THE INFLUENCE OF MANAGEMENT CONTROL SYSTEMS ON M&A SUCCESS IN SME

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THE INFLUENCE OF MANAGEMENT CONTROL

SYSTEMS ON M&A SUCCESS IN SME

Master thesis, Master Accountancy and Controlling, specialisation Controlling University of Groningen, Faculty of Economics and Business

June 25, 2018 Mark Evers S 2177838 Eerste Hunzestraat 26 9715 BL Groningen Tel: +31 6 36468904 E-mail: m.evers.5@student.rug.nl Supervisor: Drs. D.P. Tavenier

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ACKNOWLEDGEMENT

I would like to thank my supervisor, Dhr. D.P. Tavenier, for his help throughout the process of creating this thesis. I want to thank all the participants of the interviews for their time for me. Many people helped me to get in touch with the interviewees, it has been very helpful.

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ABSTRACT

Mergers and acquisitions (M&A) often fail. Research found that the post-acquisition phase is crucial since all value creation takes place in this phase. Research on the influence of Management Control Systems (MCS) on the integration phase is limited. In this explorative study, which focuses on Small and Medium Enterprises (SME) in the Netherlands, I use the framework of Merchant & Van der Stede (2007) to examine the influence of MCS on the success of M&A. I find that MCS get limited attention during the preparation phase of M&A. However, MCS do play an important role in the integration phase, especially personal and cultural controls. An interesting finding is the interrelationship between controls, which is in line with calls to approach management control ‘as a package’. However, most managers/entrepreneurs are lacking knowledge about MCS, which means that MCS are often implicit or present, but not consciously integrated. These findings call for more in-depth research on the relation between M&A success, the integration phase and the role of MCS, in order to better understand the dynamics of M&A and the integration phase.

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Mergers and acquisitions (M&A) are hardly successful in creating value, with failure rates varying between 40 - 60 percent (Bower, 2001), although some authors claim failure rates of 70 - 90 percent (Christensen et al., 2011). With a global size of $3 trillion for four straight years, the stakes are high (Massoudi, Fontanella-Khan and Weinland, 2017). Caraline et al. (2002) show that, when it comes to performance, size matters. Their paper examines the relation between size and performance and finds that poor performance is predicted for larger deals, thereby suggesting that better performance is predicted for smaller deals. Moeller et al. (2004) backs this statement up with empirical evidence. Although small and medium enterprises represent 99 percent of the European companies, they are currently neglected in research (Bauer & Matzler, 2014). An important reason for this is the absence of public (financial) information (Weitzel &McCarthy, 2011).

M&A’s take place from a strategic point of view (Datta, 1991), and play an important role in strategic management practice (Cartwright & Schoenberg, 2006). One way to implement strategy into organisations is through management control systems (MCS) (Merchant & Van der Stede, 2007: 7-8). Jones (1985) showed that when two companies merge, or when one company acquires the other, the acquired company will have to adapt their strategy to the acquirers strategy as well as to their MCS. The acquiring company chooses what type of MCS is used but also decides on how they should be interpreted. This means that MCS have to be integrated into the acquired company.

This integration process is key in the success of a M&A because ‘all value creation takes place after the acquisition’ (Haspeslagh and Jemison, 1991). This premise comes from two schools of thought: the school of organisational behaviour and the school of the process perspective (Birkinshaw et al., 2000). The school of organisational behaviour states that the individuals affected by the merger or acquisition are often overlooked, but are crucial to success. The school of process perspective focuses on action taken by managers in order to guide the integration process. Because of the value creation happening after the acquisition there is a need to dig deeper into this process. Instead of developing a new framework or model of integration and M&A success, adding to the already fragmented literature on M&A, we deepen the understanding of M&A by applying existing frameworks of MCS from Merchant & Van der Stede (2007). This

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5 framework covers the school of organisational behavior with personnel controls and result controls, and covers the school of process perspective with result controls and action controls. There is some research on reasons why SME’s are more successful in M&A than listed companies. Weitzel & McCarty (2011) for example, argue why theories that explain M&A failure for listed companies are not applicable to SME. The main argument here is that most problems arise from agency problems, which simply do not apply to SME, as the function of ownership and control is often not divided. From a financial perspective, SME are often excluded from research due to the absence of public financial information, since SME are, by definition, not listed (Weitzel & McCarty, 2011). To the best of my knowledge there is hardly any research on how MCS influence M&A’s and in which way they contribute to a successful M&A. This exploratory study is one of the first to address the influence of MCS on M&A in SME. Through exploration, I try to develop this relation more clearly and determine priorities for further research (Cooper et al., 2006). This research is guided by the following research question:

‘’What is the influence of management control systems on success of mergers and acquisitions in small and medium enterprises in the Netherlands.’’

This thesis is organized as follows: first I will discuss the relevant theories on MCS and their link to M&A. The methodology is discussed in the third chapter, results are described in the fourth chapter and the conclusion is formulated at the end, as well as recommendations for further research.

2. THEORY

2.1 M&A

A merger is defined as the transfer of ownership from a company to another person or company. At least 50% of the assets or shares are being transferred, in order to secure the existence of the company and its commercial activities (Van Teeffelen, 2010). This definition covers all sorts of company transfers. Van Teeffelen (2012) distinguishes various types of transfers. When a former manager buys the company it is called a management buy-out. When a former employee buys the company it is called an employee buy-out. When an outsider buys the company it is called a management buy-in. When the acquiring party is a company it is called an acquisition or a merger.

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6 It is important to mention here that although this definition focuses on ownership, within SME’s, most of the time it also covers the transfer of the management function (European Commission, 2002). The definition of SME from the European Commission (2003) is presented in Table 1.

TABLE 1 SME definition Turnover Employees Micro < 2 million <10 Small 2-10 million 10-50 Medium 10-50 million 50-250

2.2 Management Control Systems

Anthony (1965) was the first to mention the term MCS in scientific literature. Anthony (1965) defines MSC as “the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives” (1965, p. 17). We will elaborate on his view on MCS in the next section. The field of MSC is very broad and complex (Strauß & Zecher, 2013) and due to the limitations of Anthony’s (1965) view, more concepts of MCS evolved. Many researchers developed their own concepts in order to broaden the knowledge of and stimulate research on MCS (Merchant and Otley, 2007). Strauß and Zecher (2013) found that the three most influential MCS are Anthony and Govindarajan (2007), Merchant & Van der Stede (2007) and Simons (2000). Their survey shows that experts value the above mentioned frameworks the most. An additional analysis finds that the textbooks describing those three frameworks are used most in courses on control. We will therefore discuss those three frameworks in the next section.

