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The Role of Company Culture in Mergers and Acquisitions

How company culture influences M&A success

Bachelor Thesis 2016 39 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Table of contents

1. Introduction

2. Mergers and Acquisitions
2.1 Definition and Implications of Mergers and Acquisitions
2.2 Phases in a Merger or Acquisition
2.3 Types of Mergers and Acquistions

3 Motives and Objectives for Mergers and Acquisitions

4 “Company Culture”
4.1 What is an organizational or company culture?
4.2 How can you change “Company Culture”?
4.2.1 Communication
4.2.2 Leadership
4.2.3 Balancing processes
4.2.4 Emotions
4.3 How to measure and assess organizational culture

5 Types of Organizational Cultures
5.1 Power Orientation
5.1.1 Patriarchal Power Culture
5.1.2 Autocratic Culture
5.2 Role Orientation
5.3 Task Orientation
5.4 Person Orientation
5.5 In how far are employees’ and company interests taken care of in the different types?
4.1 The Relation between Culture Types as regards Constraints on Individuals’ Freedom

6 Cultural Fit

7 Implications of cultural types for compatibility and cultural fit

8 Strategies for cultural integration in Mergers and Modes of Acculturation
8.1 Definition “Acculturation”
8.2 Extension Mergers
8.3 Collaborative Mergers
8.4 Redesign Mergers
8.4.1 Assimilation
8.4.2 Deculturation
8.5 Determination of Acculturation Strategy
8.6 Conclusions drawn from Nahavandi and Malekzadeh’s model

9 Facilitators of cultural and company integration - Five drivers of Success
9.1 Coherent Integration Strategy
9.2 Strong Integration Team
9.3 Communication
9.4 Speed in Implementation
9.5 Aligned Measurements
9.6 Other Facilitators of Cultural Integration

10 Discussion and Conclusion

11 Sources

Table of Tables

Table 1 Ideal- typical Phases in Connection with Merger/ Acquisition

Table 2 Interests of people under four orientations

Table 3 Interests of the organization under four orientations

Table of Figures

Figure 1: Number & Value of Mergers and Acquisitions worldwide

Figure 2: The Relation between Culture Types as regards Constraints on Individuals’ Freedom

Figure 3: Most important factors in successful integration

Figure 4: Most challenging factors in successful integration

Figure 5 Potentially successful M&A – ‘role’ with ‘task’ culture

Figure 6 Potentially unsuccessful M&A – ‘power’ with ‘person’ culture

Figure 7: Suggested relationship between culture type and individual outcomes

Figure 8: Acquired firm’s modes of acculturation

Figure 9: Acquirer’s modes of acculturation

Abstract

As globalization progresses, so does the internationalization of companies. In the course of this development, over the last 30 years, the forming of mergers and acquisitions has become very popular. One of the greatest challenges in a merger or an acquisition is aligning the company culture of the merging partners before, during and after the merger. Company culture – or the lack of an integrated company culture - can crucially influence the success or failure of a merger or acquisition. However, in spite of the fact that there are a lot of ways to facilitate cultural integration, it is something that is often neglected in the planning phase, which makes it all the more difficult to accomplish successfully further along in the process.

This thesis will give a clear understanding of how and why company culture is such an important factor. First, definitions of mergers, acquisitions and company culture are given. The different types of company culture are analysed regarding their mutual compatibility. This is followed by an explanation of how cultural integration can take place and how managers can facilitate it. Finally, important findings and conclusions reached are summarized and discussed.

1. Introduction

Mergers and Acquisitions (M&As) are continually important business transactions that take place all over the world – in 2015 alone, 42488 M&As took place with a combined value of 4516 billion USD, making it the strongest year since 2007.

(Institute for Mergers and Acquisition Alliances, n.n.)

illustration not visible in this excerpt

Figure 1: Number & Value of Mergers and Acquisitions worldwide Source: Institute for Mergers and Acquisition Alliances, n.n.

