Never before in history has the convergence of companies been that intense like in the year 2006. Gaining market share immediately, cutting costs through consolidation, expanding product lines or obtaining reputation are just a few ideas behind an acquisition or merger. Mergers and acquisitions rose in US Dollars to a new high from the peak in the year 2000 with 31.022 mergers and acquisitions and a capital flow of 3.332 billion US Dollars to 29.008 M&As and 3.568 US Dollars dated by 28th November 2006. An interesting aspect is that four out of the five largest transactions in 2006 did take place in Europe and not in America. Germany has the fourth largest merger and acquisitions market in the world with 1.488 transactions and a volume of 145,1 billion US Dollars in 2005. According to an analyst from Goldman Sachs, one of the biggest players in the M&A business, the M&A market is going to stabilize on the high level of 2006 also in the continuing years. Mergers and acquisitions are not a new topic in the age of globalization but with rising competition, price wars and merging markets it seems for many companies the only backdoor.
However every second transaction is value-destroying and the aimed synergies remain a vision and never get realized. Bigger, stronger and more profitable are the key arguments for mergers and creating competitive advantage due to economies of scale. The core challenge often heard by management is to 85 % the integration process. Especially cultural differences are not taken into account properly.
The centre stage of this study is to analyse how corporate culture and mergers melt together or collide and the reasons why so many companies fail. It covers the steps of a merger process and how the corporate culture can be aligned. The study can not examine explicitly the integration process like the due diligence method but it is a brief overview on what to be aware of when thinking about summing up synergies in mergers and acquisitions with different corporate cultures. It reveals that in the M&A business you can not set up the equation that one plus one is equal to two.
Table of contents
1. Introduction
2. Importance of different corporate cultures
2.1 What is corporate culture?
2.2 Components of corporate culture
2.3 Change of corporate culture
3. Challenges of a merger
3.1 Stages of a merger
3.1.1 The Pre-Deal Stage
3.1.2 Due Diligence
3.1.3 Integration Planning
3.1.4 Implementation
3.2 Goals of a merger
3.3 Wrong expectations
3.4 Why mergers fail
4. How different corporate cultures affect a merger
4.1 Influence of corporate culture on a merger
4.2 Modes of Acculturation
4.2.1 Integration
4.2.2 Assimilation
4.2.3 Separation
4.2.4 Deculturation
4.3 What mode is likely to occur
5. Different corporate cultures in the merger of DaimlerChrysler
5.1 Clash of two different corporate cultures
5.2 Development since the merger
5.3 Future perspectives
6. Conclusion
1. Introduction
Never before in history has the convergence of companies been that intense like in the year 2006. Gaining market share immediately, cutting costs through consolidation, expanding product lines or obtaining reputation are just a few ideas behind an acquisition or merger. Mergers and acquisitions rose in US Dollars to a new high from the peak in the year 2000 with 31.022 mergers and acquisitions and a capital flow of 3.332 billion US Dollars to 29.008 M&As and 3.568 US Dollars dated by 28th November 2006. An interesting aspect is that four out of the five largest transactions in 2006 did take place in Europe and not in America.[1] Germany has the fourth largest merger and acquisitions market in the world with 1.488 transactions and a volume of 145,1 billion US Dollars in 2005. According to an analyst from Goldman Sachs, one of the biggest players in the M&A business, the M&A market is going to stabilize on the high level of 2006 also in the continuing years.[2] Mergers and acquisitions are not a new topic in the age of globalization but with rising competition, price wars and merging markets it seems for many companies the only backdoor.
However every second transaction is value-destroying and the aimed synergies remain a vision and never get realized. Bigger, stronger and more profitable are the key arguments for mergers and creating competitive advantage due to economies of scale. The core challenge often heard by management is to 85 % the integration process. Especially cultural differences are not taken into account properly.[3]
The centre stage of this paper is to analyse how corporate culture and mergers melt together or collide and the reasons why so many companies fail. It covers the steps of a merger process and how the corporate culture can be aligned. The study can not examine explicitly the integration process like the due diligence method but it is a brief overview on what to be aware of when thinking about summing up synergies in mergers and acquisitions with different corporate cultures. It reveals that in the M&A business you can not set up the equation that one plus one is equal to two.
