authority based principles to lead and makes contact less frequent. The in-group becomes bigger by more interactions between leader and members. This is important, as the in-group members have high-quality relationships with their leaders. In their meta-analysis, Gerstner and Day (1997) found that are related to the organizational members’ job satisfaction and negatively associated with intentions to quit, whereas low-quality relations between leaders and their subordinates result in more intention to quit, more turnover and less motivation. This means that the personalized relationships between the leader and his/her members is very important for the
organization: the in-group and the out-group members behave in distinguishable ways due to their relationships with their leader.
The “leader-member exchange” is the exchange or the contact that happens between the leader and the member; the communication that happens between them. Leader-member exchange leads to positive attitudes and motivation of employees, as the employees get familiar with their leader and as they are able to understand him/her. It could be stated that leadership success can be measured with the amount of high-quality relationships he/she has with the subordinates (Landy & Conte, 2010). Thus a CEO of a firm who has many high-quality relationships with his/her members due to the frequent exchanges between them, influences the firm performance in a positive way. This gives the leader a certain amount of control over the attitudes and motivation of the employees, as more exchange leads to more high-quality relationships.
relationship within the merged firm than an outsider as CEO could have, due to the history of
exchanges with organizational members of the insider. On the contrary, an outsider does not have any high-quality relationships with organizational members based on his/her history. He/she did not create the large in-group that is needed to lead effectively during change. The outsider could cause
performance decrease in the post-merger phase; an outsider as CEO could even increase conflict during mergers due to his/her lack of network centrality in complex times such as a merger. The lack of high-quality relationships and frequent exchanges with organizational members could be a source of conflict, according to the Leader-Member Exchange theory. Based on the Leader-Member Exchange theory, the following hypothesis is formulated:
H2: The appointment of an outsider as CEO during a merger increases the amount of post-merger conflicts.
However, Van Knippenberg and Hogg (2003) found contradicting results testing the Leader-Member Exchange theory. They found that the the personalized relationships of the leader with members decreased the collective self-image, trust in the leader and legitimacy of the leader. In their study, it became clear that members preferred to be treated all alike by the leader: in-groups and out-groups due to leader-member exchanges were not preferred.
The Social Identity Theory (SIT) explains these outcomes. This theory states that an individual’s identity consists of two parts: his personal identity and his social identity. The social identity is derived from the groups in which the individual is active (Van Knippenberg & Hogg, 2003). A part of the social identity often is derived from the organization in which the individual works. Van Knippenberg and Hogg (2003) combined this theory with the leadership of firms, and they argued that when organizational identities of members become salient, the personalized relations between a leader and his or her subordinates contradict the collective positive feeling of the group, due to the division of ‘favorites’ and ‘non-favorites’. According to them, the personalized aspects of the LMX can better be neglected in the case of highly salient group identities.
Cultural distance between merging firms External origin of CEO
Conflicts in the post-merger phase
differences well during a merger (Olie, 1994). It could be argued that a situation in which group identities become very salient, which is the case during a merger with large cultural distance between the firms, members prefer equal leader-member relations and they evaluated leaders who had this as more effective.
Building on these findings, merging firms with large cultural distance due to nationality experience high salience of different social identities: members of both firms will experience these identities consciously due to the change of a merger. Therefore, an outsider should be chosen as new CEO, as an outsider is impartial and has equal, non-personalized relationships with all organizational members. According to the findings of Van Knippenberg and Hogg (2003), an insider as CEO would only strengthen the clashes between the salient social identities and the different leader-member relations between the in- and out-group. The outsider CEO could reduce the amount of conflicts in the circumstances of a merger, due to his/her equal and impartial relationship with all organizational members. Thus, according to SIT, the following hypothesis has been formulated:
H3: the interaction between large cultural distance and an outsider as CEO of the merged firms decreases the amount of post-merger conflicts.
