Impact of Culture on Mergers and Acquisitions

Mergers and acquisitions (M&As) are the primary strategic choice for organizations aiming to gain a competitive advantage. Companies worldwide invest significant funds in pursuing this strategy, but accurately assessing the success rate is challenging. The main reason for this difficulty lies in clashes between corporate cultures. This theoretical paper aims to investigate the causes of failure in the majority of mergers and acquisitions.

This paper examines the following key aspects of culture clashes in merged entities: ambiguity and communication issues, cultural integration management, acquisitions and organizational culture, and improper acculturation processes. Previous research supports these factors, which form the foundation of a conceptual framework designed to generate effective approaches for the acquisition process. By using this framework, a deeper comprehension of the causes behind unmet expectations in international mergers and acquisitions can be attained.

Although mergers and acquisitions frequently fail for financial and economic reasons, organizations now recognize that a prosperous merger or acquisition necessitates more than just achieving favorable numbers. It is evident that a thriving organizational partnership also relies on the compatibility and characteristics of the partner, which extend beyond strategic alignment.

Financial advisors can offer advice to merger managers on areas where economies of scale may be achieved. However, it is not their responsibility to implement these suggestions and turn them into reality (Cartwright and Cooper, 1992; Lodorfor, 2006). The clash of cultures between merging companies is often cited as a major reason for the lack of success in mergers. Many researchers attribute this failure to the cultural differences between the companies involved and the challenges that arise when trying to integrate these differences within mergers and acquisitions (Buono et al., 1985; Datta and Puia, 1995; Veiga et al., 2000).

Difficulties faced in M&A become even more challenging in cross-cultural scenarios, where the participating companies are from multiple countries. Individuals working in different countries might respond to similar circumstances or events with diverse behaviors. Therefore, an organization engaged in an international merger or acquisition must take these variations into account from the initial planning phase in order to achieve success.

However, it is important to remember that organizations with similar cultures may meet expectations if they are managed well. On the other hand, when combining organizations with highly different and potentially incompatible cultures, good management can still be effective.

Many organizations lack the time and resources to properly analyze and anticipate market trends and integration issues. This often leads to a failure in establishing strategic objectives and performing sufficient due diligence on target companies. As a result, many transactions suffer setbacks or fail completely. Research suggests that the greatest risk for merger failures occurs during the integration process (Oon, 1998; Simpson, 2000).

Integration can be unsuccessful for various reasons, such as inadequate management and strategy, cultural disparities, communication delays, and a lack of clear vision. Mergers and acquisitions have been practiced since at least the 1900s (Gaugan, 1999), but their importance has significantly grown over the last two decades. Many US companies now view them as a standard corporate strategy to improve their organizational capabilities and achieve a stronger position in the competitive market (Buono and Bowditch, 1989; Sally Raid, 2007).

Throughout the 1990s and beyond, mergers and acquisitions were consistently occurring in the United States. In just 1998, there were a total of 7,809 M&A transactions worth $1.19 trillion (Guaghan, 1999). However, one major issue arises when looking at these transactions – their high failure rate. Estimates suggest that anywhere from 60% to two-thirds of these deals end up failing (Gilkey, 1991). Despite extensive efforts by scientists and researchers to uncover clear and systematic explanations for this phenomenon, no definitive answer has been found in the literature.

Previous research on M&A primarily concentrated on financial aspects, such as transaction methods and the quantity of bidders, or strategic factors like the degree of relatedness. While some advancements have been achieved in identifying the correct solution, an ongoing discussion remains. A frequently debated viewpoint proposes that M&A transactions with a connection tend to outperform unrelated ones by attaining increased synergy through economies of scale and scope (Datta, 1991).

Recent research has shifted its focus from financial and strategic perspectives to the human aspects of M&A. It explores organizational fit and integration processes (Hogan and Overmyer-Day, 1994). Gilkey (1991) argues that the high failure rate can be attributed to mergers and acquisitions prioritizing business and financial fit over psychological and cultural issues.

The author suggests that thoroughly studying these issues could lead to a learning process, focused on effectively managing such ventures (Gilkey, 1991, p. 331). By examining acquisitions from a different perspective, specifically a cultural ambiguity framework, we can gain a better understanding of the complexities involved and potentially avoid undesirable outcomes. Communication is emphasized as a valuable tool for navigating the ambiguous nature of acquisitions.

