Double-layered Acculturation in Cross-Border Mergers & Acquisitions: Examining the Role of National Culture. Harminder Chyle Rajan

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1 Double- Layered Acculturation in Cross-Border M&As 1 Running Head: DOUBLE-LAYERED ACCULTURATION IN CROSS-BORDER M&AS Double-layered Acculturation in Cross-Border Mergers & Acquisitions: Examining the Role of National Culture Harminder Chyle Rajan To Be Delivered At: The 11 th International Conference on HRD Research and Practice Across Europe June 2-4, 2010, Pecs, Hungary The George Washington University Graduate School of Education and Human Development

2 Double- Layered Acculturation in Cross-Border M&As 2 Abstract Over the past few years, Mergers and acquisitions (M&As) have been occurring with great frequency among organizations in the United States (U.S.) and globally as companies attempt to streamline costs, enhance efficiency, expand into new markets and incorporate new technology and talent in order to remain globally competitive. Despite their popularity, studies have found that the vast majority of M&As fail to achieve their intended commercial and financial goals. A failed merger results in adverse financial repercussions for an organization and can lead to decreased productivity, low service quality, conflict or other sorts of dysfunctional employee behavior. Scant attention has been paid to the cultural challenges in cross-border M&As where affected companies need to grapple with both the national and organizational culture of the acquirer. The focus of this literature review is to critically evaluate and synthesize selected research related to double-layered acculturation, with specific emphasis on the role of national culture and implications for cross-border M&As. Keywords: acculturation, mergers and acquisitions (M&As), national culture, organizational culture,

3 Double- Layered Acculturation in Cross-Border M&As 3 Introduction Mergers and acquisitions (M&As) across borders have been growing steadily over the past decade as companies attempt to leverage on the advantageous these opportunities offer. The main drivers of M&A include the emergence of globalization and the need to streamline costs, enhance efficiency and profits. In 2004, there were 30,000 global acquisitions worth $1,900 billion. Despite their popularity, studies have found that fewer than 20 percent of M&A firms achieve their intended commercial and financial goals (Tanure et.al 2009; Human Capital Institute 2007; Cartwright and Schoenberg 2006; DiGieorgio I 2002). In spite of the current economic crisis, M&As both domestically and internationally are expected to grow as more robust companies with strong balance sheets are able to buy over those that are in financial difficulties. Compared to domestic M&As, cross-border M&As face a greater challenge since they involve the combination of two companies with different organizational cultures that are embedded in different national cultures. This requires the acquired company to adapt not only an unfamiliar national culture, but also to a new organizational culture. This phenomenon is best described by the term double-layered acculturation defined as where an acquired organization has to adapt to both a foreign national culture and a new corporate culture (Shimizu et. al, 2004; Barkema 1996). The necessity of firms to grapple with national and/or organizational cultural issues can sometimes lead to cultural clashes or conflicts which can trigger negative psychological effects on employees or acculturation stress. Acculturative stress can potentially derail the overall performance of M&A as it reduces employee commitment, productivity, retention, and shareholder value (Weber et al. 2006; Larsson and Lubatkin 2001; Morosini and Singh 1998). The majority of research on M&As has focused on the strategic and financial challenges between the acquirer and acquired firm despite the fact that studies have shown that cultural issues are far more important than financial or strategic factors. Although there is an emerging body of research focused on the implications of culture, the discussions are usually focused on organizational issues with insufficient attention given to the national culture dimension of double-layered acculturation, in cross-border M&As. Also, much of the cross-border M&A research is fragmented and has produced inconclusive and even contradictory results. For instance, some studies note that greater barriers exists in cross-border M&As since they have to contend with both corporate and national cultures, while others suggest that cultural differences do not always lead to negative consequences and can be valuable to the extent that culturally distant countries may perform even better than culturally similar countries (Stahl and Voigt 2008; Teerikangas and Very 2006; Shimizu et. al 2004; Barkema and Bell 1996). Most researchers who have studied cross-border M&As agree that national culture plays a more influential role in determining the successful acculturation since national culture influences the organizational culture of the acquired company (Tanure et al. 2009; Lubatkin et.al 1998; Very et.al 1996). Therefore, this literature review will focus on how national culture influences the process of double-layered acculturation in cross-border M&As after the acquisition process or post-integration stage. The paper will be structured as follows. The first section will discuss the cause and effects of double-layered acculturation in organizations, the second section will examine specific dimensions of national culture that can influence acculturation in cross-border M&As and the third section will conclude with implications and