The conceptual model that is tested in the context of a merger in this study:
Figure 1. Conceptual model
3. METHODOLOGY 3.1 Research design
The approach for this study falls within the explanatory paradigm of research, as its goal is to discover new knowledge that explains merger success and failure and describes factors of influence during the merging process (Van Aken, Berends & Van der Bij, 2012). The approach that is used to test the hypotheses is theory testing. This approach is chosen, because the literary field about the management of cultural distance and leadership is mature. Therefore, hypotheses can be developed based on this
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field. The findings and broadness of the literature field indicate that there are gaps that need theoretical explanation. The usage of large secondary databases in this study makes theory testing the appropriate approach for this study.
3.2 Data collection
The data collection of this study is an important phase as the study has a quantitative basis. The data used to test the hypotheses was drawn from secondary databases. The databases included are ASSET4, Orbis and Zephyr. The data acquired from the three databases was merged into one dataset, which eventually was used to run statistical analyses. The merging of the data from the three databases was done manually, based on the companies’ ISIN-codes of the companies, as this code does not change over time or per database.
The data collection process started in the ASSET4 database, as it is the smallest database of the three. This database allows researchers to compare the social aspects of performance of about 5000 companies that are included in the database. It has data on economic performance, environmental performance, social performance and corporate governance performance of the present companies as is described in its glossary. In this study, the data on the dependent variable post-merger conflicts and on the control variable Human Resource (HR) practices was drawn from ASSET4. The list of
companies within the ‘U.S.A.’-series and within the ‘Global Without U.S.A.’-series were acquired. These lists were chosen for two reasons: to prevent a sample that was geographically biased and to get a sample as broad as possible, though without overlapping companies. The data was specified by the time period 01/01/2008 until 01/01/2015. Within this time period, the U.S.A. series included 995 companies, and the Global Without U.S.A. series included 3223 companies. This provided a total of 4218 companies within the specific time period, including the ISIN-code and data on post-merger conflicts.
The second step of the data collection process was to get information on the mergers from Zephyr, using the ISIN-codes from ASSET4. The Zephyr database, established by the Bureau van Dijk Electronic publishing, entails information on 1.4 million deals and rumours, among which also mergers and acquisitions. Zephyr teams assess the quality of their data sources annually, the sources are official sources, news services, official company filings and advisor data submissions (Bollaert & Delanghe, 2015). Zephyr provided the information that was needed on the M&A’s, such as the acquirer and target names, their country codes, the industry and the completion dates of the M&A’s. The companies had to be involved in a deal that had taken place within the time period of 01/01/2008 and 01/01/2015. Due to the large amount of available mergers or acquisitions in the database, the dataset of Zephyr consisted of 13.849 mergers or acquisitions.
financials or accounting data, on directors and contacts of companies. The data from Orbis on the CEO’s of the companies is used in this study. This data allows the research to determine if the CEO’s from the merged firms that were found in Zephyr and ASSET4 were chosen internally or externally. Using ISIN-codes from Zephyr, the CEO’s and their appointment dates of the acquiring and the target firms were provided by Orbis. In addition, the information used for two control variables was obtained from Orbis: the asset turnover ratio and the size in number of employees. This information was given over the years within the right time period: 01/01/2008 until 01/01/2015.
3.3 The final sample
The data of the sample that was used for the statistical analysis contained information about the relevant mergers on the following variables: the post-merger conflicts and HR practices (ASSET4), the deal type, industry, completion date, acquirer and target names and their country and ISIN-codes (Zephyr), the CEO’s full name and his/her appointment date (Orbis), the asset turnover ratio and the size in number of employees (Orbis). This means that each deal that was included in the final sample had to be present in all three databases ASSET4, Zephyr and Orbis. To merge the data that was drawn from the databases into one final sample, the relevant data was manually added to the dataset. The dataset was built in a design that is suitable for Stata14 to run the statistical tests. The final sample exists of 120 merger/acquisition deals that were randomly selected from the greater population of 13.849 deals from Zephyr. Because of the size of the sample and the many differences between the deals, the sample could lack representativeness for the population. To verify the representativeness of the sample for the population, two-tailed t-tests assuming unequal variances were performed. Based on the t-test performed on the control variable total assets and on the t-test performed on the dependent variable post-merger conflict, the representativeness of the sample was confirmed: there are no significant differences between the sample and the population. Therefore, this sample was used to run statistical analysis on the conceptual model of this study.