2.2.1 Anthony and Govindarajan (2007)

The work of Anthony and Govindarajan (2007) is based on Anthony (1965). Anthony (1965) divided control into three different procedures. The first was strategic planning, the second management control and the third was operational control. Strategic planning is focused on the

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7 future. The strategy and long term objectives are set. Management control is primarily focused on using resources efficient and effective in order to reach the objectives of the organisation. The process of management control is highly dependent on financial data and accounting measures. Operational control, on the other hand, is much more focused on non-financial data and is very situationally bound. This approach of strategy formulation, management control and operational control reflects the hierarchical approach of Anthony and Govindarajan (2007) of management control, which is defined as ‘the process by which managers influence other members of the organisation to implement the organisations strategies.’ This top-down focus is also visible in their formal control process (figure 1).

FIGURE 1

The formal control process

The formal control process is characterized by a cybernetic approach, as the systems are used as feedback and feedforward controls. Anthony and Govindarajan (2007) explicitly mention that the focus of this model is on formal controls, or on systematic aspects of the control function. They argue that within formal control systems one is able to describe the different steps in the system, how information gathering takes place and how the systems works as a whole. However, they argue that, in contrast to formal controls, informal controls are very difficult to describe. Only in

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8 general terms it is possible to describe what actions are appropriate for managers when faced with a situation which is not considered in formal systems. Informal controls are thus excluded from MCS. This means that MCS are just one way to implement strategy into an organisation, thereby taking a more narrow view on MCS. See figure 2.

FIGURE 2

Strategy implementation framework

2.2.2 Simons

In contrast to the more narrow view of Anthony and Govindarajan (2007), Simons (2000) takes a broader view on management controls. According to Simons (2000), social control, cultural control and ways to monitor directly can also help to achieve organisational control. Next to that, he views MCS in a bottom-up way instead of a command and control perspective. This is visible in the feedback between management control and strategy: ‘the bottom-up perspective explicitly allows strategies to emerge out of patterns of actions, and, accordingly, allows MCS to influence strategy’ (Strauß and Zecher, 2013 p. 246-247). Simons (2000) views organisational structures as hierarchical when he argues that strategy formulation is followed by strategy implementation.

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9 Strategy formulation is therefore out of scope of MCS. MCS are designed in this view afterwards and serve as ‘levers’ to implement the business strategy.

Simons (1995) defines MCS as ‘the formal, information-based routines and procedures managers use to maintain or alter patterns in organisational activities’. Simons (1995) highlights four aspects of this definition:

1. The focus of MCS is on formal routines, informal routines are excluded. 2. There is a focus on information.

3. MCS can be used not only to alter current patterns, but also to explore new opportunities and innovation, which in turn influences the strategy.

4. The focus is primarily on top management.

The first aspect, the focus on formal controls, seems to contradict to the inclusion of values and believes into the framework. With those formal controls Simons (1995) means to include planning, reporting and monitoring systems. This means that for example values and believes can be incorporated in the MCS, but only when they are formalized, for example by writing them down in official statements. This approach differs from Anthony and Govindarajan (2007) since they exclude cultural controls from MCS.

FIGURE 3

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10 Simons (1995) developed the framework of ‘levers of control’ (LOC). This model is more focused on which role management control systems play in the realization of innovations in organisations. Business strategy is in the center of the model. Four elements are then described which are key for a successful business strategy implementation: core values, strategic uncertainties, risks to be avoided and critical performance variables. The model describes four levers in order to address those elements: belief systems, interactive control systems, boundary systems and diagnostic control systems.

1. Belief systems are described as ‘the explicit set of organizational definitions that senior managers communicate formally and reinforce systematically to provide basic values, purpose, and direction for the organisation” (1995, p. 34). Examples of belief systems are mission and vision statements. Simons (1995) argues that through those systems managers try to initiate and guide opportunity seeking behavior.

2. Interactive control systems are described as “formal information systems that managers use to involve themselves regularly and personally in the decision activities of subordinates” (Simons 1995, p. 95). Interactive control systems are used to deal with strategic uncertainties and help to develop new strategies in order to deal with those uncertainties. Those systems are not situational bound and can be used in different points in time (Simons, 1995).

3. Boundary systems are described as to “delineate the acceptable domain of activity for organizational participants” (1995, p. 39). Those systems are used to limit the search of managers after new opportunities. It is important to notice that although those systems indicate borders, they are meant to stimulate the search after new opportunities within those borders (Strauß and Zecher, 2013).

4. Diagnostic control systems are described as “formal information systems that managers use to monitor organizational outcomes and correct deviations from pre-set standards of performance” (1995, p. 59). The general purpose of diagnostic control systems is to help managers to pay attention to key performance indicators and to take action when results deviate from preset goals (Simons, 1995). Examples of these controls are the budgeting process and administrative processes, for example on monitoring projects.

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11 Simons (2000) highlights the interconnectedness of the four levers, instead of the individual use of them. The interplay between the four levers creates so-called dynamic tension between innovation at the one hand and the achievement of goals on the other hand. This is necessary to achieve sustainable growth and profit. Dynamic tension emerges from the positive and negative forces within the LOC framework. Simons (1995) derives this notion of positive and negative forces from the Chinese philosophy of yin and yang, which balance the world, as the forces balance the LOC framework.

