Managerial preferences in international mergers and acquisition partners revisited - how are they influenced

MANAGERIAL PREFERENCES IN INTERNATIONAL MERGER AND ACQUISITION PARTNERS REVISITED: HOW ARE THEY INFLUENCED?Susan Cartwright and Fionnuala Price ABSTRACT Cross border mergers and acquisitions (M&As) are an integral part of international business. Although M&A activity is predominantly driven by a rational-economic model, cultural attitudes are likely to play a role in influencing selection decisions and management integration practices. This Chapter reports on a study to establish whether different national managerial groups (n = 480) have similar/dissimilar attitudinal preferences towards M&As with foreign partners. Comparisons are made with an earlier study. INTRODUCTION The dollar value of completed mergers, acquisitions and divestitures worldwide in 2000 increased by almost 25% to more than $1.7 trillion, and set a record for the sixth consecutive year. A significant trend in the recent pattern of merger and acquisition (M&A) activity has been the increase in foreign acquisitions. Whilst the USA continues to be a major acquirer of overseas companies, the value of these deals during the period 1991–2000 was significantly less than Advances in Mergers and Acquisitions, Volume 2, pages 81–95. Copyright © 2003 by Elsevier Science Ltd. All rights of reproduction in any form reserved. ISBN: 0-7623-1003-0 81 has similarly seen an increase in inward foreign direct investment. in terms of foreign acquisitions of U.7 Source: Mergers and Acquisitions.422 1. of Deals 1. In 1996. It would seem that like their U. foreign acquisitions of U.6 87.. mainly from the USA.82 SUSAN CARTWRIGHT AND FIONNUALA PRICE the level of investment flowing into the U. companies exceeded the combined total value of all other European Union countries (KPMG. U.097 1. .096 1. companies were bought by foreign acquirers in a ten year period between 1978–1988. 2001. 1997) thus emphasising the notion that M&As invariably do not deliver what is expected in terms of increased profitability or economies of scale.000 U. the success of a few top Table 1. banking and insurance.372 1. companies are both highly acquisitive and at the same time. The U.9 50. Estimates of M&A failure range from 80% (Marks. Cross border deals represent a significant and growing aspect of global M&A activity far exceeding domestic deals in terms of average value and representing an increasing proportion of the total value of all deals done across the world – 41% in 2002. companies.S.030 875 1. 1988) to 50% (Hunt. In contrast.S. extremely attractive acquisition targets.S.8 146. In 2000 alone. Weber.422 Value ($ billion) 24.K.K. 1997).4 526. tend to record higher success rates than others in terms of enhanced shareholder value. companies were acquired by overseas buyers at a value of $340 billion. 2000).S. The underperformance of M&As continues to be the focal point of much debate and attention.9 52. Whilst overall some sectors.g.236 2.2 28. 1996. Germany and France (Child et al. 1988. over a thousand U. No.K. Japan. Cartwright & Cooper. 2000). counterparts.294 1.0 36. compared to 24% in 1996 (KPMG. e. a little over 2.602 2.2 312.9 38.S. The global trend in M&A activity is further supported by the increasing number and value of cross border deals in Europe (see Table 1 below). Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Cross Border Deals in Europe 1991–2000. it has been proposed . the challenges of marrying the entrepreneurial style of a U.S. Experiences such as this serve to emphasise the importance of partner or target selection based on additional and different criteria from traditional practice (Jemison & Sitkin.S. business with the conservatism of a German company proved more difficult than was expected (Schoenberg. Clearly. January 1999). it has been argued that cross border combinations between organisations with similar corporate cultures may not be sufficient if the national cultures conflict. 1986). 2000). According to a recent report (KPMG. Schoenberg (2000) observes that research studies confirm theoretical reasoning that the relative national cultures influence the eventual outcome of an international acquisition. According to Hussey. August 2000). As the partners’ markets scarcely overlapped the strategic fit was perfect. Consequently. acquisition failure can be the outcome of any one or more of three failures of analysis: a misconceived action. within two years the combined company was worth less than Daimler Benz was before the merger and the hostile relationships between the U. despite the synergistic potential. strategic fit is obviously an important consideration in target identification. 2000). the event was heralded as the biggest ever auto merger and the year’s smartest deal (Fortune. and German management groups were widely reported in the business press (The Economist. the recognition of synergistic potential. Yet. When Daimler and Chrysler merged in January 1999. failure to think through and implement actions that will enable the acquisition to deliver the intended benefits or financial over-extension. 