TheImportanceofCulture

intheProcessof
MergersandAcquisitions

Cultureisntjustoneaspectofthegame.Itisthegame(Pritchett,2010).Accordingto
modernempiricalstatisticalresearches,morethan50%ofallMergersandAcquisitionsfailin
thesensethattheyareunabletogeneratemorerevenuesorcannotleadtothedesiredincrease
ofprofitabilitythatwasinitiallythemajorreasonforthedeal.Despitethefocusonthe
economicfailureofMergersandAcquisitions,thesourceofthisfailureisnotmainlyrelated
toeconomicaspectsbutrathertoanincorrectimplantationofculturalaspectsortothe
underestimationofopposingculturaldifferencesindifferentcompanies.Forthisreasonthis
paperaimstoshowthatculturaldifferencesintheprocessofM&Aarehighlyunderestimated
bymostcompanies.Beginningwithaformalconsiderationofculturaleffectsoncompanies,
thepaperwilloutlinetheimportanceofculturalawarenessintheprocessofMergersand
Acquisition.Basedontheimportanceofculturalelements,thefollowingparagraphwill
discussspecificmeasurementsofcompaniesfordealingwithculturalproblemsandhowthese
measurementsareinappropriate.Ultimately,fromanexpostperspective,theevaluationof
M&Asintermsoftheirculturalimplementationwillprovidereasonableinsightsthat
companiesshouldfocusmoreonculturalaspectsrightfromthebeginningoftheMergerand
Acquisition.

Inapproachingthisissue,oneshouldrememberthatitisextremelydifficulttoexplainthe
termcultureandevenmoredifficulttounderstandhowexactlyculturesinfluencebehavior
anddecisioninthebusinessworld.Incomparisontoeconomicaspects,suchasprofitability
forexample,itismerelypossibletocalculate,anticipateormeasureculturalaspectsinvalue
maximizingequationsthatarecommonlyusedtoassesspotentialMergersandAcquisitions.
Especiallybecauseofthissoftfactcharacteristicofculturalelementstheirriskpotentialis
extremelyhighastheycanhardlybeobservedbuteasilybeneglected.Inmanycompanies,
culturalaspectsarenoteventrackedwhatmakesitimpossibletograntthemanytypeofgoal
orientedimportance.Only44%ofallpartiesinvolvedinM&Astrackculturalalignment
although80%admitthatitplaysahugeroleforthesuccessofanyM&Adeal.Fromthe
perspectiveofaCEOtheanalysisofculturaldifficultiesforexampleintheformofacultural
gapanalysishastobejustifiedinfrontoftheboardofdirectorswhichismainlyduetothe
factthatthisanalysiscostsalotofmoneybutdoesnotalwaysprovideanypreciseoutcomes,
suchasanoperatingnumbersanalysis,thatwouldbesuitabletoquestionthenecessityofthe
entiredeal.Evenifacultureassessmentisperformedduringduediligence,itisdifficultto

imagineajointventureormergerbeingcalledoffbecauseduediligencerevealedthatthe
culturesofthetwolegacycompanieswereincompatible(ToucheTohmatsu,2009).This
leavesthequestionopenhowexactlycompaniesattributeenoughimportancetocultural
aspectswhichwillbediscussedinthefollowingparagraph.

IntheprocessofmostM&Asallpartnersrealizethatculturaleffectspeculiarlyaffectthe
successorfailureofthedealbutquiteoftencompaniesmisstheknowledgeonhowtodeal
withculturalproblemsdirectlyandunderestimatetheimportanceoftheminorderto
outsourcethecompetencies.Fiftyeightpercentofcompaniesreportedthattheydidnothave
aspecificapproachtoassessingandintegratingcultureinadeal(AonHewitt,2011).Inthe
earlystageoftheM&Aprocessmanycompaniesfocusalotonculturebutthenlateronstart
neglectingit.Theapproachonhowtodealwithcultureisoftennotsuitableforthepurposes
ofthecompanies.Insteadoffocusingonthecharacteristicsofthespecificculturesinvolvedin
adeal,companiesoftenlacktakingconcreteactionsanddonotmanagedifferencesactively
andsustainably.ConsideringtheexampleoftheRenaultandNissanMerger,thesuccessof
thisdealwastoalargeextentcausedbythesuccessfulandactivemanagementofcultural
problemsintheprocessofthemerge.Withthehelpofinterculturalexpertsthemergecould
compromiseonmanyopposingaspectssuchasthedifferentremunerationsystems,for
example,andexploittheexistingsynergiesefficiently.Withonly39%ofallcompanies
involvedthatconductculturalintegrationprogramsorevenonly2%ofallparticipantswho
makeaculturalgapanalysis,themajorityofallcompaniesdoesnotfocusalotontaking
preciseactions.Giventhelongevityofculturaldifferences,theinitialapproachofmanyfirms
toconsultanexpertonlyforashortperiodoftimeisnotsufficientforasustainabledeal
becauseculturaldifficultiescanneverbecompletelyeliminatedorsolved.Formany
companiesitisonlyafterthefailureoftheMergerorAcquisitionwhentheyrealizethefull
impactofcultureontheirdeal.Duetothisfact,thelastparagraphwillassessM&Asfroman
expostperspective.
Eventhough,fromaneconomicperspective,mostM&Asshouldbeabletobenefitfrom
synergisticeffectsandeconomiesofscalewhichallowcompaniestoproducetheirgoodsor
servicescheaperbecauseoftherelativedecreaseofunitcostswitheachaddedunitproduced,
itturnsout,thefailedculturalintegrationisthesecondbiggestfactorfordealfailurewitha

