Groningen, January, 2012
Author: Daan Groothuijse
Student number: S1900072
Email: S1900072@student.rug.nl
Phone number: 0616094646
Course: MSc International business and management
First supervisor: mr. drs. H.A. Ritsema
Second supervisor: drs. A. Visscher
Abstract
Cultural distance and cross-border M&A performance are topics that are well discussed separately in the academic literature. However the relationship between them is limited in the academic literature , therefore this thesis attempts to increases the understanding of this topic and relationship. This thesis examines the theory of Weber, Tarba and Bacher (2011) that is used for choosing the right integration strategy in cross-border M&As. An extensive literature review has been done on integration strategies, M&A, performance and cultural distance. The results have indicated that the new model of Weber et al (2011) is a logical and value adding adjustment to the original model. The actual influence of cultural distance on the choice of integration strategies and on the cross-border M&A performance is complicated. There are multiple variables that have influence, however there are strong arguments and findings to assume that cultural distance will determine the integration strategy and that the best chosen integration strategy will indirectly lead to an increase of the cross-border M&A performance.
Keywords: Cultural distance, integration strategies, merger and acquisitions, cross-border,
performance, integration capabilities.
Acknowledgements
Table of content
Abstract ... 3 1. Introduction ... 6 1.1 The objective ... 6 1.2 Problem statement ... 6 1.3 Research question ... 8 1.4 Integration capabilities ... 8 1.5 Reading guide ... 10 1.6 Methodology ... 11 2. Literature review ... 142.1 Merger and Acquisitions ... 14
2.1.1 The M&A process ... 14
2.1.2 Initiatives behind an M&A? ... 15
2.1.3 Merger and acquisition performance ... 15
2.1.4 Conclusion ... 16
2.2 Integration strategies ... 16
2.2.1 Absorption, preservation and symbiotic integration ... 17
2.2.2 Choice of integration strategy ... 18
2.2.3 Determinants of the level of integrations ... 20
2.2.4 Post-acquisitions integrations effects ... 20
2.2.5 Acculturation theory ... 21
2.2.6 Conclusion ... 22
2.3 Culture ... 24
2.3.1 National and organizational culture ... 24
2.3.2 CD has a positive influence on the performance of M&As ... 25
2.3.3 CD has a negative influence on performance of M&As ... 25
2.3.5 Limitations of the cultural dimensions of Hofstede ... 26
2.3.6 Conclusion ... 27
3. Conceptual framework ... 28
4. Comparison and mini cases ... 30
4.1 Comparison with other theories ... 30
4.1.1 Comparison between the original and the new theory ... 30
4.1.2 Comparison with the acculturation theory ... 31
4.2 Evidence from cases ... 32
4.2.1 DaimlerChrysler ... 32
4.2.2 AOL and Time Warner ... 34
4.2.3 Cimc and Burgs ... 35
5. Findings ... 38
5.1 Evidence ... 38
6. Conclusion and discussion ... 41
6.1 Conclusion ... 41
6.2 Discussion ... 41
7. Limitations and further research ... 42
1. Introduction
1.1 The objective
This thesis focusses on integration strategies and M&As. More specifically, it takes a critical look at the existing literature about the influence of cultural distance on the chosen integration strategy and that relationship with cross-border M&As performance. Does the chosen integration strategy have influence on the performance of cross-border M&As? What determines the integration strategy? In the current literature there are contradicting arguments for the real influence of integrations strategies in cross-border M&As. This thesis will focus on the theory of Weber, Tarba and Bacher (2011). They adapted the integration model of Haspeslagh and Jemison, (1991) by adding cultural distance and synergy potential as determinants for the choice of integration strategy. This adaption made it possible to use the model to make a choice which integration strategy is most suited for a cross-border M&A. The findings of this thesis are intended to increase the understanding of the influence of integrations strategies on cross-border M&As with high cultural differences. Besides that, companies that deal with cultural distance in cross-border M&As can use this study to give them more insight in choosing the most suitable integration strategy and increase the chance of for more synergy and a higher value.
In this thesis an overview will be given of the current literature that focusses on four different integration strategies of Haspeslagh & Jemison, (1991). Absorption, preservation, symbiotic, and holding. These integration strategies are the most common used strategies for cross-border M&As. Besides an overview, this thesis will compare the model of Weber et al. (2011) with other theories and cases that deal with integration strategies. This will help to assess the new model if it is adding value to the academic literature. There are contradicting arguments about if CD is a determinant for the selection of integration strategies and the actual influence of CD on the performance of cross-border M&As. The results this thesis provides will help to answer the research question and attempts to increase the understanding about the main topics.
1.2 Problem statement
expansion for companies over the past decades (Teerikangas and Very, 2006). Regardless of the popularity, more than half of all M&As end up in a failure (Haspeslagh and Jemison, 1991). Besides that, recent work of Moeller and Schlingemann, (2005) making a statement, they “are still pessimistic over the success potential of cross-border acquisitions”.
1.3 Research question
The aim of this research is to see if CD has an influence on the selection of integrations strategies and on the performance of cross-border M&As. Furthermore, the new model of Weber et al. (2011) will be assessed. In order to do this the following topics will be explored, integration strategies, cultural distance, M&As and M&A performance. Besides that this thesis will investigate what the relationship is between those topics. From this the following research question has been developed:
“To what extend do cultural distance affect the selection of integration
strategies and the performance of cross-border M&As?”