4 Double- Layered Acculturation in Cross-Border M&As 4 recommendations for future research. Although studies make a distinction between a merger and an acquisition, the term M&A will be used interchangeably for the purpose of this paper. Theoretical Framework Acculturation Theory The study of acculturation dates back to the 1880s where it was explored in the field of anthropology and cross-cultural psychology and cross-cultural management (Heidrich 2002; Nahavandi and Malekzadeh 1988). Larsson and Lubatkin s (2001) define acculturation as the outcome of cooperative process whereby the beliefs, assumptions and values of two previously independent work forces form a jointly determined culture (p 1574). Nahavandi and Malekzadeh (1988) define it as changes induced in (two cultural) systems as a result of the diffusion of cultural elements in both directions (p 81). However, the common thread in most of these definitions is that acculturation consists of a process where two separate cultures evolve or undergo change voluntarily or involuntarily. Only a few studies in the literature specifically use the term double-layered acculturation which is defined as... the corporate culture differences between the two firms and the institutional and cultural distances between the two home countries (Shimizu et.al 2004). Most researchers still use the term acculturation to describe the double cultural adjustments faced by cross-border M&As which suggests the lack of understanding and/or consensus on the specific challenges associated with cross-border M&As. The process of acculturation in M&As can be understood as consisting of three main patterns namely contact, conflict and adaptation. The first two stages outline the initial contact between the two firms which could potentially result in conflict as the contact intensifies. The final stage adaptation could be either positive or negative depending on if there is agreement between the two firms on how to achieve cultural synergy. The acculturation process is also dependent on the acculturation mode the firm chooses to adopt, namely, Assimilation, Integration, Separation and Deculturation. Assimilation involves a scenario where one firm voluntarily relinquishes its culture and absorbs the other s identity. Integration occurs when both firms preserve their cultural identities and remain independent and autonomous, except for combining the structural aspect. Generally, mutual learning relationship is present between both firms. Separation is characterized by minimal interaction and contact between both firms. This usually results in a high level of conflict as the acquired firm rejects any type of intervention. Finally, Deculturation results in the lost of the acquired firm s culture and management as the acquired firm distances and alienates itself due to feelings of confusion, stress and conflict (Nahavandi and Malekzadeh 1988). There are many factors that may determine which of the four acculturation modes a firm chooses to adopt. Larsson and Lubatkin (2001) attribute the decision to four factors. The first factor is the degree of autonomy or freedom that the acquired firm will be given to make strategic decisions in the company. The second factor, merger relatedness refers to the similarity in strategy, products, markets and technologies between the two firms. The third factor is the relative size of the firm measured by annual sales, employee count or assets of the acquired company. The fourth factor, social controls, consists of efforts to improve synergy and socialization in the firm such as transition teams, management involvement and task forces. Others argue that preferences or perceptions of the firms in particular influence the acculturation mode (Heidrich 2002; Nahavandi and Malekzadeh, 1988). These include areas