13 December 2000). Hussey (1998) also cautions organisations to explore in detail the wider impact of strategies before committing to any strategic decision to acquire. However. In a recent review of the literature on cross border acquisitions. it would seem is no guarantee that it will be realised. The report concludes that underperformance is the outcome of excessive focus on “closing the deal” at the expense of focusing on factors that will ensure its success. As the level of international M&A activity has increased there has been a parallel growth in the management literature on the influence of national culture on M&A integration and outcomes. In the context of both domestic and international M&As. Although the interaction of organisational cultures cannot be ignored (Larsson & Risberg. particularly if there is a lack of cultural fit. 1998).Managerial Preferences in International Merger 83 performers often masks the failure of the majority (Financial Times. particularly the potential problems of cultural integration. and to a lesser extent on the issue of partner/target selection. 83% of recent deals failed to deliver shareholder value and an alarming 53% actually destroyed value. Importantly. Many studies (Diamantopoulos et al. as a frame of reference. Ethnocentrism is identified by many studies as a barrier to international management (Cartwright & Cooper. 1996) have demonstrated the extent to which consumer purchase decisions are influenced by country-of-origin (COO) or product country image (PCI) effects. This chapter reports on recent research conducted amongst senior-middle managers to investigate whether different national managerial groups have similar/dissimilar attitudinal preferences toward foreign M&A partners. In replicating an earlier study based on data collected in 1994 (Cartwright. 1996. This perspective invokes cultural stereotyping and presents potential obstacles .e. The evaluative nature of stereotyping is considered to be a significant barrier to international understanding and cooperation (Klineberg. the emotional nature of stereotypes can often override logic and lead to irrational decisions. Zang. ACCULTURATION AT THE NATIONAL LEVEL: DISTANCE AND ATTRACTIVENESS National or societal culture is a pervasive influence on the attitudes and behaviour of its members. 1996. It has been suggested (Cooper & Kirkcaldy. 1980). to address what has been termed the “double-layered acculturation process” (Nahavandi & Malekzadeh. 1994) and is defined as a belief that one’s way of doing things is superior to that of others.. in part. Tse et al.. The national culture in which an organisation operates will to a greater or lesser extent influence the values. 1995. 1998). By their very nature. Hodjetts & Luthans. stereotypes offer a means of reducing the cognitive complexity of a decision. Cooper & Jordan. In the context of international business more generally. 1995) that the selection of suitable international partners or collaborators is influenced. behaviours and style of work organisation that companies will adopt (Hofstede. 1964). Zarkada-Fraser (2001) draws attention to the potential influence of national stereotypes on international relationships and decision-making. by cultural stereotypes. 1995) it examines the extent to which attitudes may have changed in light of the continued growth in internationalisation. cultural stereotypes are a condensation of reality in that they simplify and over-generalise the characteristics of a societal group. In the absence of detailed knowledge and direct experience of a potential merger partner or acquisition target. strategy.84 SUSAN CARTWRIGHT AND FIONNUALA PRICE that the challenge for leadership in cross border M&As is to successfully accommodate and integrate both national and organisational cultures – i. Schoenberg (2000) suggests that attractiveness in international M&As can be viewed in terms of cultural differences as well as cultural similarities.K. cultural differences do not necessarily result in negative outcomes. Interestingly. Traditionally. the U. German. More recent evidence (Child et al.e.. U. Jaeger (1983) also found a national culture pattern in ways in which organisations manage their cross border acquisitions. as exceptional. 1998) have argued that cultural differences at the national level do not have such a negative impact as differences at the organisational level in domestic M&As. Stereotypical attitudes are enduring and difficult to displace because of our tendency to focus on information and behaviours which reinforce our stereotype and discount. the French and German management approach did not conform to the accepted view of national management practice. companies. linguistic and cultural ties. However. Whilst differences can lead to greater acculturation stress and integration difficulties. In contradiction to Child et al. Furthermore. Japanese..S. i.Managerial Preferences in International Merger 85 to the effective integration of diverse national cultures in an international business context. In a study of over 200 U. French and U. it can determine what we select to notice in the first place and hence what we later remember. Stereotyping can influence the way in which we interpret and classify behaviour we have observed and how subsequently we recall that behaviour. it was found that the very process of being acquired led to significant changes in management practices. Larsson and Risberg (1998) note that organisations tend to prefer to invest in neighbouring territories or those with which they have the closest economic. 