2.2.3 Merchant & Van der Stede

Merchant & Van der Stede (2007) improved the object of control (OOC) framework of Ouchi (1979). They renamed the three forms of control into action controls, result controls, personnel controls and cultural controls. Merchant & Van der Stede (2007) mention three reasons why these objects need control; personal limitations, motivational problems and a lack of directions. Personal limitations are a reason why people are unable to act in the company's interest. People may lack the information, training, or the ability to act in the company’s interest. But even if people can perform their job in the right way, goal incongruence can exist. This means that personal goals and the goals of the company don’t align due to a lack of direction. According to Merchant (1982) ‘good control can be achieved by avoiding some behavioral problems and/or by implementing one or more types of control to protect against the remaining problems’. Merchant & Van der Stede (2007) elaborate on this stating that management control deals with employees behavior, thereby separating management control from strategic control. This type of control, focusing on behavior, can be classified as the traditional top-down approach of command and control (Simons, 1995). This top-down approach also shows which place MCS take in the management process (Strauß and Zecher, 2013). The first step is objective setting. This step is necessary because employees need to understand the company objectives in order to act on it. The second step is to determine how resources within the company are used to reach those objectives. Management control is the last step in this process. As opposed to Simons (2000), MCS do not influence strategy in this way.

Merchant & Van der Stede (2007) define management control as ‘all the devices or systems managers use to ensure that behaviors and decisions of their employees are consistent with the organisation's objectives and strategies’ (p.4). A distinction between Simon (2000) and Anthony and Govindarajan (2007) is that informal controls are included in this definition.

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12 Merchant & Van der Stede (2007) describe four types of MCS in their object-of-control framework: result control, action controls, personnel controls and cultural controls.

1. Result controls hold employees accountable for generating good results. Result controls influence actions of people since they need to achieve the right results. This leads to empowerment, where people can choose their own actions in order to reach the required results. This form of control can only be used in situations when clear objectives are set and can be controlled by the actions of employees. Examples of result controls are budgets, Key Performance Indicators or the Balanced Scorecard

2. Action controls try to make sure that people do or do not execute certain actions desired by management. This is the most direct form of control as it prescribes how employees should act. These are divided into four groups: behavioral constraints, action accountability, pre-action review and redundancy

2.1. Behavioral constraints make sure that employees do not perform activities which are not desired. This can be a physical constraint, such as locks, or an administrative constraint. An example is segregation of duties.

2.2. Action accountability holds employees accountable for their actions. In order to execute this type of control, responsibilities must be described, actions must be checked and behavior must be rewarded or punished.

2.3. Pre-action review means that actions of employees are observed before activities are complete. A common example of pre-action review is the approval of budgets by senior management.

2.4. Redundancy means assigning more people to a task than strictly necessary in order to reduce idle time and increase the likelihood that a task is completed. 3. Personnel controls build on the premise that employees control and motivate themselves.

Personnel controls should clarify expectations of an employee. Next to that, personnel controls make sure that employees with the right capabilities and resources are assigned to a job. A third use of personnel controls is the increased likelihood of self-monitoring of employees. Self-monitoring is linked to intrinsic motivation and loyalty. There are three forms of personnel controls: selection and placement, training and job design.

3.1. Selection and training means that people with the right education, experience or skills are selected for a certain job.

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13 3.3. Job design means that the job is designed in a way that a qualified employee is

likely to do the task successfully. A job should not be too complex for example. 4. Cultural controls are a powerful form of control which stimulates mutual monitoring within

groups. Group pressure ensures that employees act as the norms and values of the group prescribe. Those norms can be written or unwritten, and are relatively stable over time. Examples of cultural controls are codes of conduct, group rewards, employee rotation, intra-organisational transfers, physical arrangements social arrangements and tone at the top.

4.1. Codes of conduct are formal ways, usually written down, of communicating organisational values, obligation to stakeholders and ways in which an organisation should function.

4.2. Group rewards are a form of control which tries to maximize mutual control, as all employees are rewarded for a certain outcome.

4.3. Employee rotation, or intra-organisational transfers, make sure that employees get a sense of how different departments cope with the same problems. Also, this form of control helps to transmit the desired culture through the organisation. 4.4. Physical arrangements include architecture and office plans. This can enhance a

sense of sharing knowledge with other employees or emphasis a more or less hierarchical organisational structure.

4.5. Social arrangements include dress codes and vocabulary. This can enhance a sense of sharing knowledge with other employees or emphasis a more or less hierarchical organisational structure.

4.6. Tone at the top is important as management should act accordingly to the norms and values they try to communicate in the organisation. It means that their

behavior should be in line with formal statements and informal values and beliefs.

2.3 Link between MCS and M&A

After a merger or acquisition with a company, the acquirer often influences the way things are done and the management control system of the acquired company (Jordao et al, 2014). In most of the cases the acquired company simply has to adapt to the strategy and the objectives of the acquiring company (Child et al., 2001). This means that the acquirer chooses which MCS is used and how it is applied. Changes in the acquired company are far-reaching, but the changes in the

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14 acquiring company are fairly limited. Jones (1985) already mentioned the importance of a suitable management control system in order to coordinate, integrate and monitor employee activities after the merger or acquisition. This integration process is key, since all value creation takes place after the acquisition (Haspeslagh and Jemison, 1991). Haspeslagh and Jemison (1991) distinguish four different streams of research. The economic school, which focuses on the stock return after a M&A. The strategic school focuses on relatedness in strategy. The third stream of research, ‘organisational behaviour’, focuses on the effect of acquisitions on organisational culture and the impact on individuals. The main theoretical proposition is that employee satisfaction will occur when cultures of the two firms are compatible, which leads to higher levels of integration. The fourth stream of research is the ‘process perspective’, which focuses on post-acquisition value creation. The main theoretical proposition is that potential benefits of an acquisition are only realized through the process of integration and actions of management.

Both the organisational behavior perspective and the process perspective are important for this thesis since they both emphasize the post-acquisition integration process. However, the objectives of the two perspectives are very different (Birkinshaw et al., 2000). The objective of the organisational behavior perspective is to create a shared identity through the integration process. Burkinshaw et al. (2000) call this the human integration. It is argued by Cartwright and Cooper (1993) that long term success only can be achieved through careful management of processes, whereby a lot of attention is devoted to the expectations and concerns of the employees of both companies in order to create one common culture. The objective of process perspective is to create value through sharing of knowledge, capabilities and resources. Birkinshaw et al. (2000) call this the task integration. The argument here is that potential synergies are present through organisational and strategic fit, but whether those synergies are realized or not depends completely on the actions of management during the post-acquisition process (Greenwood et al., 1994).

