Role of Global Managers in Mergers & Acquisitions With Relation To Cultural Integration
Role of Global Managers in Mergers & Acquisitions With Relation To Cultural Integration
Cultural Integration
Rukmani Seth1
Pallavi Sridhar2
Abstract:
Mergers and Acquisitions have become the order of the day in the business world during recent
times mainly for growing in the global market. Success of a merger essentially depends on
execution of the integration plan which necessitates the evolution of the human side of
integration. Thus, Human Resource Management and Development plays a crucial role in a
successful merger. Issues such as human resource planning, compensation selection and
turnover, performance appraisal system, employee development and employee relations ideally
ought to be addressed by the Human Resource departments. With M&As especially at the
international level, a global vision is required in order to break down geographic and competitive
boundaries. Thus, the role of a global manager comes in. There is a need for the right human
resource strategies to give global managers the tools and support they need to make the merger a
success.
The aim of this paper therefore, would be to establish the crucial role played by the HR managers
aligned with that of a global manager during M&As and trace the depths to which their roles
penetrate in achieving a successful merger especially when international mergers are on the rise.
Introduction:
“It’s the people that build organisations and strategies made without keeping them in mind can
be fatal for its future. Integration and transition challenges have the capability of making or
breaking M&A deals” – Hewitt Study
Global Management is a capability that multinational businesses value and need in the
international marketplace. Companies that operate across international borders need executives
1
Studying in 4th Year, Business Law Hons, B.B.A LL.B(Hons), National Law University, Jodhpur
2
Studying in 4th Year, Business Law Hons, B.B.A LL.B(Hons), National Law University, Jodhpur
3
http://degreedirectory.org/articles/What_is_Global_Management.html (Visited on 20 August, 2010)
4
Christopher Bartlett, Sumantra Ghoshal, What is a Global Manager?, Harvard Business Review, 2003, pp. 101-
108,
http://www.business.illinois.edu/aguilera/Teaching/Bartlett%20Ghoshal%20What%20is%20a%20global%20manag
er%202003.pdf (Visited on 20 August, 2010)
5
Id. p. 105
6
Supra Note 2. p. 106
M&A will be conditional upon the strategic rationale chosen by the merging firms. In particular,
HRM strategies in the integration stage of an M&A should be tightly aligned to the undertaken
M&A strategy in a manner that enhances the likelihood of successful M&A outcomes – this is
known as the strategic fit between M&As and HRM.7 Most M&As aim to retain key talent,
capture market share, or diversify into new markets. Strategies behind an M&A can be with
regard to creating more efficiency by eliminating excess capacity; partly the human resource,
expanding geographically by acquiring smaller companies across the world and retaining local
managers, expanding product lines by acquiring companies which have related production,
gaining access to new R&D knowledge or technological capabilities by acquiring innovative
firms rather than producing the knowledge in-house and creating a new industry from existing
industries whose boundaries are eroding.8 Such a merger with or an acquisition of an
international firm with an objective of improving both effectiveness and efficiency in the global
marketplace will require a focus on the developmental practices of human resources, which
would include effective leadership structure, mentoring, training and creative compensation
incentives with special consideration to cultural differences among other things. Underestimating
or failing to address basic HR challenges that arise during merger or acquisition leaves
companies vulnerable to legal incompliance, exposed to potentially large hidden costs and
undeclared expenditures and at huge risk of losing key employees.9
M&A activity presents a different set of challenges for the human resource and global managers
in both organizations. The merger activity is found to have serious impact on the performance of
the employees during the period of transition. It leads to stress on the employee caused by the
differences in human resource practices, uncertainty in the environment, cultural differences, and
differences in organizational structure and changes in the managerial styles. Thus, the
fundamental tension in modern global management as regards cross border M&A is the need to
standardize organization design, systems and procedures10 especially in the sphere of HRM.
7
Ruth V. Aguilera, John C. Dencker, The role of human resource management in cross-border mergers and
acquisitions, Int. J. of Human Resource Management, 15(8), December 2004, 1355–1370
8
Bower, J.L., Not all M&As Are Alike and that Matters, Harvard Business Review, Reprint R0103F (2001)
9
Hewitt Associates Asia-Pacific Business Head Consulting Analytics Nishchae Suri
10
Leon Gettler, The New Global Manager Needs To Understand Different Work Cultures, The Age, February 6,
2008, http://www.theage.com.au/business/the-new-global-manager-needs-to-understand-different-work-cultures-
20080205-1qcq.html
Common Problems faced in the HR front in cross border M&As:
A global manager will have to look into the following issues while effecting a merger or
acquisition11:
1. Cultural Shock: The exposure to a new culture during mergers leads to a psychological state
called culture shock. The employees not only need to abandon their own culture, values and
belief but also have to accept an entirely different culture. This exposure challenges the old
organizational value system and practices leading to stress among the employees. Dissimilar
cultures can produce feeling of hostility and significant discomfort which can lower the
commitment and cooperation on the part of the employees. In case of cultural clash, one of the
cultures i.e. dominant culture may get preference in the organization causing frustration and
feelings of loss for the other set of employees. In case of hostility in the environment the
employees of two organizations may develop “us” versus “them” attitude which may be
detrimental to the organizational growth.
