University of DebrecenEuropean and International Business Law LL.MIntroduction to International Business Law &European Company Law EssayCultural Obstacles in Cross-Border Mergers and Acquisitions Red font: Plagiarism 1 IntroductionMergers and acquisitions (M&A) are one of the most effective approaches to corporate restructuring. Cross-border M&A have specifically become a crucial part of speed up profitable globalization. Generally speaking, cross-border business deals amount to approximately one-third of worldwide M&A activity. However, this figure continues to enlarge as the business continues to increase. Similarly to other business transactions, there are many obstacles associated with M&A. Not surprisingly, obstacles associated with cross-border M&A can be far more problematic to overcome. This essay will highlight the difference between a merger and an acquisition and the motives of same. Furthermore, this essay will discuss the benefits of M&A as well as the various issues and obstacles associated with cross-border M&A and specifically those of cultural causes. This research also contains a case study of the cultural effect on cross-border M&A involving German and American working relationships. This case study … about Walmart and the acquisition2 Mergers and AcquisitionsMergers and acquisitions are methods by which companies resort to as growth strategies and for corporate restructuring. Technically speaking, M&A are two different methods in terms of procedure, asset allocation, purpose, ownership etc. A merger is the amalgamation of two companies, usually of similar size, in order to form a new separate legal entity. In the summer of the year 2000, United Kingdom pharmaceutical companies Glaxo Wellcome and SmithKline have merged together to form the largest drug company in the world which is a notable example of what mergers are. However, both companies are of the same cultural origins which made it easier for the merge to actually occur. Generally speaking, mergers do not occur quite often given that companies tend to take many aspects into consideration prior to forming a merger as mergers are very difficult to sustain. Considering the history of mergers around the world, it seems as though all successful mergers are the ones where both companies are of similar cultures. On the other hand, an acquisition is a process by which a usually large company buys a smaller company to accomplish instant growth overnight. Acquisitions help companies increase their market share, gain access to promising new technologies and to achieve collaborations in their operations. As an example, in early 2016, Microsoft acquired LinkedIn for almost $26 billion which is one of the world’s most influential, highly read, specialized digital media companies. Also, LinkedIn has the biggest database of information about people in the world. It knows where people work, their skills, education and ambitions. LinkedIn knows about people better than Microsoft does. Or did. 3 Purposes of Mergers and AcquisitionsThe current state of research in merger motives is unsatisfactory. The most promising explanations have hardly been developed while the most popular ones seem to have only very limited explanatory power (Trautwein, 2011). It is quite difficult to identify all underlying takeover motives that a company has from acquiring another or merging with another using publicly available information. However, the most common reason for M is that is it seen as a good investment by the purchasing company (Pautler, 2003). M frequently occur when a company sees a good opportunity in growing by harnessing another company, usually smaller in size. Whether merging or acquiring with a company that provides services or products that are in a way related to its own. Particularly, the combination of two existing businesses will result in decreased costs and increased performance. 3.1 SynergiesSynergy is the idea that by combining two businesses, you will achieve better performance and a reduced cost. Technically speaking, a synergy arises when the combined value of the merged businesses is higher than the pre-merger value of both businesses combined. Acquirers pursuing operating synergies are more likely to experience highly positive and highly negative long-term returns than acquirers pursuing financial synergies (Rabier, 2017).3.2 Diversification or Sharpening Business FocusDiversification, which is the riskiest growth strategy, occurs when a company chooses to acquire another company that works in an unrelated industry in order to protect themselves from downturns that might occur in the core industry’s performance. Conversely, companies that are seeking a sharper business form tend to merge with other companies that are specialized in an area of operations that could be benefited from. 3.3 GrowthMergers give the acquiring company an opportunity to grow its market share without having to go through the work themselves. These types of mergers are either called horizontal mergers or lateral integration. For example, a company that operates in the production of wine might choose to acquire a smaller competing brewery. Such acquisition would give the small company the opportunity to increase their production while selling to its loyal customers. This way, the acquiring company not only accomplishes growth but also reduces competition by removing rivals and improves its access to raw materials. 3.4 Increase Supply-Chain Pricing PowerA business can eliminate a level of costs by buying one of its distributors or suppliers. This way, the acquiring company will be able to save in the sense that the supplier applies additional costs when selling the product in order to gain profit. These types of merger are known as vertical mergers. For example, some jurisdictions allow insurance companies to buy out brokerages in order to have control over product distribution channels. 3.5 Eliminating competitionM&A sometimes allow the acquirer to eliminate future competition by acquiring smaller businesses that are thought to develop competition to the acquiring company. However, these types of mergers can negatively affect consumers. By eliminating at least one competitor from the market, a merger would allow the remaining companies to implement price increases. For example, a merger of gas station operators would result in a market with fewer gas stations, which could implicitly coordinate price increases. For that reason, Council Regulation (EC) No 139/2004, the EU Merger Regulation was founded. Such regulation prohibits mergers and acquisitions which significantly reduce competition in a single market in order to protect consumer rights.4 Challenges with Mergers and AcquisitionsA number of issues can be considered obstacles in achieving M&A and keeping the transaction intact including communication challenges (language barriers), management and employee relations and cultural challenges in general. Therefore, such a transaction must be very well-thought-out before its implementation. When mergers and acquisitions occur, employees and management are generally left in the dark. Fear and lack of answers discourage top management from providing the information that employees need to redirect their actions to the merged company. Therefore, it is very important to keep the employees from both parties well informed at all times. The loss of employees at critical times during the transaction will inevitably result in negative effects on daily business activity. 