Many researchers tried to determine why mergers and acquisitions are (un)successful. When it comes to MCS, often one single element of management control is picked. In recent papers there is, for example, growing attention to culture as an element which influences post-merger management control systems (Jordão et al., 2014). However, approaching a single element instead of the whole MCS package has some serious drawbacks (Malmi & Brown, 2008). The first reason is that no MCS operates on its own. By studying a single element, the context of the broader control system is neglected. This could imply that some existing links are not recognized, which leads to incorrect conclusions. This is one reason why Chenhall (2003) did not found

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15 consistent explanations in linking MCS’s to certain types of organisations. Another reason is the lack of understanding those individual elements completely.

In this thesis the framework of Merchant & Van der Stede (2007) will be used to analyze the influence on M&A. This framework has a few advantages over other frameworks (Van der Kolk, 2016). The first advantage is the clear distinction between the boundaries of the various management control elements. Other frameworks have more overlap between the different elements (Strauß and Zecher, 2013). The second advantage is the more ‘objective’ classification of elements of management control as opposed to for example Simons (1995) who writes about the dynamic tension between ‘positive’ and ‘negative’ elements. Next to that, the LOC framework of Simons has been criticized for vague and ambiguous definitions (Tessier and Otley, 2012). Ferreira & Otley (2009) argue that the focus of the LOC framework is on top management, and does not pay attention to a wide range of informal controls that exist in organisations, especially in SME. This means that the LOC framework does not explain how the whole control system works, especially when organisations focus more on informal controls (Davila, 2005). The framework of Anthony and Govindarajan (2007) defines MCS in a very narrow way, which is visible in figure 2. With the exclusion of organisational structure, culture and Human Resource Management the MCS of Anthony and Govindarajan (2007) are all part of what is called result controls by Merchant & Van der Stede (2007). The purpose of this research is to investigate MCS in full breath, which makes the framework of Anthony and Govindarajan (2007) less useful.

FIGURE 4 Conceptual model

Figure 4 summarizes the purpose of this paper. It researches the influence of MCS as a whole on M&A. The different controls of Merchant & Van der Stede (2007) are researched, but attention is

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16 also paid to the interrelations of those controls. This is highlighted by the dotted line surrounding the four controls. M&A consist of three phases, the preparation phase, closing the deal and the integration phase. This research focusses on the first and the last phase. The last phase highlighted in bold since this is the phase where value creation takes place. The dotted line points out the M&A process as a whole.

3. METHODOLOGY

This chapter is divided into several sections. The first section is the description of data and interview techniques. The second section describes the different cases, in order to understand the background of the acquisitions and merger. The third section describes the four controls of the framework, and how they are used. The last section describes general findings.

3.1 Data

Eight companies where visited who were involved in at least one merger or acquisition in the past few years. The interviewees all had a managerial position in the company and where closely involved on the preparation side as well as the operating/integrating part of the merger or acquisition. All companies meet the criteria for the SME benchmark. Table 2 gives an overview of the different companies.

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17 TABLE 2 Company overview Company Position interviewee Sector Type of acquisition Buyers from

same industry (Inter)national Employees

PRARO Director/Owner Utilities Acquisition Yes National 250 POME Director/Owner Industry

Management

buy-in No National 10 RIJKU Partner Services Acquisition Yes National 61 STA Director Research Merger N.A. National 41 MIWEB Director/Owner Retail

Management buy-in No International 15 FIPA General Manager Industry Management

buy-in Yes National 12 DOTCOM Finance Director Internet Acquisition Yes National 68

GEVE

Member of Management

Team Transport Acquisition Yes International 246

3.2 Interviews

Interviews were held in a semi-structured way. A list of pre-formulated topics can be found in appendix 1, which was used as an interview guide. This served as a memory list to ensure the same topics were addressed and it increased the comparability of the interviews (Cooper et al., 2006). In the first two pilot interviews it became apparent that the interviewees were not familiar with the terminology as used in scientific literature. To tackle this problem we altered the questions a little to be able to connect to the management situations the interviewee faced. Every interview started with a short introduction of the research, stating the research question and explaining why research was necessary. After the introduction the framework of Merchant & Van der Stede was explained. During the first interview it became apparent that the interviewee was not familiar with the scientific terminology, and started to talk about ‘culture’ a lot, since it was the one phrase

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18 which sounded familiar. In the second until the last interview I made sure to give a thorough explanation of the different controls to prevent this happening again. The interviews were transcripted and labeled using Atlas. See appendix 2 for the labels. The first step in analyzing was the use of four general controls. The second step was specifying each part of the controls.

4. RESULTS

4.1 Case descriptions/Context

Every company approached the merger or acquisition different. This was due to a different starting point, different industries, different cultures and type of managers. In order to provide a better understanding of MCS, the context is described. The next paragraphs will provide information on the specific circumstances a company found itself in.

PRARO

Company PRARO participated in several different acquisitions, but the focus of the interview was on the acquisition of Wis and Otek. The acquisition of Wis was done based on a relatively low price, since the acquired company went bankrupt. This acquisition was done because the two companies ‘crossed paths’, although the owner/director still mentioned that the reasons for acquiring the company were strategic. The acquisition of Otek took place based on initiative of the former owner of the acquired company. The industry was rapidly changing due to more automation of administrative processes and for example inventory management. The previous owner felt he couldn’t deal adequately with those changes and looked for a company which was willing to take them over, in order to maintain employment opportunities. According to the owner of PRARO this made a big difference. The underlying reasons for the bankruptcy of Wis were not clear enough beforehand, which ultimately lead to huge difficulties during the integration. Company Otek was more expensive, but the company didn’t need help on short notice, which eased the integration process.

Important to mention here is the view on management of the owner/director of PRARO. He called himself ‘strict though just’. He called management of the Otek a ‘solid party’, but mentioned the lack of control at management of Wis.

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POME

Company POME was owned by a company which didn’t have any concern regarding the daily management issues within POME. The company was sold because of approaching retirement of the owners. A consulting company searched for a suitable candidate and found the current owner ‘a man with a bag of money and a lot of experience’, a management buy-in (Van Teeffelen, 2012). However, this experience had nothing to do with the industry whatsoever. It was rather experience with managing people, sometimes in situations of insolvency and bankruptcy of companies. The preparation of the current owner was limited to desk research on the industry. The current owner couldn’t finance the company on its own, and the bank agreed to help with a part of the financing on the terms that an investment company also would buy a part of the share. This construction had two advantages. The first was the shared risk for the parties and the second was that the investment company had some experience in the industry. The investment company is not participating in day to day business, but participates in quarterly shareholder meetings. The inexperience of the current owner forced him to get to know the company and the industry as soon as possible. This is one of the reasons why he focused on defining the ‘as is’ situation and the resulting result controls, as will be described in the paragraph ‘result controls’.