1.4 Integration capabilities
Source: Reus and Lamont, 2009
The different integration capabilities can be explained as follows, Key employee retention is to which extent the members of the selling company stay in the organizations during the integration process, who are vital to create advantage (Ranft and Lord, 2002). Communication to which extent the people of the buying and selling company correspond with each other with all kinds of media across former company boundaries during the integration process (Larsson & Finkelstein, 1999; Ranft and Lord, 2002). The last capability understandability can be explained as to what degree the employees of both companies can learn and organize the routines and practices from each other. This way create a resource advantage for the company during the integration process ( Zander and Kogut, 1995; Zollo and Singh, 2004). Reus and Lamont (2009) find empirical evidence to support their framework, which supports the statements of Haspeslagh and Jemison (1991), Jemison and Sitkin (1986). Integration capabilities have a direct link with integration strategies and therefore the work of Reus and Lamont is related to this research. Integration capabilities are specific organizational practices that manage the integration process, to further explain this, when companies choose a certain integration strategy it is necessary to manage key factors to successful implement the new strategy and to add value to the new company. To summarize this, there is a strong relationship between integration capabilities and integration strategies, the capabilities need to be managed otherwise it will be difficult to integrate companies.
As said in the beginning of this chapter this thesis is based on the theory of Weber et al. (2011), according to them the choice of integration strategy depends on the level of CD there is and the desired level of synergy that is needed. In other words it is necessary to use CD as a determent for the choice which integration strategy is best suited for a company that is involved in a merger. The framework of Reus and Lamont (2009) which is based on integration capabilities (a part of the total integration process) does not explain which relationships there are that determine the choice for the most suited integration strategy. Therefor their model has to be adjusted to visualize the relationships there are in this thesis and to help explain the relationships formulated in the hypotheses. To answer the research question and to create this new adjusted model the following subjects has to be investigated, integrations strategies, cross-border M&As, M&A performance and cultural distances. These subjects will be discussed extensively in the literature review, and hypotheses will be formed that needed to be tested, to draw conclusion and answer the research question.
1.5 Reading guide
1.6 Methodology
This section describes the data collection, the research design and how the results are interpreted. This thesis is a descriptive study and the research is qualitative due to the fact that there no empirical research is conducted. According to Thomas, (2004) the descriptive method of doing research can be used to better understand common theories and characteristics of processes. To assess the theory (model) of Weber et al. (2011) it is necessary to investigate not only their theory, but also the related topics and other angles. The subjects that need an in-depth examination are, integration strategies, cross-border M&As and cultural differences. The extensive literature review will help to understand the problems and to answer the research question. In this thesis the so-called deductive research approach will be used, in figure 2 the deductive research approach is shown. According to Thomas (2004) the deductive research approach is used to work from more general to more specific point of view.
Source: Thomas (2004)
In this thesis the starting point is the theory of Weber et al. (2011) and can be seen as the more “general”, and at the end of the thesis the support or answers are given to the research question and the hypotheses that are formed. In between is the literature review and the observations from cases that help to answer the raised question in this thesis.
The theory of Weber et al. (2011) are tested with the four hypotheses that are explained in chapter 2 and summarized in chapter 3. A comparison with other literature helps to assess whether the adjustment of weber et al. (2011) to the model is useful and adds value to the academic literature. The observations will be done with three mini cases of mergers between large multinationals. The first case is between Daimler Benz from Germany and Chrysler from United States of America. The second case is between AOL and TimeWarner, they are both from the United States of America, the last case is between Burg industries from the Netherlands an CIMC from China. In the first place the cultural dimensions of Hofstede are used to assess the CD between the companies. Besides that the cases are examined on the characteristics of the integration strategies if they are visible and in what degree to get a better view of what the influence is of CD on integration strategies and on the cross-border performance . In figure 3 is visualized how this thesis will perform the research.
In the literature review the foundation for the hypotheses has been formed and they are summarized in chapter 3. The hypotheses have been used in the comparison of theories and in the cases studies. The way that they are used is that the comparison and the case studies attempt to highlight the factors tested in the hypotheses. This way chapter 4 gathers evidence for the hypotheses. In chapter 4.1 and 4.2 the case studies are discussed and assessed on key characteristics of integration strategies, besides that the theory of Weber et al. (2011) will be
compared to other theories. These case studies and the comparison with theories will be used in the chapter 5. In the chapter 5 the findings of the case studies, comparison with theories and arguments of the literature review are discussed and summarized to assess if there is enough evidence to assume that a hypothesis is true or false. In this chapter the findings of previous chapters are analyzed in order to test the hypotheses. The outcome of the hypothesis testing is used to answer the research question and draw conclusions upon in chapter 6.