5 Double- Layered Acculturation in Cross-Border M&As 5 such as the degree of multiculturalism of the acquired firm, the perception of attractiveness of the acquirer and the extent that the acquired firm values the preservation of its own culture. In the organizational context, acculturation can pose a challenge for many companies undergoing M&As because employees do not usually have an option of not acculturating. This can result in acculturative stress defined as individual states and behaviors that are mildly pathological and disruptive and can affect employee morale, performance and retention (Nahavandi & Malekzadeh 1988, p.84). In cross-border M&As, the acculturation process is more complicated since both companies would be exposed not only to a new organizational culture, but also a foreign national culture which complicates the acculturation process. National Culture National culture is defined by Hofstede (2005) as the collective programming of the mind which distinguishes members of one nation from another (p. 2). Unlike organizational culture, national culture is learned through early socialization within the family and school. It is also more deeply ingrained and not easily modified. Teerikangas and Very (2006) describe national culture as not being very different from organizational culture with the key difference being the unit of analysis. Olie (1990) describes national culture as comprising central or core values which are not clearly visible. This cultural gap between countries or national culture distance is defined as the degree to which the cultural norms in one country are different from those in another country (Kogut and Singh 1988, p. 414). National cultures are commonly analyzed using Hofstede s model based on four dimensions. First, Uncertainty Avoidance is defined as the willingness to accept risk and ambiguous situations. Second, Individualism/ Collectivism refer to the role of the individual versus the group while Power distance refers to the degree to which power differences are perceived as acceptable by society. The fourth dimension, Masculinity/Femininity refers to the emphasis on competitiveness and wealth accumulation versus relationships and quality of life. Hofstede reiterates how these national culture differences have profound implications for organizations as the dimensions affect individual values or attitudes towards employee relationships, resolution of conflicts, decision-making and motivation towards work. Although double-layered acculturation involves the interplay of both national and organizational cultures, this paper will focus on the role of national culture as defined by Hofstede for two main reasons. First, the dominant characteristics of a national culture are reflected in an organization and represent the unique interaction between, and a combination of, a set of subjective cultures (Heidrich 2002, p.27 ; Kogut and Singh, 1998). This in turn suggests that the organization is influenced by (and influences) a nation s culture. Very et al. (1996) reiterate that the historical development of companies and countries has a strong influence on the development of shared believes and values (p.38). Lubatkin et.al (1998) conducted a study on 75 acquisitions in Europe and found that the management practices in both British and French firms were influenced by their respective national administrative heritage. Therefore, examining the national culture will help explain some challenges associated with the organizational culture. Hofstede acknowledges that although not all individuals think or behave similarly, these dimensions are sufficiently general to affect common behavior patterns and structure and functioning or malfunctioning of national institutions (p.236). Second, there is already abundant research on the role of organizational culture in M&As compared to national culture issues. Hence, this paper hopes to shed light on some of the key areas that affect double-layered acculturation in cross-border M&As.

6 Double- Layered Acculturation in Cross-Border M&As 6 The following section will review some studies that explore the impact of national culture differences on cross-border M&As and discuss if these national differences have helped facilitate or hinder the process of double-layered acculturation. National Culture and Acculturation Cultural Distance and Performance Many studies on cross-border M&As have utilized Hofstede s dimensions to examine the role of national culture on post-integration issues. In particular, the dimensions that are most frequently used to study cultural distance in organizations are power distance and uncertainty avoidance. Some earlier studies state that the higher the cultural distance in crossborders M&As, the higher are the chances that there will be cultural conflicts which can be detrimental to the firm s performance (Buono 2003, Olie 1990). In contrast, other studies insist that instead of being obstacles, national culture differences in cross-border M&As can have a positive impact on M&As as the clashing of national cultures does not always apply. For example, Kessapidou and Varsakelis s (2002) study of 478 foreign firms in Greece showed that a higher national culture distance can improve a firm s performance as the cultural interaction enriches the corporate management practices and repertoires (p 274). Also, Morosini and Singh s (1998) study of English and Italian firms found that a greater cultural distance enhanced the performance of firms as it enables the acquired firm to gain access to new markets and technology. Tanure et al. (2009) explored how eight recently-acquired Brazilian firms responded to the acculturation process at various stages of M&A. They argue that in most family-business companies, cultural traits related to management practices were still retained and respected by the acquirer, thereby reducing the source of conflict. Finally, Very et. al (1997) examined British and French firms involved in M&As and concluded that cross-national mergers do not necessarily result in acculturative stress. In fact, depending on the nationality of the home country, these differences can be a source of attraction rather than stress. They even go as far as to argue that domestic M&As experience greater acculturative stress compared to cross-border M&As which could be due to clashes in organizational culture between firms. Thus it seems that the presence of the national culture component or difference can have a positive effect on M&As and presumably facilitate the process of double-layered acculturation. Despite the positive results indicated by these studies, it is important to note that these benefits are not without caveats or conditions. For instance, there seems to be a specific threshold or limit to the benefits that these differences can create, since studies also show that a high national cultural distance can result in exceptionally low benefits (Teerikangas and Very 2006 ; Schoenberg, 2000). Also, the company s selected acculturative mode or integration strategy can impact acculturation and the effect of national cultural distance. The degree of integration -- such as a tight integration strategy, for instance -- can cancel out the positive effects of national culture and lead to acculturative stress (Slangen, 2006). In addition to selecting the appropriate integration strategy, successful acculturation can also be achieved by using effective social controls which help mitigate cultural conflicts or clashes by developing a common culture between the both the acquirer and acquired firm. Lubatkin s (2001) empirical analysis of fifty M&A cases in several countries found that acculturation is best achieved by implementing social controls and involving employees in activities such as introduction programs, training cross-visits, retreats, celebrations (p.1573). In particular, they examined if Swedish firms were more likely to achieve postacquisition acculturation compared to U.S. companies since the Swedish national culture is