2000) supports this foreign practice effect. other researchers (Larsson & Risberg. particularly towards more performance-related rewards. investment into British manufacturing companies identified the tendency of foreign parents to impose their management principles and practices on their acquisitions – what is termed the “foreign practice effect”. because there is a greater awareness and appreciation of .S.K. In a study of 129 European cross border acquisitions Schoenberg and Norburn (1998) found that only differences in cultural attitudes towards risk negatively impacted on acquisition performance. particularly when the goal of many M&As is to assimilate the acquired or smaller partner into the dominant culture. foreign acquired companies tended to experience a wider range of changes than domestically acquired firms. in a study of U. Dunning (1958). Many years ago. In terms of selecting a compatible foreign merger partner or acquisition target. (2000).S. and French acquirers exerted more influence than Japanese or German acquirers.S. that which is inconsistent. has preferred outright acquisition to merger or joint venturing. acquisitions by U. collectivism pertains to societies in which individuals from birth onwards are integrated into strong cohesive groups.. The country indices for Power Distance. this translates into very different employer-employee contracts and attitudes towards organisational relationships. The issue of compatibility of national cultures is frequently discussed and studied within the framework of Hofstede’s (1980) and Trompenaars’ (1993) classifications.K. Furthermore. Typically. and French mergers and found that French companies acquired by the British performed significantly poorer than domestic acquisitions. Very.. the concept of “I” and short-term individual self-interest dominates over the wider and longer term implications of “we”. In highly individualistic cultures like the USA and the U.K. 1995) on which the following study is based. In terms of Hofstede’s (1980) classification. they ranked Japan. Northern European countries and the USA tend to cluster in terms of their orientation towards “individualism” as opposed to “collectivism” which is highly characteristic of both Japan and Spain.86 SUSAN CARTWRIGHT AND FIONNUALA PRICE national culture differences and a greater tolerance for multi-culturalism. However. making it difficult to generalise. 2000). 1993) have found irrespective of nationality if the buyer’s culture is perceived as being relatively less controlling then it is more likely to be perceived as being more attractive. the preferences expressed were found to map the pattern of actual M&A activity during the previous year. found that the mainly Northern European sample of managers showed stronger preferences for merging with other Northern European and American organisations. Lubatkin and Calori (1998) incorporated all four dimensions into their study of the performance of U. a number of studies (Very et al. overall the results were not straightforward. Individualism pertains to societies in which ties between individuals are loose and where an individual is expected to look after his or herself and their own immediate family. The results of the survey conducted in 1994 (Cartwright. this contractual relationship between employer-employee is based on supposed mutual advantage and . Uncertainty Avoidance. In contrast. 1994. Most research studies on M&As have tended to focus on the dimensions of Power Distance and Uncertainty Avoidance with equivocal results (Schoenberg. Italy and Spain amongst their least preferred partners. Cartwright & Cooper. In a business context. continue to protect them in exchange for loyalty. Individualism and Masculinity developed by Hofstede have provided a means of representing cultural distance between collaborating companies. Cooper & Jordan. Lubatkin & Very. In particular. Calori. In addition. which throughout their lives. 1997. As individualism is strongly linked to the capitalist system. During this period questionnaires were distributed and . Decisions about interorganisational collaborations are carefully and extensively considered with the focus as much on the trust and ongoing quality of the relationship between the parties as the potential strategic advantage. size and experience of M&A. Similarly. METHODOLOGY The questionnaire which formed the basis of this study was adapted from the 1994 survey and consisted of three parts: (i) Biographical/organisational information: items relating to nationality of respondent.K. In collectivist cultures like Japan. organisational activity. data was collected on managerial expectations concerning their organisation’s future involvement in M&A activity over the next three years. the relationship between employer-employee is more familial and developmental with a heavier moral foundation and more linear approach to career progression. increased globalisation and an expansion in international management education may lead to a greater acceptance and appreciation of