2. Literature review
After developing the research question, this literature review will describe and explain the relevant theories. The main theories concerning cultural differences, integration strategies, merger and acquisitions will be explained. The literature review will be divided in 3 sub-chapters , in the end of each sub-chapter a conclusion is given of the main points. In chapter 2.1 issues about M&As are discussed, to specify this more, questions and issues like what are M&As, M&A performance and the initiatives behind M&A will be answered. Chapter 2.2 will discuss the most common used integration strategies, the theory of Weber et al. (2011). In chapter 2.3 issues concerning culture and CD that are related to cross-border M&As are explained. These chapter should help to understand the related topics better and form the foundation for the hypotheses. This literature review will help to assess the theory of Weber et al. (2011) and draw conclusion to answer the main-research question.
2.1 Merger and Acquisitions 2.1.1 The M&A process
Merger and acquisitions are a well-known phenomenon, however it is necessary to define M&As to make clear how it is interpreted and used in this thesis. The most common deals are mergers between companies with approximately the same size and work in the same industry, with acquisitions the buying company is in most cases larger than the selling company (Weston, Mitchell and Mulherin., 2004).
According to (Weston et al., 2004) the process of M&As is rather organized, The process starts with when a company’s strategy fits to participate in a merger or make an acquisition. In the next chapter the initiatives are explained to a larger extend. The next step is to orientate what the goal is and identifying interesting targets. The preparation is the following step, in this step information of the target company is gathered. In the following step the target company delivers the information, this information contains analysis of future expectations and financial analysis. This information helps the buying company to make an offer, if the buying and selling company think there will be room for negations the next step will be taken. The transaction step consist of an extensive investigation to prepare the final offer.
the takeover process the post-merger integration starts. The phase of post-merger integrations consists of the integration of the buying into the selling company and the realization of the synergies becomes clear.
2.1.2 Initiatives behind an M&A?
In the academic literature there are several reasons why companies perform a M&A, the most obvious are to enter economies of scale and create synergies. Weston et al. (2004) describes three different theories:
Value-reduction: free cash flow might cause value-reducing M&As. When a company has a high free cash flow, it might be attracted to participate in projects with a negative net present value. Another theory of value-reduction through M&As is that managers make themselves more valuable to the company by investing. Managers then make investments to lower the probability of their replacement.
Value-increase: in this theory value is increased through synergies. Several synergies can be brought up: economies of scale, efficiency measures, improvement of production techniques and a combination of complementary resources.
Managerial hubris: managerial hubris means that managers are subject to excessive self-confidence. In such case the manager with the most optimistic forecast of the value of a target gets trapped by the winner’s curse. This theory is explained by Rolls (1986). The winner’s curse occurs when there are several bidders for a selling company, the most optimistic manager wins the bidding competition. In these cases there is a realistic chance that the price paid for the target is higher than the actual value.
2.1.3 Merger and acquisition performance
between the two organizations has been achieved across all of its task dimensions in a satisfactory manner.”
The second level is on firm level, this is measured over the total length of the company, and therefore takes the most into account. The performance of firm level is measured during the relevant period of time when the plans for the M&A are executed (Zollo and Meier, 2008). The third level is on transaction level, this one focuses on the value creation that is generated by the M&A when it is performed. It can be summarized as the total of growth and cost efficiencies that is generated by the completed company (Zollo and Meier, 2008). The second dimension is the time scale, this is referred to as measures that can be done in short -, medium- and with long-term perspectives. The choice depends on the results that is needed, however in most cases companies choose for a short-term time-scale of one year after the merger (Zollo and Meier, 2008).
2.1.4 Conclusion
Companies perform an M&A for several reasons, because of the value reduction, creation and managerial intensions. M&A performance is difficult to measure due to the fact that there is not just “one” measurement tool to do this. The short-term timeline measurement is used in most M&As, that measures the performance of an M&A a year after the merger. Besides that most companies then assess the company’s performance at the firms level. In most cases the M&A process is structured and follows a certain pattern, however the choices that companies have to take are difficult. Different intensions, motives and companies will use diverse integrations strategies. Therefore it is necessary to investigate what integration strategies there are and why they are chosen.
2.2 Integration strategies
(Larsson and Finkelstein, 1999). To create synergetic similarities it is necessary to cut costs of overlapping actions and a combination of complementary capabilities that cannot be copied by other organizations and this gives the M&A a great potential for performance (Bjorkman, Stalh and Vaara, 2007).
According to Pablo (1994) the level of integration can be defined as to what extend there are post-acquisition changes in administrative, technical and or the cultural configuration of the company. In M&As the level of integration is an important phenomena due to the fact that in theory a high level of integration should result in high synergy potential, however in practice it will not always result in a positive synergy potential. The negative synergy potential could be a result of conflicts in the company and the coordination costs.
2.2.1 Absorption, preservation and symbiotic integration
Haspeslagh and Jemison (1991) developed their strategies by looking at two insights of and M&A, that is not only the preservation of the existing capabilities of the acquired company, but also the transfer of capabilities. These insights helped to develop a typology of acquisitions that where formed around two different dimension, namely: “ the degree of desired strategic interdependence between acquired and acquirer, and the need for the acquired firm's continuing organizational autonomy” Haspeslagh and Jemison (1991). These dimensions where combined to created four categories, absorption, symbiotic, preservation and the fourth category holding combines low autonomy and low interdependence. The fourth category is mostly deleted from the integration strategies due to the fact that it describes a holding company and integration is not used in this strategy, there is no intention to integrate into one new company. It is fundamental to know the distinction between the three integration categories, because this will determine the best suited way to manage the integration process of an M&A.