3.4 Measurements
To execute the tests that give an answer to the research question, the total dataset containing the variables had to be adapted: all the values that were not available in the database were specified as missing values in the dataset. In addition, each variable is operationalized based on theoretical findings.
3.4.1 Dependent variable – Post-merger conflicts
one or more of the sources of conflict named in this definition. The measurement of post-merger conflicts is determined in this research by theoretically assessing what the measurable outcomes of conflicts are. It turns out that post-merger conflicts lead to increased personnel turnover and
absenteeism (Buono & Bowditch, 1989). Because of this finding in the literature, post-merger conflict is approached in this study by the construct “personnel turnover” from ASSET4. Personnel turnover is measured as: “percentage of employee turnover”.1
3.4.2 Independent variables
This study uses two independent variables to test the conceptual model: cultural distance and the CEO’s origin.
Cultural distance – The culture of a company is complicated to operationalize; organizational culture has many definitions. Given the complexity in measuring organizational culture, a widely adopted approach is to use the measures of country cultures. Therefore, this study uses the construct “cultural distance” from Hofstede (1980) to compare the cultural differences between merging firms. This construct has proven highly reliable and valid for the underlying national cultural scores of Hofstede (Morosini & Singh, 1994). National cultural distance means the degree to which cultural norms in one country are different from other countries (Kogut & Singh, 1988). Implications for the firm level especially lie in the functions of “organizing”: these functions are namely the distribution of power and the control over uncertainty (Hofstede, 1983). Organizing means the manipulating of symbols or mental representations of the world through uniforms, rituals and policies (Hofstede, 1983). The functioning of organizations in a country is related to the countries position and this also applies the other way around (Hofstede, 1983).
National cultural distance consists of four dimensions: Power distance, uncertainty avoidance, masculinity/femininity, and individualism (Hofstede, 2005). Power distance means answers on questions about how to handle inequality between people. It reflects the strength of role pairs such as boss-subordinate or parent-child. Uncertainty avoidance entails the extent to which people feel threatened by unknown situations (Hofstede, 2005). Masculinity means the extent to which the emotional gender roles of men and women are clearly divided. Individualism stands for the extent to which people have to take care of him/herself, whereas collectivism stands for the extent of integration into strong and cohesive groups (Hofstede, 2005). A composite index of cultural distance was
calculated based on the deviation of each of the between two countries, to function as independent variable in this study’s statistical analysis (Kogut & Singh, 1988):
CDij = √(PDIi – PDIj)² + (IDVi – IDVj)² + (MASi – MASj)² + (UAIi – UAIj)² CDij = cultural distance between county i and country j.
PDI = power distance score IDV = individualism score MAS = masculinity score
UAI = uncertainty avoidance score
CEO origin – The origin of the CEO varies between internally chosen and externally chosen. A CEO is externally chosen if the CEO of the merged firm did not occupy a position in any of the executive boards of the merging firms. A CEO is internally chosen if he/she did occupy a position in any of the executive boards before the completed date of the merge. The database Orbis provided the
appointment date of the current CEO of the acquiring firm. Orbis also provided the history of the CEO of the acquiring firm, if he/she had any previous functions in the acquiring firm, however, the database does not show if the CEO already was on the target firm’s executive board before their appointment as CEO. Therefore, one assumption had to be made building this dataset: if the CEO of the acquiring firm was appointed after the completion date of the merge and if he/she did not have a previous position in the acquiring firm and if he/she is not part of the target board, the CEO is defined as outsider.
3.4.3 Control variables
The control variables that are used in this study are based on previous findings about influences on M&A performance. The first control variable that is used is the organization size of the firms.
Chatterjee et al. (1992) found that the size may influence the relationship between cultural differences and tolerance. Weber, Rachman-Moore and Tarba (2011) used size in the form of number of
employees as well as control variable, as change in performance of firms could also be subject to other factors than the independent variables specified. In this case, conflicts can be increased or decreased due to changes in the number of employees as well.