2. Importance of different corporate cultures
Corporate culture also known as organizational culture is an inimitable composition of an organization’s values, traditions, beliefs, and priorities. Organizational culture always reflects national culture and national attitudes of the members that form an organization.[4] The culture of each company is unique and depending on the formation of employees, the common shared history of a company, the industry sector and several more factors. The culture of an organization helps to establish the norms and unwritten rules; it legitimizes certain behaviors and attitudes while banning others.[5] Culture can be very stable over time but it is never static. Crises and new employees can change culture frequently and can reform the traditional system and values. As a whole corporate culture can be extremely powerful since it concentrates the power of the workforce and represents an asset that can not be copied by competitors.
2.1 What is corporate culture?
Corporate culture has been studied by academics worldwide for decades. The continuing problem still is according to the experts Cartwright and Cooper that “Culture fit and culture compatibility is well used but ill-defined expression.”[6] Numerous definitions exist about corporate culture but none covers all the components corporate culture is build up on. Corporate culture is defined by a group of people with shared history and is portioned in numerous subcultures. The subculture, depending on the shared experiences and members in the organization as a whole, affiliates to a total organizational culture.[7]
Edgar Schein from Sloan School of Management in Massachusetts is one of the most renowned professors in this field of knowledge. Schein states that there is not one single culture in an organization. The culture is different from small groups of employees within a department, from department to department and depending from different locations as well. However it is assumed that there is one dominant culture and many subcultures that may coexist and interact.[8]
Corporate culture is directly linked and influenced by national culture and therefore even harder to integrate in international mergers since communication problems due to different languages and cultural conflicts might arise. Culture sets the rules and defines the values and ideas - what is allowed or not, the norms - what is expected and the standards of behavior – how things are done in a system.[9] Corporate culture is like a guideline in an organization that points out the possibilities and the constrictions.
Another interesting phenomenon is that culture in an organization is like a living organism. As the individuals of an organization develop, the organization evolves and can shape a new culture. Values and standards can change due to altering external influences or due to new management. Culture changes continuously and unexpected events have an even deeper impact on the development. Rapid growth, layoffs in downturns or mergers can have a sustainable influence on corporate culture in a positive or a negative way on performance.[10]
In a sui generis study of eleven years by the Harvard Business School professor John Kotter about organizational performance and culture, Kotter deduced that organizations with rich and healthy cultures achieved a net income growth of 756 percent, versus just one percent for those with less defined cultures.[11] These results underscore the importance of corporate culture in an organization. It is a simple circuit:
“Companies that pay attention to culture are rewarded financially – through growth and value – and are seen as desirable places to work. As a result, they attract the talent that will generate the next wave of growth and value.”[12]
If an organization is able to adjust to the changes of its outer environment over time, it will retain its success in the future and the circuit is going to continue over years. Companies that can not adjust, so called nonadaptive cultures are usually highly bureaucratic and employees tend to be reactive, risk averse and not creative.[13]
2.2 Components of corporate culture
Corporate culture is multifaceted and can be classified in three components. First the way employees deal with customers and address customer needs and wants. Second the way employees deal with each other like communication style and linkage among departments. And last but not least the way leaders and managers motivate, reward and develop people in the organization. These components are the most visible ones in an organizations culture. All three components are linked with each other and if one changes, the others will adapt to the alternation. The patterns of behavior are the groundwork on that corporate culture is constructed. The way employees are dressing, responding to customer queries and complaints and the evaluation of performance are particles that make up and reinforce corporate culture.[14]