Over the past two decades, numerous authors such as Kimberly and Quinn (1984), Bueno and Bowditch (1989), Cartwright and Cooper (1992), Gilkey (1991), and Lubaktin and Lane (1996) have emphasized the significance of managing “the human factor” in mergers and acquisitions. While these authors provide valuable insights into the role of culture, these insights remain fragmented and await integration into a unified body of knowledge.

In this conceptual framework, the explanation of how the role of culture can be envisaged in the success or failure of organizational melting processes is addressed. One major factor contributing to lack of projected performance, departure of key executives, and time-consuming conflicts in business consolidation is cultural incompatibility (Bijilsma-Frankema, 2001). The reaction of employees to the new organizational culture environment is significantly influenced by culture.

According to Bijlsma Frankema in 2001, the term ‘Culture clash’ refers to the conflict that arises when two companies with differing philosophies, styles, values, and missions decide to merge. This clash can be highly risky for both companies involved. Even in the best circumstances, mergers have the potential to significantly change the nature, orientation, and character of one or both merging partners. Consequently, it usually takes employees five to seven years to fully integrate into the newly merged entity (Covin et al., 1997). The period after a merger is characterized by numerous challenges due to the many changes that occur during this time (Mirvis and Marks, 1992).

Most of the adjustment problems that employees face stem from concerns about job loss and financial debt. Additionally, the transition to a new manager and three new team members can be distressing and anxiety-inducing (Mirvis and Marks, 1992). Employees also worry about losing effective and close team members, as well as the uncertainty surrounding new team members and supervisors they will be working with. Confronted with unfamiliar colleagues and supervisors, employees often develop fears about taking risks and discussing sensitive topics.

According to Mirvis and Marks (1992), this can lead to a mindset of ‘us versus them’, resulting in low trust towards new team members. Corporations experiencing this behavior may face negative consequences such as a loss of cooperation and initiative among employees after a business combination. The desired synergies may become more challenging to attain and conflicts and disagreements may be harder to resolve or not resolved at all. This friction is most likely to occur during the post-merger period and makes it difficult for the new team to move forward as a cohesive unit (Appelbaum et al, 2000).

According to Feldman (1991:p. 146), ambiguity arises in organizations when there is “no clear interpretation of a phenomenon or set of events.” This definition applies to various situations in the organization’s activity. Meyerson (1991) states that individuals’ understanding of an event can differ throughout the organization. She also points out that ambiguity can exist both within the organization as a whole and within individuals’ cultural knowledge. Therefore, ambiguity can be present in different sets of events within an organization.

Various types of ambiguity can be experienced by different individuals in the organization at different times. Scholars such as Cohen and March (1974), Khan et al. (1964), and March and Olsen (1976) have recognized and labeled ambiguity in organizations. Essentially, all these types of ambiguity arise from inadequate information and communication among individuals. According to Khan et al. (1964), ambiguity is caused by “the lack of clear, consistent information” (p. 23). Frost et al. (1991) also link ambiguity to communication, suggesting that it can potentially be resolved through the provision of more information.

The definitions demonstrate how organization ambiguity is related to communicated information. It is clear that effective communication can reduce ambiguity, but incorrect communication can increase it. When a new company is formed from the merger of two previously separate firms, some employees will experience changes in their work structure and processes that they must adjust to. These changes are inevitable because it is rare for two independent firms to have identical work processes and employee expectations.

Therefore, it is important to recognize that organizations becoming global or “ambiguous” according to Martin and Meyerson (1991) must be acknowledged in communication. As Schein (1993) suggests, understanding another culture makes it easier to recognize it. Hence, communication can assist in acknowledging multiple cultures within an organization and facilitating cooperation among them. Davis and Jasinski (1993) emphasize the significance of communication in producing and negotiating meaning for individuals.

The effective management of change in an organization depends on proper communication. According to Young and Post (1993, p. 36), communication plays a crucial role in reducing resistance to change among employees. Their study also highlights the importance of top management taking the initiative for communication, and maintaining continuous communication throughout the change process. Additionally, it is essential to ensure that actions align with words, as inconsistencies can create confusion. Communication is a valuable tool for managing change, including acquisitions (e.g. Scweiger and DeNisi, 1991), but it must be reliable to prevent misunderstandings.

During the initial stages of the acquisition process, unreliable communication can be identified as individuals form opinions about the acquiring company. Cultural integration management is crucial in addressing not only the lack of communication between merging organizations, but also the deliberate withholding of information by senior executives involved in the merger. This withholding of information contributes to employee confusion, uncertainty, as well as a loss of trust and loyalty.

