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This article is written by Saumya Dwivedi, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. The article has been edited by Zigishu Singh (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).

Introduction

Cross border M&A are the mergers and acquisitions which happen between two companies from different nations. Cross border M&A involves when one company acquired the other company and merges into a third entity. When the two companies come together to form an alliance, there are several factors that affect the cross-border M&A and one of them is the cultural difference.

Cultural differences have a huge role in impacting cross-border M&A. The lack of compatibility between two cultures can lead to unsuccessful integration of mergers and acquisitions. Cultural differences can be dealt with by effective planning and strategy.

This article will throw light on the role of culture in mergers and acquisitions and measures to take in order to ensure that cultural differences do not become a hindrance to successful integration. 

Role of culture in M&A

Culture is an essential part of cross border M&A. The compatibility and tuning between both companies can lead to successful integration. Every country has different work ethics and local policies. If one company is okay in removing people at an instant, one may have stringent policies for protecting the rights of a worker. It’s important to look upon the factors and concerns which are beneficial for both.

There are many tangible benefits of mergers and acquisitions for the newly incorporated company. Yet, cross border M&A can also be challenging and time taking. The most challenging part of a cross border M&A is different cultures- both corporate and national. 

One of the major reasons behind the failure of cross border M&As are the cultural differences that have failed to be addressed by the two international organisations.

Understanding cultural differences 

An interesting article in The Wall Street Journal has discussed how cultural differences can be costly. It identifies the inability of senior executives to bridge the cultural difference of two companies and how it badly affects mergers and acquisitions. Studies show that cultural issues are the contributing factors for 30% of failed M&As. The impact of cultural differences can be minimised at the beginning by taking some precautionary measures.

One of the biggest M&A deals which happened between the US Food Chain ‘Burger King’ and Canadian iconic Coffee Chain ‘Tim Hortons’ are examples of successful cross border M&A. 

Tim Hortons culture was different from Burger King in several ways but constant negotiations and changing of plans led to this successful merger. They had included many risks and mitigated this with strategic planning. When two companies decide to come together and form a new entity, it is important to create a strategy to have a successful cultural M&A. It is essential to identify the potential risk involved in corporate culture and how to integrate both corporate cultures. The company has to look out for measurable objectives to form a cultural integration for successful M&A. 

Measures to take before entering into a cross border M&A

There are various measures to take before entering into a cross border M&A. The companies should not overlook cultural differences or consider it as a light area. If the cultural measures have been incorporated before, this will help it to make a successful integration. 

Identify corporate culture ‘owners’

Choose owners who have experience of corporate culture and can bring the changes according to the new culture. Assigning the responsibilities to the right candidate who can form a new set of structures. It will help to mitigate the risk of differences between the two cultures. 

Make culture tangible and measurable

The goals must be defined, specific and supported which will be addressed by the culture owners. The culture owners need to bring the two cultures on the same page. It must be governed by the main objective that is the success of their newly formed corporation. The culture owners should strategise and work for the benefit of the company.

Consider cultural compatibility

Sometimes the cultural difference between the two companies is huge. The M&A should give them time to adapt to the corporate culture of the other. It takes time to get used to the cultural aspects of one company. 

Understand the decision-making process

Post M&A can have a problem relating to making clear and long-lasting decisions. The new entity goal should be to stay on track for the benefit of its company. Sometimes the inability to take clear action results in the loss of a new organisation. 

Organisations can improve their chances of a successful M&A by:

a) Identifying the decision-makers responsible for specific integration results

b) Understanding both structure and style each organisation has brought to the M&A

c) Communicating how decisions are defined and made in a new organisation.

Remember the employees

The major part of M&A might not give importance to retaining employees and it can be seen as collateral damage. The post M&A is not an easy time for employees especially to work in a whole different environment. This is why it’s important for the new entity to make a healthy environment for its people so that they can earn the loyalty of its former employees.  The company objective is to bring trust and respect to make it a successful venture. 

Consider the strengths of both existing cultures, not just the weaknesses

Often, mature companies acquire start-ups as a means of adding products to their portfolios.  

What they often find is that the structural controls and well-defined processes that are a hallmark of predictable performance for the acquirer may be impossible to mix with the less structured ways of the start-up. A more varied integration than a simple addition of desired qualities is required.

Implement a decision-making process that is not hampered by cultural differences

Customer and employee loyalty is good for the company but if the company is not able to reach decisions, then it can result in a huge loss for the organisation. The ability to make effective and speedy decisions is good for the company. 

The need to address this issue is vital for the success of an organisation. It can be addressed by the leader of the integration team with the support of the culture team:

Using culture to promote business 

Culture influences the way we perceive our surroundings and the way we connect. 

Burger king mergers with Tim Horton is an example of using culture to promote its business. Tim Horton has a great value in Canada. The decision of Burger King to make its headquarters in Canada works in favour of both. People connect emotionally with Tim Horton and now burger king- part of Tim Horton creates a vision, to make Tim Horton, a global brand.

The corporate owners must look for the culture to benefit their organisation. They can assign people who can bring good results and help them to achieve their goals. 

People connect with the authenticity of a company. If a culture owner can bring them together and connect emotionally then it works as an added advantage for the company. 

One of the examples is of international chains in India like Dominoes, KFC, Burger King and many more- they connect with their customer base by adapting Indian Culture, innovating new Indian flavours or adding the spices which people love. 

The motto behind the international companies is to connect with their customer base and to earn their loyalty. This is where culture plays a major role. It helps the company to build trust between the customers and the organisation.

Conclusion

In the end, it is necessary for an international organisation to have a team that specialises in this area. The cultural difference must be bridged by the corporate owners and should not become the reason for a failure of M&A. culture can be used appropriately to build healthy relationships which will make a success for the newly incorporated corporation. Culture must be a focus for cross border M&A because it’s powerful and implicit. The employees generally do not want to change their cultural beliefs according to new ones and that can affect the business value. Culture can become an effective tool if used properly, trying to incorporate culture can bring forth the result and generate business value. It can help post-merger integration and make it a successful venture.

References

  1. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/mergers-acqisitions/us-ma-consulting-cultural-issues-in-ma-010710.pdf
  2. https://www.communicaid.com/cross-cultural-training/blog/how-culture-impacts-a-cross-border-ma/

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