The second control variable is financial performance for M&A’s (Ashkanasy & Kavanagh, 2006) In this study, the amount of conflicts could be influenced by a better financial performance. The financial performance of the firms is measured in this study by the asset turnover ratio, or the ratio of the value of the operating revenues relative to the value of the total assets of the firms. It shows the capability of the firm to generate revenues from its assets, explaining profitability. It is often used as indicator of efficiency of the usage of the assets to create turnover (Fairfield & Yohn, 2001.)
HR practices are measured by an item from ASSET4: “Does the company describe the
implementation of its employee satisfaction policy”, as a higher percentage on this item means that the company is more engaged to employee satisfaction and its implementation.
I also included industry controls. Specifically, I used the classification of Graves and Waddock (1997), which is based on the Standard Industry Classification (SIC). Each category is represented in the regression analysis through a dummy variable.
3.5 Statistical analysis
Now it has been clarified what the conceptual model is that will be tested and how the variables of the model are operationalized. The statistical analysis method is explained in this paragraph. The result section starts with the assessment of the descriptive statistics and the correlation matrix. Afterwards, the main- and interaction effects of the conceptual model are discussed based on the regression analyses. For all regression analyses panel-data regressions are used. This is for the reasons that the time periods are relevant per observation: it is important that the tests take an increase or a decrease over the time periods of conflict into account while also noting the completion date of the merge. Furthermore, all the results of the regression analyses are based on random effects.
To test the individual increasing effects of the independent variables cultural distance (hypothesis 1) and the outsider CEO (hypothesis 2) on the dependent variable post-merger conflicts, linear regression analyses with random effects are performed in Stata 14, based on the panel data from the dataset. In these models, also the control variables financial performance, HR practices, industry and organization size are added.
To test hypothesis 3, which states that the interaction effect of large cultural distance and CEO origin decrease the value of the dependent variable post-merger conflicts, an interaction variable was established in Stata 14. This was done by creating an interaction term between the variables “large cultural distance” and “outsider CEO”. The variable large cultural distance was established by a mean-split dummy variable (1 if Mean Cultural Distance < Score Cultural Distance). Based on the panel data, the linear regression analyses with random effects are executed. Lastly, the control variables are also added to this model: organization size, the industry variables, HR practices and financial
performance.
4. RESULTS 4.1 Descriptive statistics
smaller (N = 415) than for the independent and control variables. This is due to missing values, not reported by the firms in the ASSET4 database. This should be taken into account interpreting the results.
The correlations for the main effects on the dependent variable personnel turnover are significant (r = 0.1553* and r = 0.1528*), which becomes apparent in the correlation matrix in table 2. These
correlations are important and illustrative for the expected main effects of outsider CEO and cultural distance on the dependent variable personnel turnover.
Furthermore, it stands out that one control variable shows significant correlations with personnel turnover, namely HR practices (r = -0.1739*).
The model also was checked for multicollinearity, as many of the constructs in this model are theoretically intertwined and could have combined influences on other variables. The Variance Inflation Factor (VIF) level recommendation applied in this research is 5 (Rogerson, 2001) This was tested for all the models with each dependent variable. The result is that all the VIF values are below 2, which means no multicollinearity is present in this model. For more descriptives on the dependent variable personnel turnover, such as the histogram of the data, the boxplot and the homoskedasticity test, see Appendix I.
Table 1. Descriptive Statistics
Obs Mean Std. Dev. Min. Max.
Personnel Turnover 415 44.37933 19.60662 15.28 100
Asset Turnover Ratio 960 .8059239 2.356769 -.9278389 50.13589
Size 796 60632.12 67856.82 100 360000
HR practices 857 69.85617 28.70398 15.89 87.22
Cultural Distance 960 26.92565 27.24336 0 101.8037
Outsider CEO 959 47,13% n.a. 0 1
Table 2. Pearson’s Correlations
1. 2. 3. 4. 5. 6.