RIJKU

In this acquisition three parties were involved. The first was RIJKU, the second was company A and the third was company B. Both RIJKU and A where owners of company B, but leaderships styles differed a lot between RIJKU and A. This meant that a lot of ‘energy was lost’ due to constant discussions between RIJKU and A on matters regarding B. RIJKU came to the conclusion that the acquisition of all the shares of B would make the management of B easier. The second reason was the strategic possibilities this acquisition would bring. RIJKU had plans to enlarge their position in the market by offering a broader range of services, and the employees of B possessed the required knowledge and skills. This acquisition is unique in the way that communication with the employees of B was fairly easy.

RIJKU was the only company which mentioned that the financial goals of the acquisition were not met, although the integration was a success. External factors played a big role in this. In two years’ time the amount of work reduced with fifty percent, but two years later the amount of work was doubled. This means that all the energy of all employees goes to current projects, and that there is no time to focus on the desired new services. So although RIJKU and B are profitable, the expected synergies are not realised due to external factors.

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STA

Company STA is the only one who engaged in a merger. Company STA is the result of the merger of Company Gro and Company Dre. Already in 2008 the first attempt to merger administrative departments was made, but because of too much pressure for the employees involved the project was canceled. Both Gro and Dre were heavily subsidized by the local governments, but all of a sudden subsidy was canceled for about 85% for Dre. This meant Dre became more competitive on the market, which lead to tension between Gro and Dre. On initiative of both supervisory boards, Gro and Dre looked at the possibility of a merger again. The current director mentioned that the division of power was a very difficult process, as one of the two directors had to leave the company. This decision was postponed to the end of the process, which was a mistake according to the current director. Deciding on that immediately would have improved communication to all stakeholders. ‘The end [of the merger process] would be a happy final, instead of a difficult start’.

MIWEB

The current owner of MIWEB owns two companies, both separate from each other, in different industries. After setting up the first company the owner was looking for a new challenge and through his accountant he applied for a job at MIWEB. The former owner was however looking to sell the company. After a while the current owner decided to try to buy the company, in which he succeeded. This is called a management buy-in (van Teeffelen, 2012). The current owner had no experience in the industry. His preparation depended on desk research and visiting shops from competitors. The former owner didn’t allow the current owner to talk to employees before the acquisition, so everything, from procedures to culture, was unknown to him, with the exception of the financial data. An external consultant was hired in order to assist the current owner through the whole acquisition process, but he also wasn’t able to get a grasp of the culture.

Another point of interest was the mentioning of the word ‘power’ time and again during the interview, not only in combination with the previous owner but also in combination with the current situation. The interviewee came across as a dominant person.

FIPA

FIPA had been part of a large social company. This company provided jobs for (mentally) disabled people, and people who are looking for probation. This structure meant that they were partly owned by local governments, who’s top priority it was to be profitable. This meant that large investments weren’t allowed, limiting the expansion of FIPA. After a while it became clear that

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21 most of the employees felt that they needed to make investments in order to make progression, but that this was not going to happen with local governments still in charge. Together with the management of the social company it was decided that is was best for both parties to find an investor for FIPA in order to gain independence. FIPA was responsible for finding an investor and criteria were set up to guide the research. The investor should be people oriented, should have international experience, should understand the business and should have a connection with the current employees. A Swedish customer of FIPA was willing and able to buy the company.

DOTCOM

Before the acquisition of Company C, DOTCOM was a company with office buildings on two different locations, a headquarter and a small department. After the acquisition, those to locations merged into one, and the acquired company C became the second location. This would play a role during the integration as the employees of Company C felt they weren’t taken as serious as the location which merged with headquarters.

Company C was a reseller of products offered by company DOTCOM. The reason for acquiring company C was the growing call of customers of C to comply with all sorts of ISO regulation, but the company lacked the financial means to invest in training and certification. There was no knowhow with the employees on how to deal with the legislation, and hiring personnel just to figure that out would be too expensive. The owner therefore offered his company for sale to DOTCOM, who was already compliant with the legislation.

The financial manager of DOTCOM mentioned during the interview that a major mistake was to offer a job to the former owner. The expectations were that because of his personal capabilities he would be able to smooth the integration, contributing by sharing knowledge and managing customer relations through the process, but the opposite happened. It turned out that management of DOTCOM had a lot of discussions with the former owner about how to manage a company. The former owner did not like the introduction of formal rules but management of DOTCOM found it necessary to do so because of the growing size of the company. It was too big to handle in an informal way. Those discussions hampered integration a lot.

GEVE

Company GEVE engaged in multiple acquisitions, but only two were discussed in more detail. The reason for this was that some of the acquisitions took place more than 20 years ago, and although the transport manager has been working for GEVE his whole life, he wasn’t able to recall specific details of those acquisitions.

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22 Reasons of acquisitions for GEVE were always the bankruptcy of a competitor, first only national, but later also international. GEVE is in a very specific type of transport, which specializes in only one specific products. A truck needs to be adjusted to transport this product, and is than useless for transporting anything else. The advantage of this is that regular transporters are not able to compete in this market. A disadvantage is that in times of economic decline, trucks only transport one or two products, which makes transport prices per product very high. Due to a steady decline of the market, apart from yearly fluctuations, GEVE and its competitors battled for market domination; only the strongest would survive. To illustrate this the transport manager told during the interview that both a competitor and GEVE delivered to the same customer but both only filled the truck for around 10%. So it was a matter of time for one of them to go bankrupt, and it would be really easy for the remaining company to integrate operations into their own company, since a truck would be filled for 20% only. GEVE turned out to be financially the most healthy and acquired all major competitors throughout Europe.

There was often no need for GEVE to takeover personnel with an acquisition because of the huge amount of idle space in the trucks. The most important part in a takeover for GEVE was a delivery contract with the customers. The employees of GEVE had the capacity to absorb the extra amount of work relatively easy, and the trucks could transport the extra goods as well. Only the planning department was quite busy after an acquisition, ‘but with the help of one or two people it was not

too hard to handle’. This meant that problems with integration on management control level often

were small or non-existent.