The best known strategy is the absorption strategy , in this method the buying firm will absorb the acquired firm, this strategy is a challenge for the managers, the most difficult part is the consolidation and rationalization. They need to find out which facts overlap and which will be shared for the best practice. Key characteristics of this strategy are : Fully integrate the selling company into the buying company, the operational autonomy is low for both companies and high for the strategic interdependence , the operations and culture will be used or enforced of the buying company (Ellis and Lamont, 2004).
acquired firm. The changes that will be made, should be made with care so new organizational capabilities can be formed without harming the current sources of strength. Key characteristics of this strategy are: limited strategic interdependence, little change for both companies and keeping their own cultures for most part (Ellis and Lamont, 2004).
The last strategy is the symbiotic, this is also the most difficult form due to the fact that the buying company should achieve strategic interdependence while the acquired firm still has organizational autonomy. However the goal of this integration strategy is to use the “best practices” of both companies on every level, organizational and or cultural. Key characteristics of this strategy are: both firms need to change, best practices, developing a workable atmosphere of cooperation, requires a great effort from the managers of both companies to manage and choose the best practices and culture (Ellis and Lamont, 2004).
2.2.2 Choice of integration strategy
Source: Weber, Tarba and Bacher, (2011)
This model distinguishes itself from the original model of Haspeslagh and Jemison (1991) by using the cultural differences variable to determine with integration strategy is appropriate. According to Weber et al. (2011) the need to use cultural differences as a variable is because in the work of Haspeslagh and Jemison (1991) they found empirical evidence for the importance of cultural differences on the success of the integration strategy. Besides that Weber et al. (2011) explain that there is no empirical evidence for the fact that the need for autonomy is influencing the choice of integration strategy, which is used in the original model of Haspeslagh and Jemison (1991).
In the work of Datta (1991) they found that cultural differences between the two merging companies result in conflicts and difficulties in achieving the needed level of synergy. Another finding of their study is that due to the conflicts that arise the M&A performance decreases also when there is a low level of integration. Only when companies can both have their own management styles and keep everything separately it will not affect the performance of the company. According to Teerikangas and Very (2006) to assess the M&A performance researchers should not only look at integration strategies or cultural differences on its own, they suggest that it will lead to an oversimplification of the problem. M&A performance is a complex phenomenon and cultural differences will influence the choice of integration strategy. According to Morosini, (1998) cross cultural skills are important in the integration phase, they suggest that the appropriate integrations strategy helps dealing with the cultural differences in an M&A. In the work of Weber et al. (2011) they find empirical evidence for the link between the integrations approaches and integration effectiveness. They stated in their
research that the choice of the most suited integration approach deals with the negative effects of cultural differences and therefore creates a higher synergy level.
On the other side, in the work of Pablo, (1994) he states that cultural differences are not the most important in determining the integration strategy. In his work the strategic and organizational tasks are the most important.
2.2.3 Determinants of the level of integrations
In the work of Pablo (1994) the factors that determine the level of integrations are explained, strategic, organizational, power differential and culture are important factors. The power differential is important especially in cross-border M&As, because in M&As it is often the case that conflicts arise over the command and terms of the new company. In these conflicts the buying company will use their power to enforce their terms. The level of power that is used in an M&A partly determines the level of integration (Shanely and Correa, 1992). Cultural factors are important due to the fact that in an M&A it is possible that culture will have an instrumental effect on the control functions and coordination of the M&A. According to Shiel and Martin, (1981) culture can create commitment and therefore it is an determinant of the level of integration ( Pablo, 1994). In the work of Haspeslagh and Jemison (1991) there are two more important determinants for the level of integration: the strategic and organizational tasks. The strategic tasks are related to the level of exchange of skills and resources that are related to the value creation of the company. These strategic tasks need resources that give direction and guidance, the organizational tasks are responsible for this (Pablo, 1994). According to Pablo, (1994) the strategic and the organizational tasks are the most important determinants for the level of integration.
2.2.4 Post-acquisitions integrations effects
the merger. These results can cause synergy potential problems and can influence the integration process negatively. According to Weber et al. (2011) there is thin line between the level of integration and the exploited synergy. To achieve high levels of synergy, high levels of integration are needed, however high levels of integrations could cause problems with culture clashes and employee problems that will give a negative result to performance of an M&A. These problems can increase the cost and therefore the expected value increase will not be achieved Weber et al. (2011).
However, in cases of high cultural differences which could influence the synergy potential negatively, the M&A performance still increases. This implies that high cultural differences may improve M&A performance when the level of synergy is high Weber et al. (2011). There are contradicting arguments about the influence of the integration strategies on the performance of M&As. In the work of Larsson and Finkelstein, (1999) and Weber, (1996) they find a positive relation between the level of integration and M&A performance. On the other hand in the work of Lubatkin, Schweiger and Weber (1999) and Calori, Lubatkin, and Very (1994) they find a negative relationship between the level of integration and M&A performance. As mentioned earlier a high level of integration could result in employee problems and tensions which could lead to higher employee turnover. A high level of employee turnover is associated with a decrease of the firms value (Stahl and Voigt, 2008). There are also some studies that found that there is no relationship between integration strategies and M&A performance Morosini, Shane and Singh (1998). An answer to these contradicting findings about the relationship between M&A performance and integration strategies could be that in these studies other variables like cultural differences are not controlled. To assess the real influence of integration strategies on the M&A performance it is necessary to take cultural differences into account.