Reports on M&A success or failure vary, however it is estimated that between 50% and 90% of M&As fail or do not deliver the expected results– an alarmingly high number, considering the combined value of all M&As over the last few years (Wadlow, 2015 and Sher, 2012).

When two companies are combined in an M&A, a culture clash and internal disruptions lead to a significantly lower employee as well as customer satisfaction and ultimately to a dramatically lower profitability (Epstein, 2004). According to a study conducted by Booz, Allen & Hamilton Inc., called “Diversification: A survey of European chief executives” in which more than 200 European chief executives were interviewed, the most important aspect contributing to the success of an acquisition is the “ability to integrate the new company” (as cited in Cartwright, Cooper, 1993). This was reinforced in the M&As trend report, a study conducted by Deloitte in 2014. Despite this, while there is a lot of information about the financial aspects of M&A, the effects of human factors on M&As were only recently brought into focus (Cartwright, 1998).

Integrating two workforces, two organizational cultures that previously might have been very different and, more importantly, independent from one another presents a great challenge to everyone involved, particularly the responsible managers. If such a situation is mismanaged it will most likely lead to a poor workforce morale and low motivation, stressed employees, an increase in sickness absence and ultimately, to a decline in productivity. Therefore, cultural incompatibility or a mismanagement of the integration of two company cultures is widely reported as one of the reasons for the underperformance of company M&As (Cartwright, Cooper, 1993).

Consequently, the questions that are posed and investigated in this thesis are:

- Is “company culture” a crucial factor in the success or failure of a company M&A?
- How to find a good “Cultural Fit”?
- How can cultural integration in the Post – M&A Integration be facilitated and improved?

2. Mergers and Acquisitions

2.1 Definition and Implications of Mergers and Acquisitions

In a merger of equals two formerly independent companies of more or less equal stature forming a kind of “marriage” – they come together, use the best of both companies and together form an entirely new company (Epstein, 2004). In an acquisition, contrary to that, one company buys and tries to fit in and integrate another company into the existing structure. For the definition of the terms, the size of the companies and the circumstances are irrelevant (Epstein, 2004). An acquisition can be either friendly or hostile, depending on how it is perceived by shareholders of the acquired company (Gertsen, Soderberg, Torp; 1998). A friendly M&A is described as one where both owners “agree to the terms of the takeover transaction” (BusinessDictionary, 2016). On the other hand, a hostile M&A is done in spite of wishes of the board of directors going into another direction. There may even be open resistance (BusinessDictionary, 2016).

According to Epstein (2004), acquisitions are said to be a much simpler process compared to mergers, due to the fact that there is in most cases a clear sense as to which company gives direction (namely the buying company). On the other hand, in an actual merger, basically every little aspect of the company’s culture and way of doing business is open for discussion. Both companies have their way of doing things. Whichever way it is to be done in the future is to be discussed. This might lead to power struggles – there needs to be a strong focus on selecting the practices that will work best in the newly formed company by a thorough, neutral analysis of its needs. Otherwise each companies’ desire to maintain their way of doing things will overrule practicality (Epstein, 2004).

Even though the two alternatives are the result of legally different transactions, they share a lot of issues when it comes to cultural dimensions and cultural integration within the newly formed company. Therefore, to facilitate the process of this thesis, and because most mergers can hardly be considered a “marriage of equals” (Cartwright, Cooper; 1992; 30) (which typically involves two companies of comparable size in terms of number of employees, assets, profits, etc.; since there is no buyer or target, no money is paid (Brew, 2014)), the two terms will be used synonymously in this thesis; from here on, they are referred to as M&As (Cartwright, Cooper, 1992).

2.2 Phases in a Merger or Acquisition

There are usually five “ideal – typical phases” (Gertsen, Soderberg, Torp, 1998, 18) when it comes to an M&A. The first phase is the planning phase. Here, the company conducts a thorough analysis of its own strengths and weaknesses in order to move on to the second phase – identifying fitting merging partners. In this phase, the company uses the self-evaluation done in the previous phase to find suitable companies to merge with. In the third phase, the potential partners are evaluated; each potentially suitable company is analysed as to the advantages and disadvantages an M&A would pose, with the set out goals in mind. A decision is made. In the fourth phase, the companies negotiate the final agreement to make an M&A. The fifth and last phase, includes the whole post–merger integration (Forstmann, 1994 as cited in Gertsen, Soderberg & Torp, 1998).