Corporate culture can be weak or strong in an organization depending on the shared history. If a company has no common history or a frequent turnover of members the culture is not able to be defined and is therefore weak. Other organizations that have a common history and faced several challenges are rather strong in culture and represent a powerful asset. The culture has proven to be successful and the members of the organization are unwilling to change.[15] Therefore a weak and less defined culture is easier to change or to implement new concepts than a strong culture that has proven its strength. Strong cultures can develop team spirit that welds people together and increases efficiency. However a strong culture is no guarantee for success. Firms with strong corporate cultures tend to march vigorously the same way in the used and well-coordinated fashion which can be a bonus but can also cause practices that do not fit the businesses strategy by less flexible thinking patterns.[16]
2.3 Change of corporate culture
Change in general is always difficult to implement since human beings prefer to maintain their first learned habits. Especially in cultural aspects people tend to view a different culture in an ethnocentric way meaning that one evaluates other cultures according to its own cultural norms and values. Mostly this leads to culturocentric beliefs – tending to think that its own culture is superior.[17]
In case of a merger when cultures meet and influence one another, employees may experience anxiety since what was previously familiar is becoming contested. In case the acquired company failed, the members of the organization are putting their used culture into question and are more willing to adapt to a new culture since they experienced that their old culture was unsuccessful.[18] The following graph illustrates another phenomenon, the difference between changing norms and values in an organization. Values are deeply anchored in human mind and therefore inflexible compared to changing simple norms.
illustration not visible in this excerpt
Visible Easier to change
Source: Kotter, John and Heskett James.
Corporate Culture and Performance. Exhibit 1.1 p. 5
The graph demonstrates that the shared values are the ones that are hard to discover since they are invisible and therefore harder to change. Values that are shared by the group tend to persist over time and even high changes in group membership will not have any impact.[19] Culture clash is the most difficult starting position in a merger, e.g. when a formal culture and an informal culture fuse. Just imagine that formal IBM business people need to cooperate with the more informal colleagues from Apple Computers who are known for their relaxed dress code.[20] The way of life, style of communication and the thinking patterns are totally different and will make it hard to find a common understanding. The consequence might be that employees become first confused then frustrated and finally resistant to change.[21]
Changing an organizations culture can be compared to changing the DNA of an organism. It is like taking a field that has been dedicated to growing corn and turning it into a vineyard. Experts will tell you that it is possible but changing a corporate culture will take years – not decades, but certainly years and what you get out of it is unlikely what you expected.[22]
3. Challenges of a merger
A merger can be seen as an arranged marriage, both firms just know little about each other and both hope that they will become happy and that synergies are fertile. The challenges for a successful merger are high and the people of both organizations are the key to make the merger work. Countless problems can occur like culture clashes, management disputes, loss of talents or simple the inability to manage the change and merge both organizations into one unit.[23] The impact of negative synergies is most often not taken into account. Management thinks about the positive effects like combining resources that represent more together than individually but neglect the emerging risks. The difficulties of one firm plus the ailments of another can sum up to new and unique previously nonexistent challenges that are even harder to overcome.[24]
3.1 Stages of a merger
Typically a merger is split up in four life cycles from the beginning to the hopefully successful integration of the acquired company.[25] The deal should be planned carefully, well ahead and taken enough time to avoid the too often done mistakes like the overestimation of cost savings.
[...]
[1] Cf. Bartz Tim. Financial Times Deutschland. “Fusionsjahr 2006 schlägt alle Rekorde.” “Online on the web”, http://www.ftd.de/unternehmen/finanzdienstleister/138463.html, query from December 15th, 2006.
[2] Cf. Bartz Tim and Maier Angela. Financial Times Deutschland. “Das große Fressen.” “Online on the web”, http://www.ftd.de/unternehmen/industrie/138404.html, query from December 13th, 2006.
[3] Cf. Pennekamp Johannes. Financial Times Deutschland. “Jede zweite Fusion vernichtet Unternehmenswert.“ “Online on the web”, http://www.ftd.de/unternehmen/industrie/110451.html, query from December 13th, 2006.
