In Which strategy does the acquiring company impose its culture and business practices?

Despite the increasing popularity of mergers and acquisitions, it has been reported that more than two-thirds of large merger deals fail. Underestimating the importance of the cultural element is one of the key issues that may help explain the failure of many mergers and acquisitions.

Mergers & Acquisitions

Over the past two decades mergers have become a global phenomenon and a popular strategic choice for companies’ growth and expansion. A number of scholars argue that mergers and acquisitions (M&A) of companies are a common and important response to globalization and the changing market environment. Despite the increasing popularity of M&A, it has been reported that, more than two-thirds of large merger deals fail to create value for shareholders in the medium term. Ravens craft and Scherer (1989) found that the profitability of target companies, on average declines after an acquisition. The propensity for M&A’ failure to meet the anticipated goals is corroborated by Erez-Rein et al. (2004) and Carleton (1997) who noted that the rate of M&A failure range from 55 to 70 percent. Researchers proposed many explanations for such high rate of failures, yet one explanation –often underestimated- is of special interest to us: the cultural element in M&A integration processes. After reviewing pertinent literature, we believe that underestimating the importance of the cultural element is one of the key issues that may help explain the failure of many M&A. Research studies have found that as many as 75 % of mergers and acquisitions fail to produce their intended financial results because people do an inadequate job of engaging employees and integrating the culture of merging organizations (Sperduto, 2007).

Even though both terms are often used interchangeably, mergers and acquisition are two different processes. Mergers involve a much higher degree of cooperation and interaction between the partners, in which one organization takes over another. The organization size is of special interest, since mergers tend to involve equal size organizations, whereas in acquisitions one company tends to be larger and more powerful.
The key factor in distinguishing these two processes is the extent to which one organization is expected to give up its independence to the other one. The most prevalent reasons for organization merging is to accelerate growth, protect current market share or acquire technology or talent (Daniel & Metcalf, 2001). Companies that survive very demanding and highly competitive markets are the ones that outlast or eliminate competitors, increase market share and customer base, and minimize the costs.
True mergers are not common. Most of the times it is one company who takes over the other. However in this paper we will use the terms: merger and acquisition interchangeably, since both constructs involve combining two different cultures. Successfully combining two companies involves several phases: pre-merger and pre-planning; planning; implementation and evaluation. After several years as consultant helping companies to lead M&A processes, I can stress that it is crucial to focus on cultural issues during each of these phases.

Organizational Culture
Something that it is easy to forget, is that organizations are composed of people. Changing external aspects such as name, brand, colors, technology, etc. also involve changing a symbolic world that used to be part of many people’ own identity. This is one of the main reasons why M&A are difficult processes. They involve changes at all levels, starting by the individual level that affect the system of believes that the person is used to address.
Organizational culture focuses on how organizational participants experience and make sense of organizations. It is defined as basic assumptions and beliefs that operate unconsciously and are shared by members of an organization. The concept of “shared” meaning is central in understanding culture. Organizational culture is learned by group members who pass it on to new group members through a variety of socialization and communication processes. The degree of cultural fit between two companies is a measure of the “shock” that employees will experience by entering a new organizational environment. This is called as clash of cultures (Mirvis & Marks, 1992).

The key to cultural change
As Ott (after Min –Ching, 1990) noted defining organizational culture includes five basic assumptions: first of all, organizational cultures exist; second each organizational culture is relatively unique; third organizational culture is a socially constructed concept; furthermore organizational culture provides organization members with a way of understanding and making sense of events and symbols. Overall, organizational culture is a powerful lever for guiding organizational behavior, since it functions as “organizational control mechanism” informally approving or prohibiting some patterns of behaviors.
There are three fundamental layers at which organizational culture manifests itself (Ashkanasy & Jackson, 2001). The first level of culture is composed of the visible artifacts and behaviors within an organization. It includes symbols (the architecture and design of the building, the office layout, the art objects used, the dress code of employees); organizational language (jargon, gestures, jokes, gossips, humor); narratives (stories, legends and myths); and practices (observable rituals and ceremonies). Artifacts are easily observable but not necessarily easily interpretable and can be misleading. The second, deeper level of culture is composed of values held by members of an organization.