The following table gives an oversight over the five phases:

illustration not visible in this excerpt

Table 1: Ideal-typical Phases in Connection with Merger/Acquisition
Source: Gertsen, Soderberg & Torp (1998, 18) adapted from Forstmann (1994, 90).

According to Downing and Hunt (1990, as cited in Gertsen, Soderberg, Torp, 1998), throughout phase one to four, the main focus lies on strategic as well as financial possibilities. Factors such as culture and people, however, are completely neglected. Only later, in the integration-phase, do managers even become aware that those factors might pose an influence.

2.3 Types of Mergers and Acquistions

Gertsen et al. (1998) differentiate between four types of M&As, whereas Forstmann (1998) postulates a fifth type in addition to those four:

- Horizontal acquisition: two companies who have a very similar product mix merge. They are active in the same industry or at the same production stage.
- Vertical acquisition: two companies that are located in different positions in a vertical value chain merge. The companies are active in the same industry.
- Concentric acquisitions: this means a bigger, more diverse product mix. The companies usually have a similar process in production or distribution. They are usually active in different, but related industries.
- Conglomerate: The companies are completely unrelated – there is no existing market or product similarity.
- Increased market reach: In this case, the other company is active in the same industry or distributing similar products, however in a completely different market.

3 Motives and Objectives for Mergers and Acquisitions

Motives are the reasons why the company starts looking for an M&A-partner to begin with, whereas Objectives are much more specific. They are what the companies want to achieve through the formation of the M&A. There is a plethora of reasons for and objectives of M&As. However, the ultimate goal of every M&A is to achieve synergy or the so called “two plus two equals five”-effect, which simply means the newly formed company will make more profit than the two individual companies combined (simply adding the profit of company one and company two will not add up to the profits of the new company) (Cartwright, Cooper; 1992).

At times the decision for an M&A might be an egotistical one, made by an individual to pursuing its own interests, like the execution of power or the fear of obsolescence, rather than a decision made out of long term organizational interest (Cartwright, Cooper, 1992). There are two common categories of motives for M&As:

- Value maximizing (financial) motives (Halpern, 1983; Mueller, 1977 as cited in Napier, 1989; 273)
- Nonvalue maximizing (managerial) motives (ibid.)

In financially motivated M&As, the main reasons for merging are that it implies creating value for shareholders and financial synergy. These objectives are generally achieved through economies of scale, transferring knowledge and higher control (Cartwright, Cooper; 1992).Managerial motives include other strategic reasons. Among the more common are the goal to increase market share or raising management prestige (Cartwright, Cooper; 1992).

The general objectives of acquisitions are defined as follows:

“The main aim of every takeover is to produce advantages for both the buying and selling companies compared with the alternative situation in which both companies will continue independently.” (Hover, 1973 as cited in Cartwright, Cooper; 1992; 21)

Companies’ main objective is to increase profitability. This implies that the combination will give them an increase in efficiency, economies of scale, a bigger market share (or access to new markets) and greater power towards their suppliers.

4 “Company Culture”

4.1 What is an organizational or company culture?

There is a considerable variety of possible definitions of culture. In order to answer the question of what company or organizational culture is, first a definition of culture is needed:

Culture is the deeper level of basic assumptions and beliefs that are shared by members of an organization that operate unconsciously and define in a basic ‘taken for granted’ fashion an organization's view of its self and its environment.” (Schein, 1992)

“Culture is the collective programming of the human mind that distinguishes the members of one human group from those of another. Culture in this sense is a system of collectively held values.” (Hofstede, 1980)

Building on the definitions given above, culture usually concerns and is based in symbols, values, ideologies, attitudes, beliefs, customs, (un)written rules and assumptions that define the group or organisation (Cartwright, Cooper; 1993; Business dictionary, n.n.). Therefore, organizational culture is the combination of values and behaviours that form the individual environment (social and psychological) of the organization (Business dictionary, n.n.). The organization’s expectations, all its experiences and values are included and it expresses itself in its self-image, in how the organization and its members interact with outside players, in how the organization treats its customers and employees, but also in how free decisions are made and new ideas are developed and in how power is dispersed through the hierarchy and how the flow of information is organized (Business dictionary, n.n.).