percentageof33%.Takinginchargeindirecteffectsthatculturehasonothercrucialsuccess
determinantsofM&Athispercentagecouldevenbealothigher.

Figure1PostMergerIntegrationSurvey

AsitcanbeseenitFigure1,morethan90%ofasurveygroupof86companiesrealizedthat
theirmergerwouldhavebenefitedfromgreaterculturalunderstanding.Inaddition,70%of
thissurveygroupindicatedthattheydidnotfocusenoughonculturewhichincontrasttoonly
2%whofocusedtoomuchonculturedisplaysacleartendencyofahigherneedoffocuson
culture.FamousexamplesofM&Afailurecausedbyculturalelements,suchasthefailureof
theDaimlerChryslerCorporationforexample,causethatcompaniesbecomemoreawareof
culturalelementsbutnonethelesstheystilldonotfocusenoughonthem.Forsomedecisions
wrongculturalunderstandingsintheearlyprocessoftheM&Acanleadtoadisastrous
outcomebutinothercasestheseproblemscanbefixedinthelongrun.Forexample,the
mergerofHPandCompaqwasconsideredtobeacompletefailure,whichresultedinaloss
of13billiondollarsbutturnedouttobealongrunsuccessdealafterappropriatecultural
changesweremade.Overall,mostCEOsadmittedlyonlygivethemselvesthegradeCfor
dealingwithculturesandonlyexpostrealizethetrueimportanceofit.
Toconclude,theculturaleffectsonM&Asduringthepreparationperiodandtherealization
oftheM&Aaredefinitelyunderestimatedinawaythatmostcompaniesdonotspendenough
resourcesevaluatingpotentialproblemsordonotcareenoughaboutculturalelementstohire
someexpertsinthefieldofM&As.Causedbyseveralseverefailuresrelatedtocultural
problemsthatgotpublicinthepast,companiesarenowtryingtofocusmoreoncultural
elementsbutmostoftenfailtakingcareofthemcorrectly.Fromapersonalperspective,I
thinkthatcultureshouldbeevaluatedasafirstpriorityforpotentialM&Asbecausehard

factssuchasprofitabilityonwhichpotentialdealsarebasedonareonlytemporarywhereas
culturalaspectsusuallypersistforalotlongerperiodoftime.

WorksCited

AonHewitt(2011).CulturalIntegrationinM&ASurveyFindings.Retrievedfrom:
http://www.aon.com/attachments/thoughtleadership/M_A_Survey.pdf(lastaccess:01.07.2016)
RobertSher(Mar19,2012).WhyHalfofAllM&ADealsFail,andWhatYouCanDoAboutIt.
Retrievedfrom:
http://www.forbes.com/sites/forbesleadershipforum/2012/03/19/whyhalfofallmadealsfailandwh
atyoucandoaboutit/#17a2880a20ae(lastaccess:01.07.2016)

Pritchett(2010).CorporateCulture:THEXFACTORinMergerSuccessandFailure.Retrieved
from:http://www.peakperformance.com.au/myfiles/CultureReportFinal2.pdf(lastaccess:
01.07.2016)

ToucheTohmatsu,Deloitte(2009).Culturalissuesinmergersandacquisitions.Retrievedfrom:
http://www2.deloitte.com/content/dam/Deloitte/us/Documents/mergersacqisitions/usmacons
ultingculturalissuesinma010710.pdf(lastaccess:01.07.2016)

ShobhitSeth(November20,2014).ThetopreasonswhyM&Adealsfail.Retrievedfrom:
http://www.investopedia.com/articles/investing/111014/topreasonswhymadealsfail.asp(last
access:01.07.2016)

Figure1:
DenaKeane(August2014).TheRoleofHumanResourcesasaBusinessPartnerintheExecutionof
EffectiveChangeManagementintheMergersandAcquisitionsProcess.Retrievedfrom:
http://esource.dbs.ie/bitstream/handle/10788/2103/mba_keane_d_2014.pdf?sequence=4
(lastaccess:01.07.2016)