4.2 Controls used by the companies

This section describes the use of the four different controls. An overview of which control was used by which company can be found in table 3, in the section Conclusions. With the context in mind, I analyzed every interview using ATLAS. The first step was the differentiation between the four controls. The second step was defining which element of a specific control was present.

4.2.1 Results controls

Result controls were mentioned by four of the eight interviewees. However, the level of importance varied. In two companies it played a major role in redirecting employee behavior by making a change to the targets which employee should pursue. In POME the situation ‘as is’ was assessed, and used to set targets for the coming years. Also, regularly meetings were organized

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23 to talk about the coming period and set targets for that period. This forced employees to be more future oriented instead of focusing on daily problems. Those meetings made agreements between employees more clear and it helped people to better understand their responsibilities instead of vague agreements which made everyone responsible for everything.

STA introduced result controls to align responsibilities for the employees of the two merged companies. This meant quite a big change for some employees, since they suddenly had a responsibility to approach new prospects. In the former organization, division of responsibilities was done based on their personality, now it was based on their professional experience and knowledge.

The other two interviewees which mentioned result controls always mentioned those in combination with other, not MC related problems. Gewe highlighted the IT systems to monitor results and the importance to integrate those systems as quick as possible. For the employees in the acquired organization it meant that only the systems were changed, but not the goals. The owner/director of PRARO mentioned that the result controls were the same for the acquired organization as for the acquiring organization, but due to the loose control of management of Wis before the acquisition, employees were sloppy in filling in the required forms after a project.

4.2.2 Action controls

Two of the eight interviewees mentioned action controls in the interviews. DOTCOM encountered problems after the acquisition when they noticed that the employees of the acquired company were used to very strict instructions of the owner: ‘At the end of the week, everyone got an

Whatsapp with what work should be done the next week, regardless of employees were independent or not.’ This gave major problems in the integration phase. People were very used

to get told what to do every week, while DOTCOM tried to institutionalize an entrepreneurial mindset. It was hard for DOTCOM to communicate clearly what was meant by an entrepreneurial mindset. The financial manager mentioned that after the acquisition the employees of the acquired company tried to invoice all kind of costs, such as lunches at restaurants and car washing. ‘People try to explore how much is possible. If you gain some personal benefit with

something and you get away with it, why shouldn’t you? And if you get caught you can always hide behind your ignorance: ‘I didn’t know it wasn’t allowed’’. But being entrepreneurial isn’t about spending money, it is about taking initiative, thinking how can we help our customers’. The way

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24 invoice and what not. But doing so face to face meant that management had to be present at different locations. I will elaborate on this in the section ‘cultural controls’.

The second company, MIWEB, used action controls to redesign processes within the company, although only minor changes were made in the freight policy. The new owner felt it was necessary to optimize the process of receiving inventory up to the selling point. By redesigning this process he made sure that inventories were always sufficient, and that analysis was possible in order to improve and enlarge their portfolio of products. Checks were introduced to optimise the ordering process of goods and eliminate mistakes as much as possible. This is an example of pre-action review.

4.2.3 Personnel controls

Job design played a major role in the integration phase for RIJKU. Before the acquisition took place, management carefully set out a plan on how new employees could contribute to the strategy. This meant assessing the situation ‘as is’, analyzing what additional skills were needed and discussing with employees of the acquired company how their skills and knowledge of certain products could contribute to the execution of the strategy. RIJKU exists out of two different divisions, both with a different approach to management. In preparation of the acquisition the employees of the acquired company were asked which management style suited their personalities and management of RIJKU made sure that employees who wanted more structure were placed in the division where work was more predictable and more scheduled, and the employees who wanted to work more independently got a role where improvising and out-of-the-box thinking was necessary. In important sentence during the interview was ‘we just asked them;

what do you want?’. This made it possible to predict to a certain extent which type of employee

suited best in which division. This in contrast to for example company MIWEB or POME, where the whole acquisition was kept a secret for employees and no preparation was done with regards to job design. A striking difference is the belief of the acquiring company that it is not possible to talk to the employees of the acquired company beforehand. As the owner of POME mentioned:

‘It is simply not how that works’.

As part of the integration RIJKU also offered training to new employees in order to enable them to better advice their clients. ‘They always used the same style of advices, convincing and

commanding them, but there are other, more effective ways’. This meant that employees were

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25 Company MIWEB also used personnel controls in the integration process, in particular ‘selection and placement’ and ‘job design’. The first one is with regard to the previous owner. It was agreed that the owner could stay as an employee for one year after the acquisition. It soon became apparent that the previous owner wasn’t contributing but was ‘just screwing things up. So I gave

him demotion, but after three months we came to the conclusion that it didn’t work, so we made sure that his employment ended’. Next to the previous owner, a total of five employees were fired

because of a lack of capacities. New employees were hired with the right capacities, but also had a secondary function: ‘I have a good relationship with them and through them I get a lot of

information about how everything functions’.

Company STA used personnel controls during the merger of the two companies, especially ‘job design and resource provision’. After the acquisition, the job description of the employees from one company changed, since their job description was based on their personal characteristics, but later became based on the level of professional experience. Reasons for this were twofold: the first was that clients preferred contact with only one advisor, ‘they want to know who is in

charge of the project, and that has to be the one that sells it to them’. The other reason is more

strategic, since the company is now less dependent on a few well-performing employees, capable of selling their services.

Another personnel control which was introduced were so-called ‘flex teams’. This meant that employees of both organisations had to work together on the same topics, since ‘people easily

get along with each other when they have the same interests’.

During the interview with company DOTCOM, it became clear that personnel controls were only a minor topic during the acquisition. During the due diligence phase, employee records were checked and employment contracts were scanned in order to gain more understanding of who was involved with the merger.

