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To foster successful cross-border mergers, try cultural due diligence.
Avital Louria Hahn, CFO Magazine
July 15, 2008
Two Chefs on a Roll, a California-based maker of specialty foods, spent years searching for the right merger partner. The company wanted a buyer that would reward its founders without forcing the company to modify its carefully calibrated balance of professionalism and free-spiritedness. But the U.S.-based private-equity firms and large food manufacturers that came knocking all appeared to be poor fits.
The right buyer finally materialized half a world away. In late January, Bakkavör Group closed the deal for Two Chefs for an undisclosed price estimated in the tens of millions of dollars. Bakkavör, an Icelandic company with a major presence in the United Kingdom, makes similar products albeit on a different scale. In 2007, its revenues topped $3 billion compared with about $40 million at Two Chefs. But both companies share the two most important traits, says Two Chefs CFO David Trinkle: deep concern for their employees' welfare and a passion for the foods they produce. "We spent a lot of time talking about culture," Trinkle says, "and found we had a lot in common."
Executives tend to be of two minds about the importance of corporate culture in a merger. Some take it very seriously; many experts, for example, insist that incompatible cultures doomed Daimler's disastrous $36 billion merger with Chrysler. An ill-fated "merger of equals," the argument goes, failed to combine Chrysler's freewheeling, entrepreneurial panache with Daimler's staid, hierarchical focus on precision.
Others regard it as a squishy term that provides a convenient excuse for failure. In casual conversations, the term "corporate culture" may be invoked to describe everything from compensation policies to Casual Friday. Often, when mergers go awry, "we blame things on culture when it was actually bad planning," says Mark Sirower, a merger guru and a Deloitte consultant. "When you look at recipes for good deals," he says, "there is a whole set of things you need to have in place before culture starts to matter." The inescapable essentials: fully analyze and understand the business rationale for the deal, decide early on whether to integrate the businesses or keep them separate, develop and agree upon detailed integration plans, and settle in advance on how people will get evaluated and paid.
Yet it is clear that a purely by-the-numbers approach to due diligence might miss some vital component of a corporate marriage that can lead to failure. A robust and candid assessment of cultures during the early stages of a proposed merger may unearth intractable differences that could hobble or even scuttle deals.
Two Chefs relied mostly on instinct and common sense to vet the compatibility of its merger partner — perhaps not surprising for a company whose Website announces, "Welcome to the creamy center of the universe" — but companies that want to quantify cross-cultural fit can tap an array of more-formal options, from employee surveys to cultural-change consultants. With reputations and viability at stake, small and large companies now assign a high priority to cultural fit in a merger. And just in time. U.S.-related cross-border M&A soared to $719 billion in 2007, a 61 percent increase from 2006, according to Thomson Reuters.
IBM, which derives 63 percent of its revenue overseas, has made dozens of cross-border acquisitions since 1995, a trend that culminated early this year when it snapped up Canadian software developer Cognos for $5 billion. As soon as the deal closed, IBM integration expert Mohamad Ali and a dedicated team began crisscrossing the globe to visit Cognos regional offices. One goal was to integrate products and technologies, but another was to ensure that the companies' cultures meshed, so that anxiety or low morale did not sap productivity.
Two companies based in the same home country seldom speak exactly the same language. In cross-border mergers, two cultures may resemble apples and somaasappelen (oranges, in Dutch). Mergers must address native differences quickly or else face ugly consequences.
Cultural integration is perhaps the most critical piece of the puzzle, says Ali, who adds that IBM often partners with companies before it acquires them, which can ease integration headaches. As a multinational corporation with long tenure in many countries, IBM has another advantage: the acquired company is integrated into the branch of IBM that has, in many cases, been doing business in the country in the local language for some time. As a result, the cultural chasm may be far narrower than what a smaller U.S. firm moving into a country for the first time might have to confront.
Coincidentally, it was a former IBM researcher turned academic who pioneered the study of transnational culture clashes. Beginning in the late 1960s and early '70s, Geert Hofstede analyzed tens of thousands of IBM surveys from employees based in more than 70 countries. (Ali of IBM says his work is not specifically based on Hofstede's, but that employee questionnaires continue to provide valuable insight in this regard.)
Using five traits that affect organizational behavior, Hofstede divides the world into cultural blocks to assess the differences between them. The result, called "cultural dimensions," can help CFOs predict looming cultural roadblocks between organizations.
Power Distance reflects a culture's attitude toward leaders. The higher the score, the more a culture accepts a leader and authority without question.
Individualism measures the degree to which individuals are integrated into groups. The higher the score, the more individualistic the society. The lower, the more collectivist, meaning people assign a higher priority to a fixed group identity than to individually chosen affiliations.
Masculine vs. Feminine refers to assertive, competitive cultures versus tender, nurturing cultures. High-scoring countries place more value on competition and assertion.
Uncertainty Avoidance measures a society's tolerance for uncertainty and ambiguity. High-scoring cultures try to minimize uncertainty with strict laws and rules and place a premium on experts. Low scores indicate more tolerance to different opinions.
Long-Term Orientation measures adherence to such values as patience and hard work. Low scores indicate a short-term orientation.
While over time there have been some changes in national cultures, they have not altered underlying relationships, insists consultant Salvador Apud. His Swedish firm, ITIM International, has licensed the right to apply Hofstede's principles to customers in Europe and has licensed Accenture to do the same in the United States, says Apud.
If nothing else, the rigor that Hofstede brought to his work can help managers bring a quantitative quality to a field that would seem to defy it. Companies rate the aforementioned five criteria on a 0–100 scale. The actual numbers matter less than how far apart two companies may be. A distance of more than 10 points is considered material.
Sometimes the analysis may simply signal that certain modifications may be in order: a U.S. company with a strong individualistic culture may not want to export its "Employee of the Month" program to an overseas acquisition where a more collective spirit prevails. Companies at opposite ends of the masculine-vs.-feminine scale may find that cultural differences require more than a tweak — they may demand serious attention from management as to how to lead and communicate.
In the end, culture can be seen as the proverbial third leg on the stool. "First," says Apud, "the merger has to make sense financially and operationally." Only then does the potential wobbliness of that third leg merit a closer look, and perhaps a repair.
Avital Louria Hahn is a senior editor at CFO.