2.2.5 Acculturation theory
that should be answered is whether the selling company wants to perceive its own culture and find the buying company suitable for the choice which mode of acculturations is needed.
Figure 5: Acculturation model
Source: Nahavandi and Malekzadeh (1988)
Nahavandi and Malekzadeh (1988) argue that the similarity between the participating companies preferences for modes of acculturation will be a success factor behind the deal. It is difficult to predict the acculturative preferences because it depends on the histories of both companies. In the work of Hofstede (1980) for national culture, the historical development of companies and countries has a strong influence on the development of shared beliefs and values. Thus companies shared preferences for modes of acculturation are affected by mental schemes that are deeply embedded in the experiences of both companies employees. Acculturation theory provides an important argument in showing that cultural differences do not have a de facto or static effect on the performance of M&A. Indeed, the impact of cultural differences will be mediated by preferences for modes of acculturation made by the participating companies members throughout the M&A process. A deal that pleases both parties is likely to encounter less employee resistance than one that both parties enter with negative feelings. Furthermore, staff members’ perceptions keep altering during the integration phase. Whereas at the start, they might appear positive, these perceptions may later change depending on the actions taken by the buying company. Therefore, choices of acculturative modes are made throughout the integration phase, acculturative stress or attraction impacts the entire course of integration.
2.2.6 Conclusion
integration strategy, in their research they found evidence that M&As with high CD were more successful with the right integration strategy then others deals. These arguments lead to the second and third hypothesis, the second is formulated as follows: High cultural distance will increase synergy between merging companies. The third hypotheses is: High cultural distance will lead to high focus on integration capabilities.
2.3 Culture
2.3.1 National and organizational culture
Cultural can be measured on two different levels, on organizational and on national level. Organizational culture can be defined as that culture focuses on the beliefs, values and assumptions shared by an organization’s members (Schein, 1985). However in the last years the definition of organizational culture has changed and nowadays can be defined as, the importance to determine an individual’s commitment, satisfaction, productivity and longevity within the organization (Holland, 1985; O’Reilly, Chatman and Caldwell, 1991) besides that it is also essential to understand the climate of the organization.
2.3.2 CD has a positive influence on the performance of M&As
Researchers discuss what the actual influence is of CD on the performance of an M&A, in this sub-chapter studies and papers will be discussed that arguing CD has a positive influence on M&A performance. In a study of Larsson and Finkelstein (1999) is evidence that when the jointly shared meaning between the combing firm will lower the levels of employee resistance, and that will result in a higher extent of synergy realization in cross-border M&As. Larsson and Risberg argue that M&As are “blessed” with a higher propensity for culturally aware selection and integration management.
In a study of Morosini, Shane and Singh (1998) they show that culture distance can also have a positive influence on M&A performance. Furthermore they explain that there are two different ways in which one can improve the performance of the combined organization by access to routines and repertoires via acquisition of a firm in another national culture. The first one is through learning (Ghoshal, 1987), some organizations are unwilling or not able to develop certain routines because they do not have a certain tradition or a special ways of doing it (Barney, 1987). In this way a cross-border M&A will help the two companies to learn and interact from each other at various operating levels and combining their organizational routines (Haspeslagh and Jemison, 1991). The second is that organizations through specialization, could access specialized routines that a local context of other organizations in other national cultures (Lincoln, 1981).
2.3.3 CD has a negative influence on performance of M&As
so distracted that the potential benefits are not shown. Stahl and Voigt (2008) discusses in their study that confusion, distrust between members of the merging companies and hostility could be an effect of the differences in national culture. These problems could interfere with the integrating process.
2.3.4 Measurement of cultural distance with cross-border M&As
The two best known methods to compare countries with each other are the method of Trompenaars (1997) and Hofstede (1991). Trompenaars considers that each culture has to deal with several universal problems . An example of those problems are: social interaction, passage of time and relationship to the environment, that will unveil seven dimensions of culture. The seven dimensions are: neutral versus affective, individualism versus communitarianism, universalism versus particularism, achievement versus ascription, specificity versus diffuseness, sequential versus synchronic and the last inner versus outer directedness. Together with Hofstede they have created one of the largest databases for studies of cross-cultural management.
Hofstede (1991) defined culture as “collective programming of the human mind that distinguishes the members of one human group from those of another”. In his study that he did for IBM he developed a system to measure cultural distance. After collecting the data from a time scale of 1967 till 1973 he discovered that cultures are different form each other along four dimensions. These dimensions are: power distance, individualism versus collectivism, masculinity versus femininity and the fourth dimensions is uncertainty avoidance. In appendix I the explanations of these cultural dimensions are explained. In a later stadium of his research Hofstede (1991) added a last dimension and which is long-term versus short-term. Each of these dimensions are measured and given scores, this way it is possible to compare countries with each other to see if there is CD between them.