1. Personnel Turnover 1.0000
2. Asset Turnover Ratio 0.0593 1.0000
3. HR Practices -0.1739* 0.0147 1.0000
4. Size 0.0737 -0.0427 0.2224* 1.0000
5. Cultural Distance 0.1553* -0.0145 0.1453* -0.0984* 1.0000
6. Outsider CEO 0.1528* 0.0492 0.0474 -0.0181 -0.0716* 1.0000
4.2 Regression analyses
Several regression analyses have been performed to find the influence of the main- and interaction effects on the dependent variable personnel turnover, which approaches post-merger conflict. Below, the results for each hypothesis will be discussed. The regression analysis includes 4 models, model 1 with only the controls, model 2 with the controls and the main-effects, model 3 with the controls and the main effect of cultural distance in more detail, and model 4 with also the interaction effect added. The hypotheses of this study were tested using four panel-data linear regressions. The output of these models is visible in table 3. It should be noted that the Hotels Industry, Transport Industry and Paper Industry variables have been omitted because of multicollinearity.
Hypothesis 1, concerning the increasing effect of cultural distance on conflict, shows complex results. This relationship is not significant in model 2, whereas in model 3 cultural distance (Coef. =
-.5957072, p = 0.006*) and squared cultural distance (Coef. = 0.0087569, p = 0.002*) are both significant, representing the relationship in different directions. This means that there is no linear relationship between cultural distance and personnel turnover. This relationship is significantly curvilinear, as is shown in model 3 by the negative coefficient of cultural distance and the positive coefficient of squared cultural distance. It means that cultural distance decreases post-merger conflict for certain levels, while for other levels cultural distance increases post-merger conflict. The
relationship is shown in figure 2. It means that hypothesis 1 is not confirmed, as there is no linear Table 3. Regression Models 1, 2, 3 and 4
Model 1 Model 2 Model 3 Model 4
Variable Coef. P>|z| Coef. P>|z| Coef. P>|z| P>|z| P>|z| Cons. 34.38067 0.040* 22.34331 0.191 42.9311 0.010* 20.40544 0.230
Asset Turnover Ratio -.1495355 0.514 -.1419381 0.535 -.1655742 0.468 -.1564595 0.491
HR Practices .0769425 0.021* .0742448 0.026* .0829093 0.012* .0685514 0.038*
Size (m.c.) .0000635 0.001** .0000657 0.000*** .0000668 0.000*** .0000683 0.000***
Cultural Distance .0338011 0.660 -.5957072 0.006* .2000651 0.047*
Sq. Cultural Distance - - .0087569 0.002* - -
Outsider CEO 10.71823 0.010* - - 22.45081 0.000***
Large Cult. Dist.*Outs. -16.9053 0.012*
Industry dummies included Yes Yes Yes Yes
relationship between cultural distance and post-merger conflict. However, there is a significant curvilinear relationship in which cultural distance directly increases post-merger conflict above a certain level of distance. This means that these findings are able to specify the relationship between the two variables even in more detail, which is an important aspect that will be elaborated on in the discussion.
Hypothesis 2, concerning the direct increasing effect of an outsider CEO on post-merger conflicts, is confirmed by out data with the strong significant effect of the Outsider CEO in model 2 (Coef. = 10.71823, p = 0.010*) and in model 4 (Coef. = 22.45081, p =0.000***). This indicates that when an outsider is appointed as CEO of a merged firm, the percentage of personnel turnover rises.
Lastly, it turns out that the interaction effect formulated in hypothesis 3 is significant as well in model 4 (Coef. = -16.9053, p = 0.012*): the interaction of large cultural distance (1 if value > 27,0164) and an outsider CEO decreases personnel turnover, the approach of post-merger conflict. This confirms hypothesis 3.
Overall, this means that especially model 4 shows significant effects of the two main effects and a significant effect of the interaction term on the dependent variable. However, it is important to keep the curvilinear relationship of cultural distance and post-merger conflict in mind interpreting the results.
5.
DISCUSSION & CONCLUSION
This study aimed to find the effects of the interaction between cultural distance and CEO origin on post-merger conflicts. The theoretical implications of the findings regarding the three hypotheses are discussed. Furthermore, the practical implications, the limitations of this research and the further directions for future researches will be discussed.