In conclusion, company culture consists of the behaviour of individuals as well as the company as a whole, and the organization’s modus operandi. At times, culture is referred to as a kind of “social glue” holding the organization together and binding individuals in order to create a cohesive organization. (Cartwright, Cooper; 1993)

4.2 How can you change “Company Culture”?

First of all, the term “change” needs to be clarified. Austin and Claassen (2008) defined it as “the adoption of an idea or behaviour - whether a system, process,

policy, program, or service-that is new to the adopting organization”. Another definition given is that change is “a process by which an organization identifies, examines, and implements a new idea.” (Austin and Claassen, 2008, 324f).

In order to successfully change organizational culture, or blend in two different cultures, one first has to gain a deep understanding of the concept of culture. The companies have to be completely aware of how individual employees and the behaviour of the whole group are influenced and defined by the company culture. Moreover, it must be taken into consideration that a company is usually not made up of one single culture, but is a collective of a variety of subcultures working together (Dina, Giffords, 2003).

Smollan and Sayers (2009) state that successfully achieving change in organizational cultures is a rather difficult task that is hard to complete. The emotional outcome of changing an organization and its culture can be either positive or negative. This depends on a variety of different factors, such as the perceived attractiveness of the end result, how the change is implemented (speed, frequency, processes), leadership in the change process, and, of course, the personality of the individual employee. Negative reactions or even resistance to the change targeted can be seen two ways: Either as “culturally acceptable and negotiable – or as unacceptable as a barrier to be ‘dealt with’ or ‘managed’” (Dent, Goldberg, 1999; van Dijk, van Dick, 2009 as cited in Smollan, Sayers, 2009, 439). This means, that it is either seen as a chance to get more helpful input for the change process by involving employees, or that managers have to suppress these negative reactions and get them under control (Smollan, Sayers, 2009).

The most important aspects to have in mind when changing the culture of a company are described in further detail below.

4.2.1 Communication

Primarily, management has to give members of the newly formed organization a sense of belonging to the company. In order to achieve that, a common mission, value system and a vision that is shared by everyone have to be developed. This gives employees a sense of moving forward together. The difficulty lies within letting everyone participate and listening to everyone, but at the same time giving direction to and shaping the M&A. The most important issue in this process is communication. To give the M&A a chance of realizing its full potential, the members of the organization have to be “brought in the loop, listened to, respected, and given time to adjust” (Dina, Giffords, 2003, 76). This way, response will be more positive and employees will be more likely to work towards the M&A’s success (Dina, Giffords, 2003).

4.2.2 Leadership

Another important aspect in changing company culture is leadership. According to Austin and Claassen (2008), leaders who have certain characteristics are generally more effective in managing change within an organization. Relevant characteristics include: considering the individuals, inspiration, an orientation towards the future, taking risks, building coalitions and, as Dina and Giffords (2003) also mention, effective communication (Austin, Claassen, 2008). According to Khademian (2002, as cited in Austin, Claassen, 2008) there are some characteristics that facilitate change. Among others, these include:

- “Listen and learn from the information gathered.”
- “Look for ways to broaden the base of participation.”
- “Identify and provide resources to enable all participants to excel.”
- “Practice continuous evaluation.”
- “Target authority structures within and without the program.”

4.2.3 Balancing processes

According to Duck (1993), managing change is all about connecting the individual processes and balancing them out. It is vital to understand how the pieces work together and how changing one can set off all the others. She uses the metaphor of trying to balance a baby mobile – pulling on one piece influences all the others. What is important is not that each individual process works well, but that the combination of all the individual processes is a success (Duck, 1993).