5 Cultural Challenges with Cross-Border Mergers and AcquisitionsNational culture is a set of largely implicit and fixed shared values, beliefs, and assumptions that influence the behaviour of humans in a society. Various studies conducted on the outcome of cross-border M&A around the world show that 83% of them fail within three years, mostly as a result of a lack of adaptation towards the cultural context in which an M&A takes place. A corporate culture is “The way in which members of an organization relate to each other, their work and the outside world in comparison to other organizations” Prof. Dr Geert Hofstede. The important thing to notice is that when integrating, the devil is in the details. An acquisition target might be very financially lucrative but if the way of working does not support a future strategy, it is highly probable that the acquisition will not stand. Taking corporate structure into consideration is one of the most important steps to be taken during M&A. When companies do not pay attention to differences in conditions in the other country, a ‘clash of cultures’ will be the result. Therefore, it is essential to conduct culture surveys in order to determine the cultural norms within both businesses and to take into consideration the differences in philosophies, formalities and operating styles. For example, decision making at one of the businesses can be the opposite of the other, the leadership style could either be dictatorial or consultative and the way people work and interact could be formal or informal.Culture influences have the potential to be broad and far-reaching. Here are some of the cultural effects on M&A and what they might result in: Cultural effects ResultDecision-making style • Effective transactions require speedy decision-making.• Different styles in decision making can result in a clash and could lead to a failure in implementing decisions.Leadership style • A different style of leadership whether dictatorial or consultative could result in the employees objecting to such change. This is usually the case with the most important employees.• Losing top talented employees will result in a decrease in M&A value. Ability to change • Refusal to implement new strategies and a lack of willingness to risk new things and work through the difficulties of establishing a new business ethics. Employee relationship style • Inconsistency will be the result of merging two companies that work in different relationship styles, one based on the formal structure and the other on informal relationships. Such inconsistency will bring about frustration to the employees.Beliefs and approach regarding success • Some organizations focus on teamwork as a form of success while others emphasize on individual success. This could lead to frustration of the employees; hence, obstacles in getting the work done.6 Case Studies of cross-border Mergers and Acquisitions that failed due to cultural mismatch Daimler-Benz & ChryslerIn 1998, Daimler-Benz (German) and Chrysler Corporation (American), two of the world’s leading car manufacturers, agreed to merge their businesses in what was at the time called “merger of equals”. This merger was one of the biggest cross-border mergers in the automobile industry. The main aim of this merger was to expand the companies geographically and to create a situation where both companies could benefit from shared capacities, infrastructure and facilities. Conflicts arose “when an upright, hierarchical approach to things at Daimler Benz and a risk-taking, entrepreneurial, loose organization at Chrysler were forced together” John Brock. One of the biggest obstacles said merger faced was of a cultural nature. After the merger was implemented, various cultural differences between the American and German style of management. The Germans entered into this merger with the aim to gain superiority over the Americans which created a struggle for leadership. Conflicts: Leadership is one of the most important aspects to be managed during M. When this merger was entered into, the Germans strived to gain leadership over the Americans. This created a big void that reflected on the administration of the new establishment as well as all its employees. “Leadership “voids” during M&A events can negatively impact momentum and destroy value. And worse, it can permanently hobble a “newco” right out of the gate. Your leadership “posture” during an M&A event should be a carefully planned and coordinated to avoid unexpected results and issues” Scott C. Whitaker.One of the very first basic conflicts that occurred during this transaction what the struggle over the location of the new establishment. Daimler-Benz were not willing to compromise and to change the location of the headquarters of the company and so were Chrysler Corporation. Another conflict arose when trying to determine what the name of the new establishment would be. Daimler-Benz claimed that their name had too long of a history to be changed, albeit the Americans have suggested combining both names together so the new establishment would be named “ChryslerDaimler-Benz”. Also, work habits between both companies strongly differed. The Americans were used to a dress-down style while the Germans were always formally dressed. Additionally, a disagreement occurred in the financial reporting system which is different in both countries. In the United States, a quarterly based reporting system is followed, whereas, in Germany, the financial reporting system is based on full-year reports. Major losses were projected as a result of this failed merger. In 2007, Chrysler was sold by Daimler-Benz to Cerberus Capital Management for $6 billion.7 ConclusionIn conclusion, companies usually tend to dismiss the power of culture while focusing on financial goals. Culture is rigorously linked to behaviours that affect business value. In order for businesses to achieve post-merger objectives, all sides of the merger must be covered and attention should always be paid to the cultural aspects, especially while performing cross-border mergers were culture is always an issue. What is concluded from the Daimler-Benz & Chrysler case study is entering into a merger with the intention to dominate will not result in positive outcomes from the M. Also, Germans and Americans are two strong cultural societies, therefore, compromises cannot be expected from them when implementing an M. Trying to merge two companies Due diligence On the other hand, properly dealing with culture as a main factor in the M will likely help with giving back positive results and will likely be an effective instrument for accomplishing post-merger objectives.FootnotesPautler, Paul. “Evidence on Mergers and Acquisitions.” Antitrust Bulletin Vol. 48. (2003), pp. 119-207. Maryjane R. Rabier “Acquisition Motives and the Distribution of Acquisition Performance” Vol 38 Issue 13 (2017).John Brock, Miami University economics professor on the Daimler-Benz Chrysler merger. Scott C. Whitaker on Completing Successful Cross-border Mergers and Acquisitions; An interview by Bob Morris. Merger Motives and Merger Prescriptions Author(s): Friedrich Trautwein (2011)Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation).Mendenhall, Mark. Mergers and Acquisitions: Managing Culture and Human Resources, Stanford University Press, 2005.