According to multiple authors, the transition from functional forms to network forms in organizations leads to the growing importance of trustful relations among members for organizational performance. In network forms, trust is considered equivalent to control in functional forms (Miles and Snow, 1994).

A widely accepted notion is that trust, which is influenced by managerial beliefs, philosophies, and actions, helps to lower transaction costs. When relationships are based on trust, expenses related to control, checks, monitoring, and similar activities can be kept to a minimum (Cumming and Bromiley, 1996; Powel, 1990; Sheperad and Tuschinksky, 1996).

Furthermore, according to certain authors, trust will decrease if control is not reduced, as trust and control are vital aspects of two organizations. Handy (1993) goes as far as to assert that trust in subordinates and the control managers have over their work are inversely proportional – an increase in control leads to a decrease in trust by the same measure.

The appearance of these carefully balanced solutions is still unknown, as there is limited knowledge regarding which managerial behaviors or actions impact the perception of trust or distrust by subordinates. By establishing shared norms, the potential discord between managerial behavior and trust among subordinates can be mitigated, as these norms reduce the likelihood of misunderstandings and differing expectations. For instance, an individual who possesses a desire to avoid causing harm may unintentionally do so if they are unaware of the prevailing norms and expectations.

According to Garfinkel (1967), a crucial method for advancing shared norms involves regular dialogues between two parties. During these dialogues, individuals exchange their ways of thinking and reasoning, as well as explicitly communicate norms and expectations. Argyris (1983) maintains that dialogue also entails individuals sharing the thought processes and reasoning that have influenced their conclusions about each other’s behavior. However, simply exchanging conclusions is insufficient for fostering a collective learning process.

Learning about each other’s way of thinking contributes to mutual understanding and facilitates comparison. It helps us determine whether the other person’s reasoning is truly different or simply an alternative pathway derived from a shared foundation. Do these alternative pathways effectively address specific situations, each with their own measure of success? Can they be viewed as complementary to one another? Is it possible to merge both ways of thinking into a new logical framework? These considerations, which can enhance integration, may arise through engaging in a high-quality dialogue rather than simply exchanging conclusions. Acquisition and organizational culture are often negatively impacted by clashes between cultures.

The existing literature has commonly explored culture by examining similarities and differences in “values”. Previous research on successful acquisitions has predominantly focused on identifying compatibility between the merging companies, such as similarities in management styles and corporate culture. It is generally assumed that integration of the two organizations is necessary to achieve the optimal outcomes of the acquisition, aiming for a mutual corporate culture. However, Haspeslagh and Jemison (1991) propose that complete integration is not always required in every acquisition scenario.

The message conveyed is that the level of integration should vary depending on the type of acquisitions. Regrettably, the acquired company usually has to conform to the culture and routines of the acquiring company (Napier et al, 1989), which can make it challenging for them to adapt to the parent company. Conversely, it should also be considered which organization has a more favorable organizational culture. A culture seen through an ambiguity lens cannot be classified as either harmonious or conflicting.

Instead of having a complete alignment of viewpoints, individuals in an organization tend to have a mix of shared, disagreed, and unknown or indifferent viewpoints (Martin and Meyerson, 1991). The belief that the acquired company should integrate into the acquiring company’s culture is likely based on existing organizational theories that do not consider cultural variations within the organization (Fines, 1991). Within a single organization, multiple cultures exist due to the diverse backgrounds of its workforce, including differences in ethnicity, gender, or nationality.

In organizational theories, organizational culture is seen as something that homogenizes the organization and its members (Martin and Meyerson, 1991). Therefore, when two cultures are combined, existing theories often assume that one culture should assimilate into the other to ensure the success of the new organization (Berry, 1980; Nahavandhi and Malekzadeh, 1988). However, organizational culture typically does not consist of values and assumptions shared by all members; rather, it can be composed of different subcultures with conflicting views on reality (Schein, 1993).

According to Martin and Meyerson (1991), there are three perspectives that can be used to study the corporate culture: integration, differentiation, and ambiguity. The integration perspective focuses on consistency among cultural manifestations, such as events and artifacts, and on organization-wide agreement among cultural members. In the context of acquisitions, this perspective would involve denying the differences between the members of the combining companies.