the potential value of cultural differences. M&A activity is very “individualistic” in cultural orientation. (iii) Compatibility – this section required respondents to indicate which foreign country they considered was most/least compatible in terms of managerial style. access was granted to the Executive lounges over a two week period during summer 2001. airport. In addition. Following negotiation with airport authorities at a major international U. nationality of parent company. However. partnerships between organisations are predominantly founded on the opportunity to capitalise on a situation of immediate strategic advantage irrespective of the quality of the interpersonal relationship between the partners.Managerial Preferences in International Merger 87 reciprocal exchange. This apparent tendency of managers to prefer national cultures which are to be perceived to be “more like us” suggests that M&A selection decisions may be influenced by an underlying desire to reduce cultural differences and avoid cultural distance. (ii) Attitudinal preference – this section invited respondents to place in rank order (1–3) their preferred/least preferred choice of foreign merger partner or acquirer and the rationale for their choice. Swedish managers comprised 11% (n = 54) of the sample as did Dutch managers (n = 51).88 SUSAN CARTWRIGHT AND FIONNUALA PRICE collected from business passengers awaiting flights. given that the data were collected at a U. energy and financial services. Type of Activity in Which Organisation Had Been Involved During the Last 5 Years (1996–2001). 45% of the sample was British (n = 217). The majority of respondents were Northern European. telecoms. No. Furthermore. Their organisations represented a broad spectrum of industries including manufacturing. In the same period Table 2. As the majority of the sample (66%) worked for organisations whose nationality was different from their own.K. healthcares. 62% indicated that it was likely/extremely likely that they would make further acquisitions within the next three years. airport. with U. Over half had acquired another organisation and one-third had merged during the last five years. RESULTS Biographical and Organisational Information Completed questionnaires were returned by 22 different nationalities. As Table 2 illustrates. the sample could be satisfactorily described as being international. managers (n = 24) and Irish managers (n = 24) both accounting for 5% of the sample. the respondents were representative of organisations that were highly active in M&As and were particularly acquisitive. Almost three-quarters (72%) worked for very large organisations with over 1. A total of 480 questionnaires were collected and analysed using SPSS for Windows. Merged Acquired another organisation Been taken over Target of an unsuccessful bid Party to a joint venture Entered some other form of strategic alliance 153 276 69 33 145 159 % 32 58 14 7 30 33 .S. The majority of the sample worked for British (25%) or American organisations (24%). Not surprisingly. pharmaceuticals.000 employees and in the main described their responsibilities as being in the area of strategy (34%) or operations (48%). with the U. The results found that the U. Table 4 shows the least preferred choices of merger partner or acquirer for the overall sample and the subset of national groups. of Cases Total Sample USA U. an analysis was conducted to investigate the combined frequency of the 1st. Finally.K. German U. as the most popular (28%) 1st preference.S. with 40% of U.S. U. Most Preferred Merger Partner or Acquirer.S. U. However. German (10%) and Switzerland (5%) also entered the rankings. remains the most preferred merger choice for the total sample (18%) with the U. respondents choosing their own nationality.S. U. While Japan emerged as the least preferred choice for the overall sample and the nationality subsets. Attitudinal Preferences Table 3 shows the overall and highest ranking ‘preference dimension’ choices for each of the analysed nationalities. No. the pattern indicates a further significant increase in M&A activity. U. This analysis was restricted to national groups which contained at least 10 respondents.K. 2nd and 3rd ranking. Compared with 1994 data.S.S.S. a similar percentage of U.S.S. while 20% expected to merge. Forty-seven percent of German respondents chose their own nationality. Danish Dutch German Irish Swedish 480 24 217 19 51 15 24 54 1st Preference U. which was cited as being at least four times as important as market potential or management approach. All these respondents were currently working for organisations of different national parentage to their own.K. U. In 69% of cases the reasons given for their choices was perceived cultural compatibility. being a close second (25%). it is interesting to consider the second preferences which tend to mirror the 1994 survey data.K.Managerial Preferences in International Merger 89 86% indicated that they expected to become involved in joint ventures/strategic alliances. Table 3. respondents (46%) also chose their own nationality.K. . the France (4%). again a close second (16%). It is notable that the total sample selected the U. U. Table 5 relates to the Power Distance dimension.S. Finally.S. Danish Dutch German Irish Swedish 480 24 217 19 51 15 24 54 A range of issues relating to incompatible culture and differences in working practices. slow decision-making.K. Power Distance 40 35 40 40 35 40 35 .S. Danish Dutch German Irish Swedish Power Distance 40 35 18 38 35 28 31 Power Distance.S. U. It is notable that Danish managers expressed a preference for merging or being acquired by a national Table 5. U. German U. of Cases Least Preferred Japan Japan Japan Japan Japan Japan Japan Japan 2nd Least Preferred France France France France Italy/France France Ireland Italy/USA Total Sample USA U. the results were examined using the country indices for the four dimensions developed by Hofstede (1980). 