2.3.5 Limitations of the cultural dimensions of Hofstede
2.3.6 Conclusion
3. Conceptual framework
In the literature issues around CD, M&As and integration strategies are explained. In chapter 1.4 the conceptual model of Reus and Lamont (2009) showed the relationships between integrations capabilities and CD on M&A performance. However this model did not show all the relationships that are applicable for this thesis. The literature review outlined different relationships and variables between integration strategies and cross-border performance. In figure 6 the conceptual model of this thesis is showed.
Figure 6:Conceptual model
relationship will have a negative influence on the synergy potential. The third arrow shows the relationship between the level of synergy and integration capabilities that will influence the choice of integration strategy. According to Weber et al. (2011) the choice of integration strategy will influence the M&A performance in a positive way, this relationship is indicated with the fourth arrow. Besides that Weber et al. (2011) show that the choice of integration strategy is influenced by the level of CD there is in a company. Research done by Haspeslagh and Jemison (1991) indicates that there is emphasize on the importance of CD and that it has influence on the choice of integration strategy. The contradicting arguments about the influence of CD on M&A performance make it difficult to determine the actual influence. In fact according to Harzing (2009) the arguments that CD has a positive influence on M&A performance are stronger, however according to Teerikangas and Very, (2006) that did research on the influence of CD on M&A conclude that more factors need to be taken into account. The suggestion is that CD has an indirect influence on M&A performance. The fourth arrow indicates this relationship that CD influence M&A performance via the chosen integration strategy.
In chapter 2 the literature review 3 hypotheses are formulated, in the table1 they are summarized.
Table 1 : Hypotheses
Hypotheses
1. High cultural distance will lead to integration strategy symbiosis.
2. High cultural distance will increase synergy between merging companies.
3. High cultural distance will lead to high focus on integration capabilities.
4. Comparison and mini cases
The hypotheses that are formed need to be tested, however in order to do that, data and arguments need to be presented. In this chapter these data and arguments are partially generated and discussed here. The other part that provides arguments is in the literature review. First the theory of Weber et. Al (2011) will be evaluated and compared to other theories. These arguments will be used to form the evidence for the hypotheses. In the second place the case studies will be examined to see if key characteristics of integration strategies and characteristics that are used in the hypotheses are visible (e.g. synergy, symbioses, CD and M&A performance). The key characteristics are important for the falsification of the hypotheses, in order to do that the overall integration process of M&As will be examined and the cultural dimensions of Hofstede will be used for indicating the CD on national level. Furthermore a summary of problems/positive point will be given to show how the integration process/ merger developed over the time. These findings from the case studies will be used to see what academics are suggesting is also visible in real cases.
4.1 Comparison with other theories
In this chapter the suggested theory of Weber et al. (2011) will be compared to other theories. In chapter 4.1.1 the theory will be compared to the original model of Haspeslagh and Jemison (1991), besides that the findings of other researcher will be used to assess if it is useful to use CD and synergy potential as a determinant for the choice of integration strategy. In chapter 4.1.2 the acculturation theory will be used to give another view on the use of CD in M&As and integration strategies. In the research field of the acculturation theory arguments of other researchers are used to support or reject the findings and conclusion of Weber et al. (2011) and of the acculturation theory.
4.1.1 Comparison between the original and the new theory
Companies want to gain autonomy for several reasons, however according to Haspeslagh and Jemison (1991) managers need to be careful in gaining autonomy and keep the value creation goal in mind. Gaining autonomy too fast could create conflicts and lower the potential for value creation Haspeslagh and Jemison (1991). In figure 7 the model is displayed.
The main differences between the two theories is that the need for autonomy is replaced by cultural differences and the need for strategic interdependence by synergy potential. According to Weber et al. (2011), the reasons for changing the existing model is that even the empirical evidence Haspeslagh and Jemison (1991) found indicated that importance of cultural conflicts on the integration process. Besides that according to Tetenhaum (1999) in M&As culture is the key point is in a the integration process, they even describe it as the “heart” of the whole process. In research of Weber and Camerer (2003) they found evidence that differences in cultures between two merged companies can lead to a decrease in their performance. Employee stress and integration effectiveness are influenced by cultural differences or similarities (Chatterje, Lubatkin and Schweiger, 1992; Weber 1996).
4.1.2 Comparison with the acculturation theory
According to the research of Teerikangas and Very, (2006) the integration strategy depends not only on the buying company but also on the selling company. It depends on the willingness of the selling company to change their culture and the attractiveness of the buying company. The acculturation theory provides the academic literature with arguments that CD does not have a fixed effect on cross-border M&A performance, it is suggesting that the influence of CD is more indirect and that there are more factors that need to be taken into account Teerikangas and Very, (2006). The acculturation theory deals with changes in culture within companies, therefore is it necessary to see the importance of CD in M&A Teerikangas and Very, (2006). An M&A could be more successful if there is less employee resistance, the acculturation theory is suggesting that cultures in organization are in constant change and therefore the integration strategy has to be adapted to that. According to Chatterjee (1992)
companies need to be very careful in the integration process and has to keep the cultures in mind. A conclusion that is drawn in the article of Teerikangas and Very, (2006) is that the influence of CD on cross-border M&A performance is influenced by the chosen integration strategy and the chosen acculturation mode. These choices are made by both companies in order to lower the resistance and increase the added value. According to Miller (2000) companies want to create a “family” feeling in the company, they are trying to get their employees to identify themselves with the organization and see it as their own company. However if a cross-border M&A take place, and the “family feeling “ is high, the employees will feel abandoned when mangers and leaders will leave due to the merger. This indicates the importance of CD in cross-border M&As to manage feelings (culture) of the employees.