5.1 Theoretical implications – Similarity-attraction paradigm
The curvilinear relationship of cultural distance on post-merger conflicts shows again that cultural distance is a double-edged sword when it comes to its effect (Hofhuis, Van der Zee & Otten, 2012; Trefry, 2006). The findings of this study imply that the first hypothesis is only true for cultural distance above a certain level. The similarity-attraction paradigm accounts for the increase of personnel turnover above a certain level of cultural distance. However, it does not explain the decreasing effect of cultural distance on post-merger conflicts.
The similarity-attraction paradigm (Byrne, 1971) explains why large cultural distance can lead to more conflicts in a merged organization. The term refers to the natural preference that people have regarding interactions with others who are similar to themselves. This causes that employees are more attracted to colleagues who share their personal characteristics, attitudes and appearances (Stockdale & Crosby, 2004). Bruning and Saqib (2013) found that the national bias is influenced by cultural (dis)similarities, which is certainly the case in international mergers. This theory explains the increasing effect of cultural distance on conflicts.
However, the findings of this study show that there is a curvilinear relationship between cultural distance and post-merger conflict, which means that the logic of the similarity-attraction paradigm is only applicable for higher values of cultural distance. Byrne (1997) has summarized the research body on the attraction paradigm in one article, in which he also pays attention to the question if similarity-attraction is also applicable in cases with intermediate similarities, instead of very high similarities or very low similarities. To answer this question, researches have been conducted in many different settings, to improve the validity and thus generalizability of the similarity-attraction
paradigm. Examples of the these other researches are similarities between sexes (Byre, 1982), young adults (Byrne & Fisher, 1983) and husbands and wives (Byrne & Blaylock, 1963). He states that the circumstances do not change the outcome of this theory.
Nevertheless, this paradigm has not been applied before in a M&A setting on cultural distance, like this study did. Here, a curvilinear effect of similarity-attraction is found, which contradicts the current research body on the theory. The paradigm does not account for intermediate levels of cultural distance, thus intermediate levels of similarity. Therefore, the theory on similarity-attraction should be nuanced for M&A settings based on the results revealing the curvilinear relationship in model 2 and model 3. It might be possible that lower levels of cultural distance do not lay enough emphasis on the perceived differences for the employees: the differences are not that salient that employees perceive the other culture as very strange or non-similar. This bias might only be applicable to large cultural distance between organizations.
It turns out that cultural distance can form a disadvantage, but also an advantage (Trefry, 2006). As the similarity-attraction paradigm cannot account for this, another explanation should be found by investigating what antecedent factors turn cultural distance into an advantage for
over diversity, however, they argue that diversity can thrive when it is managed well. They approach diversity with the training perspective from Jackson and Joshi (2001). This perspective states that there are different kinds of diversity training: individual trainings versus team trainings and single cultures versus multiple cultures trainings. They state that to manage diversity on the work floor well, the right trainings have to be given. Furthermore, Landy and Conte (2010) appoint that managers have to take steps to reduce interpersonal conflict, they have to acknowledge cultural difference instead of ignoring them and they need to uncover and root out biases or discriminatory practices. Lastly, Landy and Conte (2010) state that leaders with universally accepted traits such as openness and honesty have to be appointed, to bring diversity to a good end.
If cultural distance is turned into an asset of a firm, it creates a stimulating and rather enjoyable work environment. Moreover, it enhances creativity, as problems are approached with diverse ideas (Landy & Conte, 2010). However, the advantages of cultural distance are not easily reached. It is imaginable that cultural distance at a level that is too high, is not manageable by trainings or universal traits of leaders. It is possible that at high levels of dissimilarities in business settings, the similarity-attraction paradigm takes over. This contrast between small and large cultural distance could explain the findings on the first hypothesis: at a lower level of cultural distance, diversity can thrive through good management and cause better firm performance, whereas at a higher level the similarity-attraction paradigm comes to play, and the cultural distance is not manageable anymore.
