Posted September 30, 2005 Atlanta
College of Management
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Mars-Venus Marriages: Culture & Cross-Border Mergers & Acquisitions
Culture clashes are an expected consequence when companies from different countries merge. But contrary to conventional wisdom, cross-border mergers and acquisitions tend to be most successful long-term when the cultural divide between nations is wide, according to a new study by Georgia Tech College of Management researchers.
"Mergers and acquisitions involving firms from countries with dissimilar cultures, on average, do better than those between firms from countries with similar cultures," write Georgia Tech finance professors Rajesh Chakrabarti and Narayanan Jayaraman and doctoral student Swastika Mukherjee in the study "Mars-Venus Marriages: Culture and Cross-Border M&A."
According to the study, which examined 405 cross-border mergers and acquisitions from 1991 to 2000 involving acquiring companies from 34 countries and target firms in 37 countries, greater cultural disparity can be beneficial because of:
Lower likelihood of acquisitions motivated by hubris in unfamiliar or distant environments.
Greater autonomy granted to acquired firms in distant cultural locations, resulting in greater retention of their pre-acquisition strengths.
Better screening, contracting, and due-diligence during the deal-making process as a result of heightened awareness of cultural differences.
Diverse organizational strengths leading to performance-enhancing synergies.
Mergers and acquisitions rarely deliver their promised benefits, often resulting in long-term under-performance. But greater cultural disparity between merging firms seems to lessen detrimental effects, found the researchers, who examined corporate performance thirty and thirty-six months after the unions. Despite their risks, mergers and acquisitions are becoming increasingly common events as a result of rapid globalization. American companies conducted nearly $4 trillion worth of acquisitions between 1998 and 2000- more than in the previous thirty years combined. Twenty percent of those acquisitions were cross-border.
The researchers point to General Electric's acquisition of the Hungarian light-bulb maker Tungsram in 1989 as an example of a cross-border merger fraught with difficulty. Individualism and individual responsibility defined GE's culture but not that of Tungsram, reportedly drawing out the latter's assimilation by several years. Problems also plagued the merger of Michigan-based Upjohn and Sweden's Pharmacia B in 1995, with the former firm used to a more hierarchical structure. Their differences appear to have stemmed not only from corporate-level practices, but also from national cultural traits, the researchers note.
"While corporate culture may be extremely difficult to measure, there exist widely accepted metrics of national culture," they say. "It is important to reiterate that we focus on national culture as opposed to corporate culture in our study."
The study measured national cultural differences using not only language, religion, and legal/corporate governance systems, but also widely accepted measures developed by Geert Hofstede in his landmark book on international management, Culture's Consequences: International Differences in Work-Related Values. Hofstede's measures include power distance (the degree of inequality between people in a country), individualism (the extent to which society emphasizes individual achievements over collective ones), masculinity (how much society reinforces the traditional model of male power in the workplace) and uncertainty avoidance (societal attitudes toward ambiguity and unstructured situations).
In the study sample, Australia and the United States proved to have the most similar cultures while New Zealand and Malaysia had the most disparate. The study also found evidence that acquisitions go better when acquiring companies are from countries with stronger corporate-governance systems than the target firms.