Company PRARO took a different approach to acquisitions and made use of personnel controls in the process. Instead of buying a company based on strategic reasons, PRARO decided that they needed employees with the right skills before buying a company which would add to their portfolio of services, but of which they wouldn’t have up-to-date knowledge of. The first step was hiring people with the right skills, consisting of knowledge of the service and the personality to sell those services. When new projects started coming in, PRARO hired new people in order to live

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26 up to the promise of delivering the service. The last step was acquiring the company and integrating it into PRARO. This approach also helped with the integration of the acquired company as ‘we had people who took other mechanics with them to jobs so they could get the proper

training. We also gave them in-service training. This is a key element in the approach of an

acquisition of PRARO. This element of mechanics working together helps integration in two ways. The first is the transfer of knowledge within the company, mechanics learn from each other. The second element is the transfer of culture, but we will elaborate on that in section ‘cultural controls’. Another element of the acquisition was training of employees in the administrative systems: ‘They

did many things in a very different way and at first we allowed it to some extent, but now they are trained as well. (...) It is very important that you maintain control over your company. We don’t want to rush the integration, since it is important that everyone can make the necessary changes. But that's why we are transferring people to the acquired company in order to help employees to make that change. It is important to notice here that the transfer of employees is not just used in

order to maintain a common culture, but the first reason is the transfer of knowledge and the on-the-job training.

Company FIPA made use of personnel controls by clarifying tasks and responsibilities. This was done through the creation of an extra board member position. This person would be responsible to make the organization act more ‘professional’. The interviewee mentioned the importance of the new board member because of a more objective way of looking at the organization and the prevalence to enact that change: ‘it is because of the new people that things really start to change.

I can tell them {the employees} exactly the same things, but I work here for 10 years. Other people can change things. About the new board member the interviewee said: ‘He is not an industry specialist, but he gives us insights and helps us to handle things. (...) We know sometimes that things should go different, but we don’t know how to change it. We needed an instrument, and in this case it meant a person. (...) At one point he {the new board member} asked us: ‘what do you even mean? Have you messed up this project or what do you want to say?’ That was what we needed.’

Another important issue which became clear just before the acquisition was that the previous owner lacked the insights and motivation to implement a new, more internationally oriented strategy in the company. During the years before the acquisition the owner delegated the decision rights more and more to other employees. This meant that with the acquisition the owner fully withdrawed from the company, leaving space for initiative and entrepreneurship to others in the organization. According to the current general manager, it was an important decision because ‘he

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didn’t have the power to change things. In the past I wanted to change things, but in the end it was him who was the boss. It bothered me because things were not going as quick as they could but you can’t change that. That is different now.’

4.2.4 Cultural controls

Cultural control were mentioned by every interviewee and played a major part in every merger or acquisition. Sometimes cultural controls were an addition to other forms of control or vice versa.

For company POME, one of the major issues after the acquisition was the uncertainty of employees, since the previous owner didn’t involve them in the process and didn’t tell them anything about their plans to sell the company. ‘The people here only knew the company was for

sale only 20 seconds to 12, so to say. (...) Employees experience a lot of emotions when the company is sold, they earn their living with their job. They didn’t know what they were up to, so they all opposed to the new situation (in Dutch: ze gingen op de rem staan). This was a major problem’. The previous owners didn’t have a role within the company and didn’t inform their

employees about the coming acquisition. The new owner was the messenger of the news that he would buy their company causing a lot of insecurity among the employees. The way he dealt with this problem was starting by communicating very clearly about the future and the roles of employees. ‘I stressed that nothing would change for the employees’. The new owner made use of cultural controls of norms, values and believes, in combination with tone at the top. ‘I do not

have a double agenda, I am sincere. People have to know that, they have to feel that, they have to believe that.’ In order to show the employees those values, the owner talked a lot to every

individual employee, not only about their insecurities, but also about his plans with the company and how every individual could contribute to the plan. ‘It creates commitment with the employees

and shows my good intentions’. The owner mentioned the possibility of skillful employees to

resign as the biggest threat. In order to maintain those employees he continuously stressed the importance of teamwork and mutual dependency. Being clear, transparent and taking people serious were values which were communicated through the organization by being the first one (as a manager) to act accordingly.

Company RIJKU encountered differences in management styles between the acquired company and the acquiring company (see also ‘Personnel controls’). Where one company was very directive in their management style, the acquiring company had a more entrepreneurial

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28 management style, where assertiveness and initiative are valued. This became clear in their vision on appearance of shops. The management of the acquired company valued that every shop looked the same, while RIJKU emphasized that every shop chooses its own development. That didn’t mean that every shop looked different, but a certain amount of freedom of decision-making stimulate a sense of local entrepreneurship. By preparing the employees before the acquisition for those changes, people of the acquired company were able to integrate smoothly, picking up on those values and attitudes.

Company STA took a careful approach to the merger of the two companies, especially with regards to cultural controls. An external consulting company was hired to assess the differences in cultures, which were reported. Key questions where what the philosophy of the organisation looked like and how the organization was managed. The expectation was that those points would be causes of friction between employees. ‘I thought that both organizations where quite similar

and that at the core we didn't differ that much, but it turned out to be very different. One of the

differences is described in the paragraph ‘result controls’. An underlying value was the phrase ‘reciprocal solidarity is most important, because we have to do it together’. This is one of the reasons why result controls were not introduced to be very strict targets, but rather as a guidance. In that way, it wouldn’t hamper cooperation.

Right after the merger, it became clear that both management teams had a very different style of communication towards employees. There was also a big difference between the extent to which employees were informed about the merger. An example of this is a New Year’s reception which was organized to get to know each other better but it turned out that when company A arrived at the location, management of company B didn’t inform their employees, so they took that visit as a huge surprise. This hampered integration, because employees had a lot of questions and insecurities with regard to the merger. ‘It took a lot of time develop a common culture, due to

difference like this. It took us three years and we are still not there’. In order to develop a common

culture, a consulting company helped the merged company to formulate new core values, core qualities, a mission, a vision. Management of STA took this very serious and kept talking with each other and employees to implement this common culture. Tone at the top is very important in this process since ‘managers are the ‘carriers of culture’ of the culture we stand for’. This became especially visible in the way the director saw her position relative to the employees: ‘the

former director wanted a room for herself, but I gave up my own room immediately after the merger to show that a new era had started. A merger gives a lot of uncertainty, so that is why you

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have to talk, talk, talk. Just work with them {employees} in the same room, in order to gain their trust. (...) It takes time for employees to recognize that I am one of them.

