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Bridging the Culture Gap in Cross-Border M&A

It is no secret that cultures change from country to country. They may even change from region to region within the same country. Having an M&A advisor who is intimately familiar with the culture of your target country is a critical component to executing a successful transaction.

In this final installment of our Buy-Side-as-a-Service (“BSaaS”) series we will discuss culture from the perspective of a nation and an organization. It is true that individual culture exists and is important; however, it is less significant in our discussion. For that reason we will focus solely on national and organizational culture.

Understanding Culture

Before we jump into the weeds it is important to ensure we are speaking the same language when we discuss culture. Sociologists and anthropologists may argue over the definition of the term culture, but for our purposes we will use the following: culture is the total way of life of a people, composed of their learned and shared behaviour patterns, values, norms, and material objects[1].

In the world of M&A, the culture of the target company is generally acquired in its entirety when the transaction is finalized. Throughout the integration process the culture may evolve to reflect that of the Buyer. When approaching a cross-border transaction management shouldn’t focus on if the culture, at the national or organizational level, is the same or different. Rather, management should approach the culture question from the perspective of the expected synergies. Will the changes necessary to recognize deal synergies cause a conflict in both cultures?

It is natural to expect that some bumps will be encountered along the way for both the Buyer and Seller. It is management’s job to evaluate to what degree these bumps may actually become roadblocks to achieving the business goals. When conducting this analysis management can look at culture from the perspective of the nation in which the target is located and the organization itself.

National Culture

A national culture connects people who share a common history, beliefs, and values. It represents how these people interact among each other and how they react to someone external to their culture. Companies engaging in cross-border M&A transaction must take care to understand how culture at HQ differs from the culture found in other countries where the target entity is located.

Buyers approaching an M&A transaction with a foreign company that adopt an “our way or the highway” mentality are likely in for a poor outcome. This is due to the fact that different cultures have different rules and norms for behaviour and procedures. It is unlikely that they will change due to new ownership of their company. Both buyers and sellers should be aware that work will need to be done before, during, and after the transaction to ensure that cultures are respected throughout the process.

Savvy buyers will try to get an idea as to a country’s culture prior to engaging with a target. Various methods could be utilized in this endeavour from traveling to the country for a first hand experience, speaking with colleagues in the country, or dong some online reading. All can be beneficial, though some are obviously more fun than others. To provide an introduction to various forms of culture we will present Hofstede’s cultural dimensions theory below. This is a theory, and not a law, and should be viewed as a jumping off point and not the finish line in your cultural research.

Hofstede’s Cultural Dimensions Theory

Professor Geert Hofstede surveyed IBM employees from around the world from 1967 – 1973. His research led to the creation of Hofstede’s cultural dimensions theory and studies how culture influences values in the workplace. The original study produced the following six dimensions[2]:

Power Distance
How does society handle inequality? To what degree do the lower members of society accept and expect that power is unequally distributed?

In a high power distance society people tend to accept that a hierarchy is necessary and don’t question the status quo. In a low power distance society people demand a more equal distribution of power. People in a low power distance society will want justifications for any inequalities.

Individualism vs. Collectivism
Individualistic cultures are defined by people who are obligated to take care of themselves and close family only.

A collectivist culture is more tight-knit. People in a collectivist culture can rely on support from extended family and even other, unrelated members of the community.

Individualism vs. collectivism gets down an “I” vs. “We” mentality.

Masculinity vs. Feminism
If a culture tends to focus on material rewards, assertiveness, and achievement it would be defined as masculine.

On the other hand, a feminist culture is more focused on cooperation, modesty and is more consensus-oriented.

To avoid gender stereotypes masculine and feminine can also be referred to as tough and tender, respectively.

Uncertainty Avoidance
This dimension gets down to how comfortable or uncomfortable members of a society tend to be with uncertainty.

A country strong in uncertainty avoidance would exhibit unwavering beliefs and not tolerate non-traditional ideas or thoughts. Countries that are low in uncertainty avoidance are more open to different thoughts and experimenting with new ideas.

Long Term vs. Short Term Orientation
How do you respect your past while also preparing for a future that is certain to change? Countries around the world approach this from different perspectives.

A short term orientation culture adheres to time-honoured traditions and tends to be skeptical of change.

Long term oriented cultures are more open to change. They encourage efforts to plan today for what changes may come tomorrow.

Indulgence vs. Restraint
Of all the dimensions these are probably the easiest to grasp.

A country that leans towards indulgence accept gratification of basic human needs and other wants and desires. Live life and have fun may be a slogan for these cultures.

Those that are more restrained suppress gratification and may go so far as to do so via strict social norms or laws.

Naturally, just because a country tends to lean toward one direction doesn’t mean a company operating in that country is the same. For example, you could have a company that has adopted a culture of experimentation and challenging the status quo that just happens to be located in a country generally defined by strong uncertainty avoidance. Management should use Hofstede’s cultural dimensions as a tool to start understanding other cultures and not as a law written in stone.

We’ve reviewed how national culture influences individuals. Now let’s explore how culture influences the companies that operate within a country’s borders. A review of organizational culture and the role it plays in M&A follows.

Organizational Culture

Before you can understand an organization’s culture, you must first understand the national culture. The organization, by operating within a country, will have many similarities with the national culture. However, differences will also be evident.