1st Preference U. Subset Nationality U. lack of directness.K.K.K.S. U. The results found that Japan remained the least preferred partner followed closely by France and Italy.90 SUSAN CARTWRIGHT AND FIONNUALA PRICE Table 4. dominate the reasons given by respondents in choosing Japan. Further analysis was conducted to investigate the combined frequency of the 1st.g. Least Preferred Merger Partner or Acquirer. 2nd and 3rd rankings. U. e. The data shows a uniform clustering of nationalities choosing either their own nationality (hence an identical power distance rating) or nationalities with very similar positions on the Power Distance Index. No. U. U. is 54 which is very much higher than the nationalities sampled. Index Score 91 89 91 89 67 89 89 Individualism/ Collectivism Index 91 89 74 80 67 70 71 culture which is associated with rather more formality and greater power distance.S. U. Danish Dutch German Irish Swedish Masculinity/Femininity.K.K. Subset Nationality U. U. Table 7 compares the results in terms of the Masculinity/Femininity dimension.S.S. German U. the least preferred nationality.K. U.S.S. U. Table 6 presents the results in terms of the Individualism/Collectivism dimension. Danish culture scores very low on this dimension comparative to most other countries. Danish Dutch German Irish Swedish Individualism/Collectivism.K.S.K. However.Managerial Preferences in International Merger 91 Table 6. German U.S.K. 1st Preference U. U. Table 7. Index Score 62 66 62 62 66 62 66 Masculine/ Feminine Index 62 66 16 14 66 68 5 . In the context of partner preference the results support the notion that there is a cultural attraction amongst countries which are high on individualism and an avoidance of highly collectivist cultures such as Japan which has a score of 46 on this index. Subset Nationality U.S. 1st Preference U. U. U. It is notable that the Power Distance Index for Japan.S. U.S. 92 SUSAN CARTWRIGHT AND FIONNUALA PRICE Table 8. With the exception of Germany. it may also be fruitful to focus more on their inherent attitudes and strategies towards M&A activity and their level of cultural tolerance. U.K. For example. Index Score 46 35 46 46 65 46 35 Uncertainty/ Avoidance Index 46 35 23 53 65 35 29 The countries represented in the sample differ significantly in their orientation on this dimension. although Japan is the most “macho” culture with a score of 95. It has been argued that better M&A outcomes could be achieved if more attention was paid to culture at the selection stage. Rather than focussing on the inherent characteristics of different national cultures. U. U. Japan has an extremely high Uncertainty Avoidance index of 92 and is risk averse preferring to plan carefully and take a longer-term perspective.S.K.S. U. and Germany are considered to be high on masculinity. Low scores are indicative of a greater propensity to tolerate uncertainty and to take risk. all the countries represented in the sample are considered to be relatively high risk takers. it is feasible to hypothesise that some cultures may be more inclusive and less ethnocentric than others.S. The Netherlands and Sweden are all regarded as feminine cultures which place a high value on relationships.S. Certainly the potential importance of culture is increasingly recognised as a factor which influences M&A integration and subsequent outcomes. In the context of . the USA.K. 1st Preference U. Subset Nationality U. In contrast.S. Danish Dutch German Irish Swedish Uncertainty Avoidance. U. considerable effort has been expended in increasing the awareness of both researchers and practitioners to the importance of human factors in M&As. Denmark. Table 8 relates to the Uncertainty Avoidance dimension. However. In contrast. U. the complex interplay between national and organisational culture and its level and direction of influence is still perplexing in light of the current and still limited research evidence.K. SUMMARY AND CONCLUSIONS Over the last decade. caring and the quality of life. German U. they are perceived more likely to recognise and accept the instrumentality of a merger or acquisition and are more familiar. 361–379. D. Oxford: Butterworth Heinemann. Child.. there is a pressing need for further research in this area.. acquisitions and strategic alliances: interpreting people and cultures. (1995). Control mechanisms in cross border acquisitions: An international comparison. S. Therefore. (2000). Without doubt. 4. (1997). The results of this study show that. 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