Future researches should look into which situations cause the curvilinear effect of similarity-attraction, with a focus on business settings. If more settings in which the paradigm is not applicable are found, there might be an underlying causing mechanisms for these outcomes which is of great importance for managers during M&A’s. In addition, it might revise the similarity-attraction paradigm more validly. Furthermore, it is interesting to investigate the specific turning point of cultural distance and the mechanisms that cause advantages of diversity to turn into disadvantages for the firm. This could contribute to both theory and practice as well.
5.2 Theoretical implications – Leader-Member Exchange and Social Identity Theory In the theoretical field about leadership and firm performance, appointments of externally chosen CEO’s were associated with turn-around strategies and changing bad firm performance (Dalton & Kesner, 1985). Moreover, CEO’s that were chosen externally are characterized by their lack of network centrality and lack of detailed knowledge of the internal processes of a company, even in merging firms (Kotter, 1982.). Therefore, the confirmation of hypothesis 2, saying that the
relationships a leader creates with these behaviours will be of high or low quality, which causes an in-group and an out-in-group to form. Members from the in-in-group are more motivated and have a higher job performance than members from the out-group (Landy & Conte, 2010). Thus, a leader should create a large in-group to reach good firm performance, through many high quality relationships with
employees.
The theory states that the creation of a large in-group is possible through social exchanges, such as valued rewards or communication (Landy & Conte, 2010). In the case of an outsider as CEO, this theory would focus on his/her lack of high quality relationships with organizational members. Therefore, an insider as CEO would be preferred. An outsider CEO increases post-merger conflict, because of his/her lack of network centrality. The new CEO of the merged firm did not create high quality relationships with his/her colleagues, as the CEO is completely new to the company. The new leader has not formed an in-group of organizational member yet, which causes less buy-in than an insider as CEO would have. According to the Leader Member Exchange theory, the fact that a new leader does not have good relationships with his/her subordinates causes more turnover and absenteeism and lower employee satisfaction.
However, the findings confirming hypothesis 3 show that this theory does not stand alone in the process of a merger. It is not generalizable for all situations and problems that occur regarding leadership and subordinates. This is implied by the finding large cultural distance in combination with an outsider CEO decreases post-merger conflicts. This is contrasting with both the significant
individual effects of cultural distance and outsider CEO: they increase post-merger conflicts, whereas their interaction decreases post-merger conflicts. These results argue against the LMX, which explains that an outsider as CEO increases post-merger conflict. This contrast is due to the differences in salience of group identities, which the Social Identity Theory (SIT) illustrates.
The SIT states that group membership is of strong influence on the self-perception and behaviour of individuals (Van Knippenberg & Hogg, 2003). Individuals have a subconscious “social” identity, which they derive from the groups they are part of (Van Knippenberg & Hogg, 2003), this identity is a part of the complete self-concept of an individual. Self-conception including a social identity derived from group membership involves the psychological uniting of the self and the group, into an in-group prototype (Van Knippenberg & Hogg, 2003). Group members who are more alike this prototype, become more powerful in the group.
Combining the SIT with leadership, Van Knippenberg and Hogg (2003) state that if a group member’s identity becomes conscious, he/she perceives a leader based on his/her group prototypicality and his/her intent to act in the group’s best interest. They found that in groups with one salient identity the personal characteristics of the leader or his/her interpersonal relationships with members become relatively less important: the prototypicality of the leader and his/her group-oriented intentions
The contrast with the LMX lies in this theories’ focus on personalized relationships between leader and subordinate, whereas according to the SIT, leadership combined with personalized
relationships can have negative effects: in groups that are highly salient with strong divided identities, personalized relationships cause tensions in the common social identity of the group. Depersonalized leader-member relations match better with the collective self-conception of the organizational members. It creates more equality of the group members. Therefore, a group-oriented egalitarian and impartial leader is needed in highly salient and divided groups. An outsider CEO fits this role better than an insider as CEO, who was part of one of the merging firms. This is also confirmed by the results of the statistical analysis: in the case of large cultural distances in combination with an outsider CEO, conflicts in the post-merger phase decrease. Van Knippenberg and Hogg (2003) found that increased perceived effectiveness of the leader corresponds to depersonalized leadership in highly salient groups, which corresponds with the significant interaction term in this study. This relationship was weak under lower salience of the group identities, which implies why the LMX can be applicable in such circumstances. This also shows why an impartial outsider as CEO is not always the right choice, he/she increases conflict in case of low salient group identities.