4.2 Evidence from cases
In this chapter different mini cases of real M&A will be discussed. In order to assess the theory of Weber et al. (2011) it is necessary and useful to see what happens in practice and not only in theory. The first mini case will be between two large automotive companies Daimler Benz and Chryler, the second one between two large media organization AOL and Time Warner, and the last between a Dutch and a Chinese trailer manufacturer. The first two cases are cases where CD distance had a negative influence on the merger and in the last case the outcome of the merger was positive.
4.2.1 DaimlerChrysler
Figure 8 :Cultural dimensions of Germany
Source: Hofstede, (2011)
The scores of the German cultural dimensions are PDI 30, IDV 73, MAS 72, UAI 71 and a LTO of 27. To compare this to the cultural dimensions of the USA the scores are given in figure 9.
Figure 9 :Cultural dimensions of USA
Source: Hofstede,(2011)
The cultural dimension scores of the USA are, PDI 37, IDV 88, MAS 68, UAI 41 and a LTO of 24. When the USA and Germany are compared to each other there are differences visible. Especially on the dimensions of IDV and UAI, these results could forecast difficulties between a German and a USA company. Without a good integration strategy and adjustments to each other problems could occur.
Table 2 : Problems occurred in the merger of DaimlerChrysler
Which problems occurred after the merger
What did they do to resolve these problems
Market share dropped from 16.2% to 13.2% They tried to become more a low-cost
producer
Cultural problems that started at the top. They tried to change their reward system and reassign people of fire them.
Almost 66,6% of Chryslers managers where fired or reassigned.
The new reward system and the managers on other places regained slowly acceptance. The CEO of Chrysler was fired in a time
period of less than a year.
The appointed a new CEO for Chrysler
In 2007 Daimler sold Chrysler due to the fact that the merger did not increase the company’s value. During the time period of the new company continuous lawsuits about who is in charge and how the problems could be solved were not stimulating for solving their problems. It turned out that Daimler thought it was better to sell Chrysler because of the huge losses. In the article of Apfelthaler, Muller, Rehder (2002) that investigate the problems found that the main reason was the totally different culture between Daimler Benz and Chrysler. Another article that did research on this merger, found that there were a lot of problems with the acceptance and openness of the managers and that the culture was deeply rooted in both companies (Yu, 2000). The research of Apfelthaler, Muller, Rehder (2002) and Yu (2000) both highlighted that Daimler Benz and Chrysler underestimated the cultural differences. Both companies were more focused on keeping their core competencies then on creating a new company that could add value to each other. Some researchers are suggesting that it was better to create strategic alliances instead of doing a merger or doing strategic outsourcing in their case. Key characteristics of this merger are: use of best practices of both companies, both companies need to change and a low need for strategic interdependence.
4.2.2 AOL and Time Warner
supply of content to stay ahead of the competition. However the merger did not worked out as well they had planned. In 2009 both companies went their own separate ways and the company AOL Time Warner was dismantled. The problems that occurred are displayed in table 3.
Table 3 : Problems that occurred in the merger of AOL and Time Warner
Which problems occurred after the merger
What did they do to resolve these problems
Stock price declined from $ 71 to $8.70 in 2003
They tried to regain market share and more sales
Cultural problems between executives
between both companies.
They tried to change their views and to adjust to each other
Competition gained more and more market share
Due to the clashes not much happend
Mismatch between corporate cultures The arguments of both companies did not
work their different views did not came together
Both companies were founded in the United States of America. The cultural differences on national level are for the most part the same, due to the fact that both companies are from the United States of America, however on organizational level there are major differences. In figure 8 are the cultural dimension of America. It was very difficult for both companies to work together, because according to Carlson (2000) and The NewYorkTimes, (2010) and Rubinfield and Singer (2001) their cultures were totally different. AOL was a “new” age company and Time warner was an “old” company. In an article from Carlson (2000) he said to make mergers successful a large part is to combine the culture between two companies. In an article of Donahue (2004) they are discussing why there where so many problems between America Online and Time Warner. At some point he is stating that Time Warner and America Online where trying to combine two totally different cultures without a good integration strategy. They both wanted to keep their own cultures and were not willing to adjust to each other. Key characteristics of this merger are: high need for strategic interdependence, cultural clashes, mismatches organizational and strategic and enforced strategy.
4.2.3 Cimc and Burgs
CIMC would almost create a monopoly position in the world and that would lead to no competition. Therefore Burg Industries had to split up their container division from the rest. However in June of 2007 the EC approved the merger and the company and CIMC Burg industries was created. CIMC bought 80 per cent of the shares of Burg Industries for €108 Million . To investigate this merger better it is necessary to know more about the Netherlands and China.