7 Double- Layered Acculturation in Cross-Border M&As 7 based on principles of egalitarian, collectivism and cooperation. Their results showed that Swedish mergers utilized more social controls compared to US acquirers leading to more successful acculturation. Therefore, although differences in cultures may exist, using effective social controls can help cross-border M&As transition more smoothly. Implications and Conclusions To conclude, the complex nature of double-layered acculturation requires companies to exercise caution when planning cross-border M&As. Although the literature seems to indicate that national culture can be a source of cultural synergy for M&As, factors such as the integration strategy, preferences of acculturative modes, and role of managers can determine the impact of these cultural differences. Managers have an especially important role in understanding and identifying the dimensions of national culture of the acquired company s country of origin at the onset to ensure how they can positively influence post-acquisition acculturation and performance. Second, the dynamic nature of double-layered acculturation makes it difficult to estimate its impact on cross-border M&As. Teerikangas and Very (2006) sum up the complexity of double layered acculturation by cautioning that the relationship between culture and performance is not straightforward due to interconnections and multi-layered nature of both organizational and national culture ( p. 33). This makes it difficult to separate and study both cultures. However, despite this complexity, acquiring firms still have an important role to play in reducing acculturative stress by making acquisition decisions that facilitate rather than hinder company performance. For example, given that organizations may have different preferences of the mode of acculturation, a lack of agreement or congruence between both companies about the acculturation mode will affect the success of M&As (Nahavandi and Malekzadeh 1988). In the context of cross-border M&As, this implies that the acquirer needs to understand the desires and preferences of the acquired company as this can have a profound influence on the success of the M&A. Successful acquirers are cognizant of the national characteristic dimensions of the acquired firm and use that to influence the integration or acculturation strategy. They are aware of the negative repercussions or cultural conflicts that may arise from imposing too much integration or pursuing an integration strategy that does not match the cultural preferences or a country. Since most of the limited studies on cross-border M&As have been conducted largely with U.S and European firms, future studies need to examine how it would be different in the Asian context, especially so since many Asian firms have become much more prominent players in cross-border M&As. It would be interesting to ascertain how Eastern and Western national cultural differences acculturate and if they experience more or less acculturative stress compared to intra-western or intra-eastern cross-border M&As. Also, in the case of crossborder acquisitions where the acculturation mode is integration, both organizations will presumably have to blend their operational and managerial functions in order to achieve a single or shared identity. This implies that both companies will experience a greater degree of double-layered acculturation since neither party can impose its culture and structure on the other company. Hence, this will give rise to a new or third culture (Olie, 1990). It would also be useful to examine the characteristics of the evolved culture and its implications for M&A performance. Finally, although Hofstede s national culture dimensions are frequently used to understand national cultures, it has been criticized as being simplistic due to its generalizations and outdated. Therefore, future studies could tap on other national culture dimensions to

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