[4] Cf. Weber, Shenkar and Raveh. “National and Corporate Culture Fit in Mergers / Acquisitions: An Exploratory Study.” Management Science. Vol. 42. No. 8. (August 1996) p. 1216
[5] Cf. Pritchet Price, Robinson Donald and Clarkson Russell. After the Merger – The Authoritative Guide for Integration Success. Dallas: McGraw-Hill, 1997. p. 10 [6] Cartwright S. and Cooper C.L. “The Role of Culture Compatibility in Successful Organization Marriage”, Academic Management Executive, No. 7 (1993) p. 60
[7] Cf. Schein, Edgar H, “Organizational Culture.” American Psychologist, Vol. 45. No. 2 (February 1990) p. 111
[8] Cf. Weber, Roberto and Camerer. “Cultural Conflict and Merger Failure: An Experimental Approach.” Management Science. Vol. 49. No. 4 (April 2003) p. 405
[9] Cf. Weber, Roberto and Camerer. “Cultural Conflict and Merger Failure: An Experimental Approach.” Management Science. Vol. 49. No. 4 (April 2003) p. 405
[10] Cf. Beaudan Eric and Smith Greg. “Corporate Culture: Asset or Liability.” IVEY Business Journal (March/April 2000) pp. 2f
[11] Cf. Beaudan Eric and Smith Greg. “Corporate Culture: Asset or Liability.” IVEY Business Journal (March/April 2000) p. 3
[12] Beaudan Eric and Smith Greg. “Corporate Culture: Asset or Liability.” IVEY Business Journal (March/April 2000) pp. 3
[13] Cf. Kotter John and Heskett James. Corporate Culture and Performance. New York: The Free Press, 1992. p. 44
[14] Cf. Beaudan Eric and Smith Greg. “Corporate Culture: Asset or Liability.” IVEY Business Journal (March/April 2000) pp. 2f
[15] Cf. Schein, Edgar H, “Organizational Culture.” American Psychologist, Vol. 45. No. 2. (February 1990) p. 111
[16] Cf. Kotter John and Heskett James. Corporate Culture and Performance. New York: The Free Press, 1992. p. 142
[17] Cf. Author unknown. Wikipedia Encyclopedia. “Organizational Culture.” “Online on the web”, http://en.wikipedia.org/wiki/Corporate_culture, query from December 15th, 2006.
[18] Cf. Styhre Alexander, Börjesson Sofia, Wickenberg Jan. “Managed by the other: Cultural anxieties in two Anglo-Americanized Swedish firms.” The International Journal of Human Resource Management. (July 2006) pp. 1297ff
[19] Cf. Kotter John and Heskett James. Corporate Culture and Performance. New York: The Free Press, 1992. p. 4
[20] Cf. Author unknown. Wikipedia Encyclopedia. “Organizational Culture.” “Online on the web”,
http://en.wikipedia.org/wiki/Corporate_culture, query from December 15th, 2006.
[21] Cf. Pritchet Price, Robinson Donald and Clarkson Russell. After the Merger – The Authoritative Guide for Integration Success. Dallas: McGraw-Hill, 1997. p. 11
[22] Cf. Beaudan Eric and Smith Greg. “Corporate Culture: Asset or Liability.” IVEY Business Journal (March/April 2000) p. 4
[23] Cf. Lloyd Joan. “Making Mergers work.” “Online on the web”, http://www.shrm.org/foundation/bookpromo.asp, query from December 4th, 2006.
[24] Cf. Pritchet Price, Robinson Donald and Clarkson Russell. After the Merger – The Authoritative Guide for Integration Success. Dallas: McGraw-Hill, 1997. p. 34
[25] Cf. Lloyd Joan. “Making Mergers work.” “Online on the web”, http://www.shrm.org/foundation/bookpromo.asp, query from December 4th, 2006.
- Quote paper
- Thomas Weihmann (Author), 2007, The role of different corporate culters in case of a merger, Munich, GRIN Verlag, https://www.grin.com/document/72296
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