China is still one of the biggest emerging markets and has a large population, China has a real growth percentage (GDP) of more than 10 percent ( IMF). The Chinese culture is associated with Confucian, one of the main traits is a strong sense of responsibility to the family, group, and/or the Nation. Besides that Chinese people are long term focused and have a strong tradition of self-improvement and education (Adams and Vernon, 2007). The religion of the Chinese people was officially chosen by the state as Atheist, however the Confucianism is woven into the society. There are a lot of rules and restrictions obliged by the government for practicing a religion (Hofstede, 2011). To compare China with the Netherlands the cultural dimensions of Hofstede are used. In figure 10 the dimensions of China are displayed.
Figure 10 : Cultural dimensions of China
Source: Hofstede, (2011)
Figure 11 : Cultural dimensions of the Netherlands
Source: Hofstede, (2011)
The religion in the Netherlands is for the largest population (39%) Atheist, the next largest group is Catholic. The high scores for individualism indicates that the Dutch people have loose bond with others and have really individualistic attitudes, this in contrast to the Chinese people who score real low in individualism. The Dutch people are focused on their privacy, this is also in contrast to China. The real GDP growth rate in the Netherlands is 1.7 percent in 2010,which is much lower than China. A summary of economic and county and population numbers is given in Appendix II.
The differences between the Netherlands and China are not only on cultural level, for this research the differences on cultural level are the most important. The Netherlands and China are the two opposites of each other on the level of in individualism, besides that the Chinese people are more long-term focused then Dutch people.
5. Findings
In this chapter the findings of the literature review, case studies and the comparison with other theories will be used for the hypothesis testing. The case studies are examined on characteristics of integration strategies and CD therefore it is possible to use these findings for hypothesis testing. The findings of the cases will be compared to the arguments that researchers are giving in the academic literature. Both findings and arguments will be used to see which is stronger or better, this way the evidence for the hypotheses is generated and that is used for the falsification. To recall in figure 3 from chapter 1.6 is shown that this chapter will cover the analyzing and testing parts, the findings of the literature review and chapter 4 are analyzed and will be used for the hypothesis testing.
5.1 Evidence
them. In the merger process they found key characteristics of symbiosis, high CD, they want to use the best practices of both, both firms need to change and it was necessary developing a workable atmosphere of cooperation. Due to these key characteristics and demand of both companies they used the symbiotic integration strategy and integrated into a new company. The arguments of Weber et al. (2011) and Ellis and Lamont (2004) and the findings from the cases indicate that there is more evidence to believe that high CD will lead to the integration strategy symbiosis.
Hypothesis two is: “High cultural distance will increase synergy between merging companies.” According to the theory of Weber et al. (2011) the synergy potential is a determinant for the choice of which integration strategy is best suited for a cross-border merger. In the findings for hypothesis one the result is that high CD leads to the integration strategy symbiosis. In the work of Lubatkin et al. (1999) they found empirical evidence for when a company want to realize the synergy potential it is necessary to select the most suitable integration approach. Due to the fact that high CD results in the best integration approach (symbiosis) should suggest that it will increase the synergy potential. However in the work of Larsson and Finkelstein, (1999) and Schweizer, (2006) the emphasize that to realize high synergy more factors need to be changed, in fact practical and structural changes must be undertaken by both companies. These findings suggest that relationship between high CD and synergy potential not static is. In the cases of DaimlerChrysler and TimeWarner the CD was high and should suggest that the synergy potential should increase, however in both cases the synergy potential was not realized, due to other factors that have influence. Therefore the findings of the cases and other researchers make it more credible that high CD will not directly lead to an increase of synergy, due to fact that there are multiple factors that have influence on this.
6. Conclusion and discussion
6.1 Conclusion
The aim of this thesis is to investigate if the adjustments of Weber et al. (2011) are adding value and are useful for the academic literature, in order to do his the following research question was developed: “To what extend do cultural distance affect the selection of integration strategies and the performance of cross-border M&As?” The hypotheses that were tested helped answer the research question, in fact CD does influence the selection of integration strategies and the performance of M&As. However the performance is influenced by multiple variables and there is not enough evidence to conclude that the influence is static. The choice of integration strategy is determined by CD however also in this case it is not the only variable that has influence on the choice. It is also the willingness of both companies and the economic circumstances. However as Weber et al. (2011) suggested that in the last decades CD has become more important due to open borders and cross-border trade. Therefore when selecting an integration strategy CD is an important determinant that should be used to prepare the integration and help select the most suitable integration strategy.
6.2 Discussion
7. Limitations and further research
7.1 Limitations
In this thesis there are some limitations that needed to be addressed, first of all the topics of data access, generalizability and time management will be discussed. This is a descriptive study and for the hypothesis testing cases and the theories of multiple researcher were used. However the evidence for this research is based on only secondary data (e.g. home pages, cases, annual reports and research papers). Due to the use of only secondary data, some detailed information about the integrations strategies and processes of the cases was lacking. This restricts the generalizability of the findings to some extent, in fact there could be other variables that have influence on the choice of integration strategy and the performance of a cross-border M&A. In terms of time-management, the choice is made for not making a large survey and questionnaire. This limits this thesis in gathering first hand data of companies for the cases, however the reasons for this choice are that responds rate is very low, and to create good cases of multiple companies, it is necessary to survey for several years in order to conclude if the integration strategy had influence. There was no time for a survey over several years. All in all the cases that are used are a good representation of large (cross-border) mergers and the data of the empirical research of other studies is used.
7.2 Further research
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