These values pertain to desirable end-states and behaviors, indicate what ought to be and what is acceptable. Values guide selection and evaluation of situations and behaviors. The third layer is composed of the basic assumptions resulting from an organization’s successes and failures in dealing with its environment. These assumptions make up the organization’s basic philosophy and worldview, and they shape the way the environment and all other events are perceived and interpreted. Schein (Borman et al. 2003) concludes that basics assumptions are rarely confronted and are difficult to change. Basic assumptions provide security by defining what employees should pay attention to, how they should react emotionally and what action should they take in various kinds of situations. Thus, it is an attempt to change basic assumptions will be met with resistance, anxiety and defensiveness. Interpreting the different layers helps to define the content or substance of culture, which is necessary when cultural change is attempted.
Organizational culture has been viewed as a key driver of organizational effectiveness and performance, relating to many crucial organizational outcomes such as employee job satisfaction, customer satisfaction, employee organizational commitment, withdrawal intentions, and turnover (Crede, 2007). Differences in organizational cultures of merging companies may have a great impact on these work outcomes.

As described above, organizational culture guides employee’s behaviors by establishing basic assumptions on what is and what isn’t acceptable and how things should be done. It provides employees with sense of security and predictability by creating behavioral framework and understanding of surrounding environment. By operating in particular culture, employees’ learn how to do their job well and be successful. They become part of their company traditions and culture. Organizational culture also defines who they are; it is the part of an individual identity. Large body of research presents that employee organizational commitment affects job satisfaction, job performance and intentions to leave. Affective commitment, defined as emotional attachment, involvement and identification with (Meyer et al., 2002) is the strongest predictor of these desirable outcomes. Organizational culture creates basis for employees’ affective commitment to an organization. The strength of culture is an important factor. The stronger is the culture the clearer is behavioral guidelines. Some studies suggest that the type of culture is a less important factor than its strength. That can be explained by people preference to work in a well-defined environment. Also, the stronger the culture the more difficult it is to change it.

When two companies are brought together, it is natural that people would compare their own group with the other and make distinctions favoring their own group. It is claimed by researchers that culture similarity can increase the likelihood of successful M& A. The greater the sense of coherence between an organization’s belief and values and its actions, the stronger the organizations compatibly will be. Correspondingly, the greater the disparity the more trouble is the organization likely to face. Moreover, the degree of cultural fit between two companies is a measure of the “shock” that employees will experience by entering a new organizational environment. This is called as clash of cultures (Mirvis & Marks, 1992). However, the organizational culture fit is not always a necessary condition. In some cases, when organizational culture is dysfunctional, both leader and employees want changes that lead to more constructive work environment. M & A provides opportunity for such a change and also for gaining new resources. Furthermore, cultural differences do not always predict failure if we acknowledge that there are different modes of acculturation.

Acculturation
Acculturation is a process in which members of one cultural group adopt the beliefs and behaviors of another group. Although acculturation is usually in the direction of a minority group adopting habits and language patterns of the dominant group, acculturation can be reciprocal- that is, the dominant group also adopts patterns typical of the minority group. Assimilation of one cultural group into another may be evidenced by changes in language preference, adoption of common attitudes and values, membership in common social groups, and loss of separate political or ethnic identification (Hazuda et al. 1998). According to Nahavandi and Malekzadeh (1993) the process of getting to know and function with another culture can be a highly positive experience, however many times this process is accompanied by disruption and alienation for members of the less dominant culture and, in some cases destruction of entire cultures; with a feeling of unending conflict.

The process of acculturation can illustrate what happens when two cultures collide in a merger situation. Even when adaptation comes quickly and painlessly, there are three stages that can be identified: contact, conflict and adaptation (Nahavandi & Malekzadeh, 1993).
The fist stage is when people from both merging organizations have their initial contact. Companies may need minimal contact or whole synergy, yet in any case the establishment of a relationship becomes essential. This first contact is rarely entirely peaceful; since there are many interests and emotions involved, the first issues of conflict may emerge after this first contact. In order to start working together, employees from both merging companies need to start relating and knowing each other. In this second phase conflict is usually unavoidable. Employees try to protect the territory, power and way of doing things. Typically the acquirer company tries to impose their systems and philosophies while the acquired firm tries to resist and preserve their old culture. This is lead by the sense of superiority based on the belief that the acquirer company has been more successful since it can afford to buy the other company. Yet, the stronger the cultures of two merging firms, the stronger resistance and conflict are likely to be. Sooner or later, conflicts related to the contact between two groups are likely to be resolved –positively or negatively. This last stage is commonly seen as an adaptation phase, since the two groups need to agree on which operational and cultural elements of each company will be preserved, and how they will manage differences in the new relationship. If conflicts extend too long without reaching the adaptation phase, consequences involving resentment, dissatisfaction and turnover are likely to emerge and linger.