The findings of this study predict that the salience of identities determines which theory is applicable in a specific merger, which is why the current theories of LMX and Social Identity have to take this factor into account. This study shows that the negative effects of cultural distance and an outsider CEO combined turn into a positive influence. This ties the Leader-Member Exchange theory and the Social Identity Theory together: they are complementary to each other. Both theories account for different situations of a merger process, whereas before they were seen as contrasting or separated in M&A’s. For future research, it could be useful to investigate how to control salience of group identities. In this study, group identities become salient when two identities are confronted to work together. This is strengthened by a leader who is biased towards one of the groups. However, there might be more ways to reduce the salience of group identities, which could be very useful during M&A’s.
5.3 The interaction of cultural distance and an outsider CEO
In total, this study provides a lot of information about which theory is applicable in what specific part of cultural management in organizations. The similarity-attraction paradigm is applicable when cultural distance lies above a certain level, whereas thriving diversity through training and good management can be achieved with cultural distance beneath a certain level.
both true in different scenario’s. And, just like the LMX and SIT, the effects of cultural distance cannot be lumped together into one conclusion: the level of distance is very important, the effects complement each other at different levels. In short, the interaction between cultural distance and an outsider CEO decreases the post-merger conflicts significantly, whereas both individual effects of these cultural distance and an outsider as CEO can have an increasing effect on post-merger conflicts under certain circumstances. Each of these findings is justifiable through a different industrial psychological theory.
5.4 Managerial implications
The managerial implications of this study are relevant for the planning-phase of a merger and the post-merger phase. In the planning-phase decision-makers have to anticipate on the level of cultural distance between the merging firms: is this level high or low? This has consequences for the choice of CEO for the new firm. If the distance is very high, causing highly salient identities, this study
recommends to choose an outsider as new CEO, whereas if the cultural distance is low and the merge will not cause higher salience of the identities, an insider as CEO is the better choice, as an outsider will increase conflict. After this assessment, it is important for the CEO in the post-merger phase to act upon the LMX or SIT. If the LMX is applicable, it could be wise to create a larger in-group by
extending personalized high-quality relationships. However, if the SIT is appropriate, it might be better to depersonalize the relationships and focus on the collective social identity of the employees. Choosing the right behaviour will decrease post-merger conflict, and thus increase post-merger firm success.
5.5 Limitations and other future research directions
Interpreting the findings of this study, some limitations of this research have to be taken into account. The first limitation is the assumption that was made about the origin of the CEO’s used in the sample. It would have been more reliable and valid if the biographies per CEO were checked, to rule out that they already were employees at one of the merging firms before the merge. To restrain this limitation, the CEO’s were only labelled as “outsider” if they were appointed as CEO after the merger completion date, if they did not occupy previous positions in the acquiring firm and if they were not part of the target board before the completion date of the merge.
The third limitation is about the proxy personnel turnover for post-merger conflicts. Even though personnel turnover is an outcome of post-merger conflicts, it does not cover the entire construct. In addition, personnel turnover might also be the outcome of other variables than conflict.
Therefore, in future research designs, there might be better solutions for measurement problems regarding cultural differences and conflict. To deepen the literary field about mergers, especially the measurement of culture should be investigated. Culture of firms can be very relevant for the performance of mergers, which is why the measurement should be specified. Furthermore, in future researches it might be interesting to root out other aspects of the CEO history than only their previous positions. This might reveal more discoveries about why CEO’s have specific influences over firm performance.
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7. APPENDIX I: Descriptives of Personnel Turnover Figure 3. Histogram of frequencies Personnel Turnover
Figure 4. Boxplot Personnel Turnover
Table 4. Breusch-Pagan/Cook-Weisberg Test for Heteroskedasticity H0: Constant variance
Variables: Fitted values of Personnel Turnover
Chi2 (1) = 3.67