As buyer’s consider the culture of a foreign entity they can divide the organization into two parts:

1) The organizational climate

2)The national culture

A new owner can influence the organizational climate. This includes changing thinking about how the business operates and introducing new practices and technologies.

The national culture part of the organization, however, cannot be changed. A company located in the U.S. will have employees who mostly adopt American culture. In more authoritarian regimes aspects of the national culture may be imposed by law on companies.

It can be helpful to classify the organizational culture of your company as well as your target. While we don’t have a universally agreed upon set of categories for organizational culture, the following are a good start[3]:

Market Culture – Develop a competitive advantage and pursue a market leading position

Clan Culture – Develop strong internal morale among employees to create a more tight-knit and cohesive company

Hierarchical Culture – A bureaucratic structure

Adhocracy – A flexible organization that encourages innovation and an entrepreneurial mindset

Power Culture – Focus on power with well-defined rules

Role Culture – Formal procedures and written rules. Similar to a hierarchical culture

Person Culture – Personal growth and development is a focus

As two companies plan to merge it is necessary to consider and plan for obstacles arising from conflicting cultures. This will not be isolated to one level of the organization. Incompatibilities in culture can be witnessed from the ground floor employees all the way up to the C-Suite executives.

Where is Culture Reflected in the Organization

When examining an organization, culture is reflected in various processes[4]:

1) Policies & procedures: How are procedures documented, who is responsible for developing the policies and procedures, and how are changes approved?

2) Systems & controls: What type of relationship do managers have with personnel? Is the objective to manage and control or to coordinate?

3) Information & communication: What information is shared and how it is distributed to various levels of the organization

4) Decision making: who makes decisions, who is involved in the process, and what level of the organization is responsible for certain decisions

Approaches to Connecting Cultures

Various theories exist that try to guide companies with different cultures through the integration process. Like many theories, they sound good on paper but may be harder to execute in the real world. The following are a few established theories. Your integration may be able to incorporate pieces from the following or may require an entirely different approach. Motives for the transaction, the geographies involved, the human resources and other factors will all play a role in deciding upon a strategy when connecting cultures.

Impose Your Culture
This method is very straightforward. The buyer, as the new owner, will impose their culture on the newly acquired company. If you decide to go this route ensure it is done with careful planning and execution. Employees will want to understand the motives behind the decision and will seek justification as to why your organizational culture should be adopted.

Culture Autonomy
This approach allows the buyer and newly acquired entity to retain their existing organizational culture. Pros to this method are that culture shock can be reduced, or eliminated, and employees can continue to perform at a high level as they aren’t distracted by change. This approach could also reduce the risk of M&A failure. Cons include difficulty in communication and limiting potential synergies.

Create a New Culture
If neither of the above sounds appealing then why not create a brand new culture. This will be a complex task. Management will need to identify the pros and cons of each existing culture and then structure a better culture that works for all parties. This approach starts with a detailed understanding of the various cultures and creating bulletproof reasons as to why certain elements should be included in the new culture. To pull this off management will need to be expert communicators.

Regardless of which approach you take to connecting two cultures conflicts are bound to arise. In preparation for a transaction management should openly acknowledge that conflicts will occur and have a plan to quickly identify and resolve issues before they get out of hand.

Sources of Cultural Conflict

Understanding the differences of national and organizational culture can help a buyer plan for a cross-border M&A transaction. It is also helpful to understand various sources of conflict. Below we describe a few various sources you should consider throughout the M&A process.

1) Cultural differences – Misunderstandings that result from differences in point of view and methods of communicating

2) Assimilation vs. ethnic identity maintenance – The needs to assimilate with a new culture competing with conservation of a cultural and ethnic identity

3) Power imbalance – The manner in which power is distributed

4) Competing goals – Different divisions within the organization may have competing goals, resulting in conflicts during interaction

5) Competition for scarce resources – From capital to raw materials different divisions within the same company will be competing for limited resources

Conclusion

When preparing for a cross-border M&A transaction a buyer will have many important facts to consider. While valuation, deal structure, and integration plans are critical, buyers must also recognize that culture plays an important role. It is important to create a global corporate culture for your business that respects and incorporates the various national cultures.

If you are exploring M&A opportunities in the United States our team of licensed investment bankers would love to have a conversation. Our team has worked with foreign buyers before and we can help you navigate some of the cultural aspects of deal making that aren’t easy to pin down in a spreadsheet.

Fill out our contact form and one of our associates will be in touch.

Sources

[1] Rogers, E. M., & Steinfatt, T. M. (2007). Intercultural Communication. Long Grove: Waveland Press. Retrieved May 29, 2019.

[2] Hofstede Insights. (n.d.). National Culture. Retrieved May 29, 2019, from https://www.hofstede-insights.com/models/national-culture/

[3] Nahavandi, A., & Malekzadeh, A. R. (1993). Organizational culture in the management of merges. Westport (Connecticut): Quorum Books.

[4] Schneider, S. C., Barsoux, J., & Stahl, G. K. (2014). Managing across cultures. Harlow, England: Pearson.

Corbin Bridge on Linkedin
Corbin Bridge
Corbin Bridge is a licensed investment banker at InvestmentBank.com. He has prior experience assisting private companies in developing and executing acquisition strategies. Corbin works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. His areas of interest include Blockchain, AdTech, and Entertainment. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Corbin resides in Las Vegas, Nevada.
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