Cultural deal breakers in European M&A transactions
In this article, I want to start a discussion about (post-acquisition) cultural deal breakers in European M&A transactions. The scope is not specifically on post-acquisition only but applies to the acquisition process in general. Corporate Finance in Europe is most active in middle market (EUR 2-50 million valuations) transactions where cultural issues might have a different nature than in billion euro transactions. I have received some material from Marijn Visser, a student who is working on a thesis regarding the topic of cultural issues in the market of M&A. She has given her personal opinion on two business cases of cultural issues within the Daimler/Chrysler and the Air France/KLM mergers. Further, she has contributed to portions of this article.
I am interested to hear your thoughts and practical experience about cultural deal breakers in European M&A transactions as there must be many interesting stories that could be very useful for our clients, business owners and buyers of companies.
Overview of the content of this article on cultural deal breakers in European M&A transactions:
- How important is company culture in an M&A transaction?
- Do the differences between European cultures also existing during M&A transactions?
- What are the main cultural deal breakers? (or deal breakers that have a cultural background/cause)
- Ways (alternatives) for buyers to deal with different cultures
- Example 1 of a business merger case where cultural differences caused an acquisition to fail
- Example 2 of a business merger case where cultural differences were an issue
- Conclusions and discussion items
How important is company culture in an M&A transaction?
Of course, company culture is hugely important in any acquisition. As a buyer, you have to determine how you best integrate your own company culture into a newly acquired organization. One option is to leave a large part of the acquired company’s culture in place or to start changing the company culture gradually over time. How to determine the best approach to cultural issues is a very difficult question.
A study found that more than 90% of European M&As fall short of forecasted objectives, owing to difficulties in combining corporate cultures and governance structures (Hay Group 2007). This and other studies have confirmed that cultural issues are crucial. What are your thoughts on this?
Do the differences between European cultures also exist during M&A transactions?
Obviously, differences between European cultures also occur during M&As. Don’t forget that organizational culture is something that is created by the leadership of the organization and can become ingrained into the core fabric of the way things are communicated and business is done on a day-to-day basis. (LOTICH, P). it would be interesting to get some practical examples of cultural issues in European M&A transactions.
Country-specific cultures play a role both in smaller as well as in larger companies. In smaller organizations, there is generally more direct contact between employees. Knowing each other on a personal level can alleviate misconceptions surrounding country-specific cultural issues. Organizations need to realize that the culture of an organization, just like the culture of the people, can be a motivating factor in maximizing the value of human capital, which can ultimately be managed for organizational success (Aina et al, 2012). Having said this, it is clear that it emphasizes the importance and the connection between organizational communication and organizational culture.
What are the main cultural deal breakers? Which deal breakers have a cultural background/cause?
Here are some of the main cultural deal breakers:
Job security and the way companies deal with laying off employees (the US versus European labor contracts).
Micromanagement, this is when employees have the feeling that their employer constantly looks over their shoulder to check what they are doing. There is no trust, and this can affect employee performance.
Lack of transparency. Not only in the work that is being done, but also transparency in the work environment.
Disengagement can also be a cultural deal breaker. When employees are disengaged they are most likely less interested in the company, thus also in the company culture.
Having no company perks is also a cultural deal breaker.
The source of the deal breakers above is Ron Stewart.
Which other cultural deal breakers do you see in your world of M&A transactions?
Ways (alternatives) for buyers to deal with different cultures
Communication by the leaders is one of the cognitive mechanisms to deal with reactions to M&As. Emotions need to be handled at the cognitive level and employees must be provided with information. If employees are not well informed, the danger of rumors becoming the information basis becomes reality (Shearer, Homes & Runge, 2001)
A strong company culture is essential during M&As. How we integrate companies during the M&A process is key, because when both organizations have strong and unique cultures it can be a problem for the integration process. Buyers need to be transparent and also take into account that merging the company cultures may take longer than expected. Management should be aware of the importance of merging the company culture. As cultural differences can either make or break an M&A transaction.
Example 1 of a business case where cultural differences caused an acquisition to fail
Let’s take an example of a cross-border M&A where the integration process was difficult because of the strong and unique cultures. Daimler-Benz (a German company) and Chrysler (an American company) had difficulty in merging successfully due to the diverse cultures. Daimler had a strong engineering culture that was more hierarchical and emphasized routinely working long hours. Daimler employees were used to being part of an elite organization, evidenced by flying first class on all business trips. However, Chrysler had a sales culture, where employees and managers were used to autonomy, working shorter hours, and adhering to budget limits that meant only the elite flew first class.
Example 2 of a business case where cultural differences were an issue
An example of European cultural differences during an M&A process is the clash between KLM and Air France. A clash of national cultures and an inability to understand each other’s languages threatened to make the merged Air France- KLM group of airlines unmanageable. During this merger, the French thought of their Dutch colleagues as money- grabbers while the Dutch thought of their French colleagues as detached.
Don’t forget that the smallest cultural customs can make or break a merger. With these two companies, it was the Dutch that thought it was ridiculous that they had to pay €10 for a lunch at the French office while the French only paid €4. This made them feel more unconnected instead of a feeling of unity they were expecting. The opinions of the Dutch and French managers differed so much that they started operating on a rumor basis, instead of talking to one another. Air France- KLM made an official statement acknowledging the difficulties they were experiencing, culture-wise and stated that they were learning from their mistakes and had high hopes for the future.
Conclusions about cultural items in M&A transactions and discussion items
Company and country-specific culture are crucial during and after an acquisition. As a buyer, you need to know your own company culture well and be clear on your plan on how this culture should be incorporated into the acquired company. As a business owner selling your company, you have to determine in detail which buyer is going to be the best match for your company. This is not only from a personal and financial perspective (the sales price a buyer pays) but also from the company cultures.
Here some final questions and discussion items:
- What do you think is the main cultural deal breaker in an M&A transaction?
- How should a buyer deal with cultural items in M&A transactions?
- Which story with a cultural aspect have you encountered during your career as an M&A advisor?
Elco van Grotenhuis | Wednesday 2 May 2018 | website:
Very true Govert!
I have done several post-merger integrations and almost always the impact of cultural differences are underestimated. They are also the most difficult to reconcile.
The root problem is that many M&A deals are based too much on financials (and short-term personal gains). Commercial and Operational logic should come first and the rest should follow.