With the acquisition of MIWEB, the current owner came across some difficulties which were not known to him. It was agreed with the previous owner the current owner could not talk to the employees. According to the current owner this was due to a ‘rotten company culture’. An element of this was a very hierarchical division of roles, but the people in charge didn’t have the right skills. This was changed very abruptly by the current owner. This was accepted by the employees because he ‘was a nice guy. You need to make sure that the process of a merger gets a human

touch. (...) You have to make sure people can get used to the new situation. (...) What helps is that the previous owner was a very irresponsible entrepreneur. It strikes me how unhuman someone can be. He saw employees just like puppets. People came to work very unhappy. That helped me because I soon turned out to be much nicer and better [than the previous owner].

Company DOTCOM made conscious decisions about how cultural controls could help the integration process, but also what impact changes could have toward clients. Therefore, they started changing some physical aspects, such as their branding, in order to make employees feel like part of the company. ‘We still have some people on the payroll of the acquired company, but

everyone how gets a contract extension or a raise is put on the payroll of [the acquiring company]’

However, towards clients, at first nothing changed. ‘[The acquired company] was a small

company, and clients are very dependent on the entrepreneur. They choose for the entrepreneur, not for the enterprise. So we choose to change that very slowly. First we emailed all our customers that we acquired the company. After that, the previous owner send an email to explain everything from his point of view. (...) Our clients want certainty. There is a reason for the existence of this company name’. The downside to this approach was that it was confusing for personnel. But

according to the financial manager it helped a lot that the name of the acquiring company was on the payroll. Next to that he stated that it is ‘easier to manage employees than to manage clients.

You see your coworkers every day, so it is easier to tell them that nothing has changed.’

The second way to integrate the acquired company was the presence of top management at the acquired location. At first, management thought this would not be necessary since all the employees were highly educated and self-employed, but it turned out that ‘people felt lost’. It seemed towards the employees that they weren’t taken as seriously. This also had to do with the fact that the acquired company had only 8 employees, while the acquiring company had 60 employees. During the interview the acquired company was described as ‘the little sister’. ‘The

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dynamics with those systems are about how often you are physically present, how much attention you give to the employees, where does it happen, where doesn’t it, what happens with decision making, that whole game changes’. To make this specific and measurable, the company decided

that the manager operations has to be present at least once a week. The other members of the management team are at least once a month present. An additional benefit from this was that ‘many details could be organized by us [the management team] personally. That keeps you on

top of things.

Company GEVE made use of physical arrangements as well to boost integration. GEVE took part in a view acquisitions, in which they took the same approach with regard to those cultural controls. ‘We made sure to paint the trucks in our colors. We did it for the cheapest price since the lease

contracts were about to expire, but we didn’t want any association with our former competitors.’

However, in some cases the colors of the trucks stayed the same. This was due to the differences between the two companies in service. Both companies were highly specialized, but weren’t complementary to each other.

Another part of the cultural controls is the appearance of the offices. GEVE makes sure that every office looks the same, from the outside and from the inside. This means using the same colors, the same types of carpet, and when possible also the same office plans.

During the interview, the transport manager mentioned differences between countries in culture and mentality. ‘When you engage in an international acquisition you get to deal with their culture.

We were very used to work in our own way, we used introduced a few Dutch guys to show them, this is our culture, this is how we are used to operate and this is the way we want it. You have to imagine that the Belgium office held twelve employees before we came. We took over their business, made sure that we managed it tight and only four employees were left. We did with four guys what they did with twelve’.

Another example of culture came from an acquisition of a German rival. ‘There was a different

culture, everything was very hierarchical’. The way GEVE dealt with this was sending their

transport manager to the German office to assist with the integration of GPS tracking systems and administrative systems.

PRARO has engaged in different acquisitions, but not all of them were equally successful in terms of financial goals. With the acquisition of Wis, goals were not met due to big differences in norms and values, which made integration very hard. The interviewee told during the interview that two things are critical to the success of an acquisition: the integration of employees and the integration

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31 of systems. ‘[Before an acquisition] you have to look carefully at what methods a company has.[…]

But with Wis there was a certain freedom allowed by management which was not good for the company. This meant that a change of norms and values had to take place, but PRARO wasn’t

able to make that happen, so Wis was sold. The acquisition of Otek was successful, as PRARO was able to integrate the company into their own. The first item that was mentioned was the tone at the top of the acquired company. ‘The management of Otek was a strong party, they knew

what went on in their company. The mentality was there. I am in favor of strict but justice. People like that, there have to be rules. People want freedom, but there have to be rules, boundaries. And we saw that with the management of Otek, they were solid’. Due to the complementarity of

the norms and values it was possible to integrate the acquired company relatively quickly. One way this integration took place was that mechanics of the acquiring company joined the mechanics of the acquired company, in order to train them, but also to spread common norms and values. Before the acquisition of Otek however, things weren’t going as they should. ‘We

needed to take a big leap forward, otherwise we would go bankrupt. In order to create a better

common ground the management felt the need to implement a new, centralized structure for all their overhead: planning, finance, management, it department. This was made possible by designing a new building on a new location. “People didn’t have any contact with each other, that

had to change. We needed to become united again. The realization of this building helped enormously, people started talking to each other, we started to ‘speak the same language again’.

The design of the building was carefully planned, since management wanted to spread norms and values through their office plans. ‘The main stairs are very important. The stairs belong to all

of us and we need to look each other in the eye when we pass each other.’ Next to those physical

aspects, formal regulations were drawn up, in combination with founding of an entrepreneurial council (Ondernemingsraad). Another part was the branding towards clients, which was changed to emphasize their presence on the market. ‘We got a different appearance, the cars, the clothes’. The vision behind this was that every division had its own culture, and through the measurements mentioned above, PRARO was able to create one common culture. PRARO’s management took culture very seriously. ‘If you want ‘the right’ culture within your company, you must work on that

every day and take people with you along the road. That means that if there is a New Year’s reception, everyone should be there.’ But also the importance of tone at the top is mentioned

during the interview. It was emphasized that management had to be present at every location, especially for the mechanics. ‘It is important that management is seen, just as we want to see our

mechanics on the job. (...) If you [as management] never go somewhere else, you miss something. When a baby is born, you get a card.’ Management should not only know how things

THE INFLUENCE OF MANAGEMENT CONTROL SYSTEMS ON M&A SUCCESS IN SME