4.2.4 Emotions

Feelings and emotions have been proposed to play the most important part in getting all the employees on board (Duck, 1993):

“Change is fundamentally about feelings; companies that want their workers to contribute with their heads and hearts have to accept that emotions are essential to the new management style. (…) In fact, the most successful change programs reveal that large organizations connect with their people most directly through values—and that values, ultimately, are about beliefs and feelings.” (Duck, 1993, 112)

Therefore, by evoking positive emotions within employees, they are much more likely to be on board with the changes put into place by the management. By engaging emotions, leaders provoke commitment within the employees towards their cause (Seijts, Farrell, 2003).

Back in 1996, Larkin and Larkin encouraged leaders to communicate content instead of values. However, this has changed. Using only facts and analyses has a limited power to motivate people (Kotter & Cohen, 2002). If content is presented in a way that individuals can see and feel it, getting the required response from them becomes much more likely – and this is only possible by communicating values and emotions (Seijts, Farrell, 2003).

4.3 How to measure and assess organizational culture

Forstmann (1998) assumes in his research, that culture can be measured in two ways: either by looking at the inputs to culture, like for example the norms and values, or by looking at the outputs that are the result of deeper rooted things, e.g. the preferred way of doing things (Forstmann, 1998). According to Cartwright and Cooper (1992), it is only when one can no longer be surprised by the actions an organization takes and is even able to predict the most likely response of members to certain situations in most cases that one can claim to have completely understood a company’s culture.

There are a variety of ways to measure organizational culture in a comparable way. Forstmann (1998) used a questionnaire with three parts. It is constructed as follows:

“Part one asked for values and norms as well as bahviors. (…) Part Two asks for the degree of occurrence of integration problems out of a list of possible problems as well as for a qualitative explanation. The third part, finally, asks for statistical data in anticipation of the need to divide the data in sub – cultures.” (Forstmann, 1998, 65)

This methodology is able to show significant cultural differences between M&A partners (Forstmann, 1998).

Another strategy to assess organizational culture is used by Cartwright and Cooper (1992). Their goal is to divide the culture in either one of the four types of power orientation, role orientation, task orientation or person orientation which will be explained below. According to them, the more useful techniques include (Cartwright and Cooper, 1992):

a) Describing the organization as an animal – why would you choose exactly that animal? Is it “aggressive like a tiger, or slow like a tortoise”?
b) Finding a fitting, honest advertising slogan for the company

Alternatively, they, just like Forstmann, suggest using a questionnaire to achieve the same result (Cartwright and Cooper, 1992).

5 Types of Organizational Cultures

There are various ways to classify types of (organizational) culture, such as the models developed by Deal and Kennedy (1982) or a different model by Denison (1990), who describes culture on the four general dimensions of mission, adaptability, involvement and consistency. However, the model of the cultural fit developed by Cartwright and Cooper uses Roger Harrison’s model of classifying culture as a basis. Therefore, this model will be described in further detail and be used from here on.

In his conceptual framework, Harrison (1972) states, that there are four types of “organization ideologies”, which basically are different types of cultures. These determine two things: how compatible are the interests of the organization with the interests of its members and how well is the organization able to handle the external environment (Harrison, 1972)? The four types power orientation, role orientation, task orientation and person orientation, which will be described in detail here, hardly ever occur as pure forms. Most organizations have a tendency towards one or the other, but they are confounded (Harrison, 1972).

5.1 Power Orientation

In a power oriented culture, the company or organization strives to dominate its environment and get rid of all opposition. Within the organization, those in charge have a strong tendency to keep complete control over employees or subordinates. The organization tries to augment its territory or control with disregard for others and by exploitation of weaker organizations (Harrison, 1972).