1. There are different ways for companies to resolve conflict and adapt their cultures after a merger or acquisition. According to Nahavandi and Malekzadeh (1993), it is possible to identify four ways in which both groups can interact with each other: 1) assimilation, 2) integration, 3) separation and 4) deculturation. Each of these modes involves increasing degrees of conflict.
   1) Assimilation is the most common form of integration after a merger. It is experienced when conflict between companies is resolved by one company giving up their practices, procedures and philosophies becoming totally assimilated into the acquired firm. In this case, one company dominates the other; the acquired firm adopts the acquirer’ company culture and identity. It is frequently expected that the acquired firm will cease to exist.
   2) Integration involves moderate levels of conflict. It can be experienced either when the acquired firm –due to its strength and success- maintains most of the cultural and organizational elements that provide it with its unique identity, but allows the acquired firm some freedom to maintain cultural elements; or when both firms openly share and negotiate exchanges.
   3) Separation is when two strong cultures decide to maintain their own identities. Both companies retain its cultural elements and practices and remain separate under the umbrella of the parent company.
   4) Deculturation is the least desirable mode of acculturation since it involves the highest level of conflict, often leading to high stress and confusion for the acquired firm. It is experienced when the acquired firm is not willing to adopt the cultural aspects of the new company, but at the same time its own culture is not strong enough to lead and its members relinquish resulting in a disintegration of both cultural and managerial entities. Deculturation does not provide any benefits to the merger partners since the goal of such a merger is the liquidation of the target firm. It is the state that should be avoided.

Recommendations: guideline for a cultural integration process
Closing this review, I would like to stress the importance about paying attention to cultural integration issues during mergers and acquisitions by being proactive. Based on Lodorofos (2006) findings and personal experience gained from several projects carried out in Latin America, I propose a guideline to help managers successfully integrate cultures of merging companies during each phase.

(Phase 1) pre-merger and pre-planning stage:
It is crucial before the first contact between the two organizations that each of them prepares themselves to the next big step. Gathering information from their future partners and developing trust through one-to-one interaction between members of both companies are recommended. Identifying cultural gaps and clarifying fears during workshops are also good strategies to be prepared to share. Overall the pre-planning stage is designed to create cultural awareness that refers to recognition that two sites enter the combination with distinct histories, styles and reputations.

(Phase 2) planning stage:                                                                                                                                                               This stage aims to produce the action plan to facilitate the cultural integration process. There are some key tasks during this phase that are recommended to undertake: (1) Negotiating the composition of a mixed group designated to work towards integrating culture. (2) Decide on the extent of cultural integration. (3) Decide on methods and timing of change. (4) Assess the potential risks. (5) Identification of training needs. (6) Setting integration goals. (7) Budgeting for integration. The planning stage is designed to assess the degree of cultural similarity between partners as well as to develop the understanding of desired changes, look at similar core values and complementary resources. Also, at this stage leaders decide on the most appropriate mode of acculturation.

(Phase 3) implementation stage:                                                                                                                                                  This stage is designed to integrate structure and control systems. During this phase it is important to (1) Create an atmosphere for cultural integration. (2) Have open communication. (3) Plan training and staff development. (4) Integrate structures, functions /control systems. The implementation stage is designed to promote cross-cultural understanding. Encouraging a good flow of information and contact between combining companies can help to clear out misconceptions.

(Phase 4) evaluation, review and reflection:                                                                                                                           Finally it is important to do follow ups in order to: (1) Evaluate expected against actual outcomes. (2) Recognize what could have been done differently and learn lessons. (3) Revise through consultations. In all cases, the key is always to discuss and try to reach an agreement over which mode of acculturation would be most appropriate in that particular situation.

By following this guideline managers might find easier to maintain their focus and energy in the process of cultural integration. In all cases, the key is always to discuss and try to reach an agreement over which mode of acculturation would be most appropriate in that particular situation.

Cecilia Cortina

References

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