It is probable that the top management is denying the differences in order to merge the two companies into one with a uniform culture. The top management avoids dealing with the ambiguity that can arise from cultural differences. Studies on acquisition have also utilized the differentiation perspective, emphasizing the inconsistency and absence of compromise in corporate culture. It views culture as either harmonious or conflicting. As mentioned earlier, most failures in acquisitions have been attributed to clashes in culture (e.g. Buono and Bowditch, 1989).

Cultural clashes occur when two merging companies discover differences in their corporate cultures. The differentiation perspective, like the integration perspective, acknowledges ambiguity but focuses on subcultures and their variations. This includes recognizing the contrast between marketing culture and engineering culture, without disregarding shared agreements within the organization (Marting and Meyerson, 1991). “Subcultures differentiation ‘fences in’ these distinct perspectives.

Each subculture becomes an isolated area of simplicity, with ambiguity only present in the spaces between subcultures. According to Martin and Meyerson (1991), the differentiation perspective views ambiguity as swift cultures create pathways around these isolated areas. In the context of acquisitions, the merging companies represent these subcultures. Rather than denying their cultural differences, they acknowledge and focus on them. Each company emphasizes agreement within their own organization, while differences will arise during the interaction between the two companies.

The third perspective, ambiguity, sees cultural manifestations as neither clearly consistent nor clearly inconsistent. Instead, the corporate culture is viewed as fragmented, comprising many subcultures with diverse and shared values. When these two corporate cultures converge, the ambiguity is acknowledged and sometimes even deliberately emphasized. Ambiguity perspective recognizes that a culture cannot be characterized as either in harmony or conflict; rather, individuals share some viewpoints, disagree about some, and remain oblivious or indifferent to others (Martin and Meyerson, 1991).

The concept presented here is beneficial for comprehending cultural interactions, especially in cross-cultural takeovers where challenges in communication can result in ambiguity and uncertainty. Individuals from diverse cultural backgrounds bring distinct interpretations, principles, and assumptions into workplace discussions. These divergences frequently lead to misinterpretation and communication breakdowns, risking a shared alignment with organizational objectives (Fine, 1991; Limaye and Victor, 1991; Schein, 1993).

The acculturation process, as cited by Nahavandhi and Malekzadeh (1988, p. 2) in Salama (2003), refers to the cultural changes that occur when one organizational culture interacts with another. The process of acculturation is based on the differentiation of cultures and the forces within organizations that promote integration. Buono and Bowdich (1989, p. 105) as cited in Salama (2003) have observed that some individuals may intentionally resist giving up their culturally bound ideologies, traditions, or behaviors, thus causing a delay in the acculturation process or falling behind the organization in terms of accepting cultural change (Vansina, 1991).

According to Salama (2003, p. 314), acquisitions selections decisions are typically influenced by financial and strategic factors. However, many organizational alliances do not meet expectations due to challenges in the acculturation process, which can hinder knowledge transfer and learning. These difficulties in acculturation may arise from either the integration strategies employed or the mismatch between the cultures of the partnering organizations (Carwright and Cooper, 1992).

Conclusion

According to various authors in the literature, the perspective of ambiguity in mergers and acquisitions highlights the significance of communication throughout the entire merging process. Inadequate communication is often the source of many ambiguities observed in mergers and acquisitions. If there had been a proper understanding of communication among employees at all levels during the merging process, the severity of many ambiguities could have been reduced or even completely avoided. Additionally, if different cultural backgrounds had been acknowledged, any ambiguities resulting from communication misunderstandings could have been prevented as well.

One crucial factor is ensuring effective management of the cultural integration process. When employees lack security, trust in top management diminishes, leading them to be oblivious about their work and interactions with their manager. Consequently, managers may overlook crucial information related to the integration process.

Trust is identified as a crucial element in promoting cooperation between groups from different cultures when it comes to cultural integration processes. Building trust in a newly merged organization can be achieved through various measures such as having shared goals, engaging in regular dialogues, sharing knowledge about similarities and differences in norms and expectations, making agreements, monitoring compliance, actively addressing non-compliance, and agreeing on conflict resolution beforehand. It is observed that regular dialogues within the merged organization play a significant role in trust formation. The conceptual framework presented in this work presents initial findings from an ongoing research project.

The author suggests that the ideas in this paper can be applied to mergers and acquisitions in countries where there are significant cultural clashes. However, the author recognizes that further improvement is needed when applying this conceptual framework to specific cases. The author would like to express gratitude to fellow lecturer M/S Sumera Mustafa for their kind cooperation and assistance in completing this paper.

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