The most important characteristic of a power oriented culture is the strong centralization of power. It often lies with a single person or a small circle of individuals. Due to the fact that power cultures are very hard to keep up as the organization grows bigger, this type is more often encountered in small companies with a charismatic leader (i.e. family businesses - founder). Decisions are mostly made by the person in charge and often based in intuition rather than logic (Cartwright, Cooper, 1992, 60f).

The biggest advantage of this sort of organizational culture is that the company is able to react rapidly in case it needs to, due to the central decision making (ibid.). On the other hand, in such a situation the company is ill-suited to process information effectively as it needs to pass through all organizational layers (Harrison, 1972). Moreover, low morale and dissatisfaction among workers are often ubiquitous, leading to the company not fulfilling its potential (Cartwright, Cooper, 1992).

Power orientation can be further differentiated into patriarchal power cultures and autocratic cultures:

5.1.1 Patriarchal Power Culture

In a patriarchal power culture, the exercise of power is perceived as legitimate. This is due to a strong personal commitment of the leader to the business and its future. He or she usually has a strong benevolent attitude towards and strong protectiveness of their employees. The staff is often treated in a familial, patronising way and usually poorly informed of “grown up” matters concerning the organization (ibid. 61).

5.1.2 Autocratic Culture

Leaders in an autocratic culture base their exercise of power solely in their position within the organization and their commitment to the organization is a question of personal gain. Therefore, their exercise of power is not considered as legitimate among employees (ibid. 62).

5.2 Role Orientation

Role orientation can be considered a reaction to Power Orientation. The focus is on being very rational and orderly; legality, legitimacy, and responsibility are valued highly. Every aspect of organizational life is carefully defined in agreements, rules and procedures. Behaviour in such an environment is highly predictable, with stability and respectability being cherished at least as much as professional competence. In a role oriented culture there is a tendency to value procedural correctness higher than actual task effectiveness (Harrison, 1972).

Cartwright and Cooper (1992) define it as “a bureaucracy, as its guiding principles are logic, rationality and the achievement of maximum efficiency. The organization’s view of itself is as a collection of roles to be undertaken rather than a collection of people/personalities” (Cartwright, Cooper, 1992). This type of culture can usually be found in big organizations where highly specialized work is required and labour is highly divided (ibid.).

A role oriented culture has proven very effective in stable environment conditions. However, the high level of formalization detains change. Quick reactions to changing market conditions are almost impossible. The security and predictability such a system offers comes at the price of constrained innovation and high risk aversion (ibid. 63).

5.3 Task Orientation

As the name suggests, the completion of a task, the achievement of a higher goal is the most important thing in a task oriented culture. This goal is not necessarily a financial or economic one; however, the whole organization’s structure is fitted to the achievement of that goal. Structure, processes and activities are constantly evaluated as to how well they contribute to the higher goal. If anything stands in the way or is not ideally suited to reach the goal, it is replaced. This also applies to people, rules, authorities and every other aspect of the organization (Harrison, 1972).

Project teams within existing organizations are often characterized by a task oriented culture. The commitment to and the challenge the task proposes energizes and boosts the individual team members. There is no formal authority dictating how the project team has to organize itself. Rather, the characteristics of the task itself dictate how work is organized (Cartwright, Cooper, 1992).

On the one hand, such a work environment is highly flexible and grants a lot of autonomy to the individual workers. If handled effectively, this leads to a very creative environment and hugely satisfying working conditions (ibid.). What is more is that such an organization is well prepared for changing circumstances – short communication channels and decentralized control enable a prompt and adequate reaction to a change in the external environment (Harrison, 1972). On the other hand however, the absence of formal authority means that control can become an issue. Furthermore, when times get hard, such cultures often develop into role cultures (Cartwright, Cooper, 1992).

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Details

Pages
39
Year
2016
ISBN (eBook)
9783668206946
ISBN (Book)
9783668206953
File size
603 KB
Language
English
Catalog Number
v317880
Institution / College
University of Linz – International Management
Grade
1,0
Tags
role company culture mergers acquisitions

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Title: The Role of Company Culture in Mergers and Acquisitions