According to a KPMG12 study, 83% of all mergers and acquisitions have failed due to failure to
address problems of cultural differences.13 An instance is the failure of Wal-Mart in Germany
primarily due failure to address the contrast in the cultures followed in U.S and Germany.14 Even
the Renault-Nissan merger was going to suffer the same fate; however, on realizing the problem,
they rectified it and once again were on a profit-making path.15
2. National difference across market economies: Problems in this arena arise when two firms
of equal stature in their home countries integrate. This aspect of a merger would be best
understood by illustrating the Daimler Chrysler merger. Daimler-Benz (German) paid executives
much less than did Chrysler (American), making it necessary to adjust the various performance
11
Amit Pande & Sandeep K Krishnan, Knotted forever, http://stdwww.iimahd.ernet.in/~sandeep k/merger.pdf
(Visited on 20 August, 2010)
12
KPMG is a global network of professional services firms providing Audit, Tax and Advisory services,
http://www.kpmg.com/global/en/Pages/default.aspx (Visited on 20 August, 2010)
13
Gene Gitelson, et. Al, The Impact of Culture on Mergers and Acquisitions,
http://www.itapintl.com/facultyandresources/articlelibrarymain/the-impact-of-culture-on-mergers-a-
acquisitions.html (Visited on 20 August, 2010)
14
Andreas Knorr et. Al, Why Did Wal-Mart Fail In German?, Institute for World Economics and International
Management, http://www.iwim.uni-bremen.de/publikationen/pdf/w024.pdf (Visited on 20 August, 2010)
15
http://www.worldservicesgroup.com/presentations/paris/Presentation%20for%2011%20April%20final%20pres
entation.ppt (Visited on 20 August, 2010)
systems. The acquired firm belonging to a coordinated market economy like that of Germany,
was rigid to any change. Daimler executives felt that it would be impossible to raise the pay of
German executives to the level received by the American executives, in no small part because of
pressures that would arise from German works councils. Also, Daimler had a bureaucratic
organization that relied heavily on rules and procedures to manage employees. By contrast,
Chrysler had a more decentralized decision-making apparatus and was more flexible. The worst
of the problems arose when there begun severe communication problems between the two firms.
Daimler Benz failed to convey their intention to handle the top management on their own,
causing many executives to leave midway due to pent up misunderstanding, thus, highlighting
the role of both trust and communication in the merger process, particularly in M&As across
market economies.16
3. Altering the size of Employment: HR issues are critical when it comes to downsizing the
firms to ascertain the appropriate employee strength. If the merging companies are related, even
the top management have to face the axe as the arena of functioning is similar for which a wide
management may be unnecessary.17 Retention issues may be a cause for discomfort depending
upon the national context. Liberal Market Economies have fewer institutional constraints as
compared to Coordinated Market Economies which in contrast, offer greater legal protection to
employees and also possess a long-term view of employment relations among actors in these
labour markets.18 Retaining and inducting employees is also of supreme importance especially
when firms are acquired in pursuance to expansion and gaining access to RnD. For example, in
Microsoft’s purchase of the Japanese firm TITUS, Microsoft strongly supported the management
team they acquired, with a similar outcome in Cisco System’s acquisition of the Israeli firm
Pentacom. Mergers may not give the acquiring firm time to assimilate and systems must fall on
track immediately. One firm that does an exceptional job in assimilating new employees is Cisco
Systems. It disregards integration costs in order to assimilate the right employees and is also
16
Vlasic, B. and Stertz, B., How Daimler–Benz Drove off with Chrysler. (New York: Morrow, 2000)
17
Walsh, J.P., Top Management Turnover Following Mergers and Acquisitions, Strategic Management Journal, 9
(1988), 173–83
18
Child, J., Faulkner, D. and Pitkethly, R., The Management of International Acquisitions (Oxford University Press,
New York, 2000)
willing to pursue a hands off policy with respect to certain practices if the systems of the
acquired firm are superior to those of Cisco.19
5. Employee Relations: When two organizations come together via a deal, it needs to be
ensured that steps are taken to bring together the employees of both organizations. Equality
19
Ibid
20
T. Malikkarjunappa et. Al, Why Do Mergers and Acquisitions Quite Often Fail?, AIMS International, 1(1),
January, 2007, pp. 53-69 at 62.
21
Niyati Ojha, Failure Mergers, http://jurisonline.in/2008/11/failure-mergers/ (Visited on 20 August, 2010)
22
Charlene M. Solomon and Michael S. Schell, Managing Across Cultures: The Seven Keys to Doing Business with
a Global Mindset,(United States of America, 2009)
23
Anne Fisher, How to be a better Global Manager, Fortune Magazine, July 9, 2009,
http://money.cnn.com/2009/07/08/magazines/fortune/how_to_be_better_global_manager.fortune/index.htm
needs to be the key. For example, the acquisition deal between Kraft and Cadbury has seen lot of
bumps on account of the dismissal of various key employees of the latter by the former.24 On the
other hand, Infosys Australia has a good experience. Infosys redefined the Australian notion that
there is only way to manage. Infosys Australia arose out of a fully owned Australian business
after it was acquired by Infosys Technologies in 2004. The company initiated programs to make
its Indian and Australian employees to understand how to work with one another. Infosys based
its program on the work of Dutch management theorist Dr Geert Hofstede. Sean Fernando,
Infosys Australia general manager of human resources, said the research identified three critical
areas of difference between Australians and Indians: uncertainty avoidance, dealing with
authority and decision-making. While Australians required high level of certainty even with
regard to travel plans, Indians did not mind uncertainties and took to the attitude that “they can’t
control everything in life”. In dealing with authority, while Indians preferred taking instructions
from their leader in the team, Australians preferred consultation. The training program brought to
light these differences enabling the employees to consciously work upon it.25
24
Stephen Huard, Mergers & Acquisitions - An Opportunity To Improve Employee Relations or Pull off Some Krafty
Moves?, Employment Law News, http://www.clarkslegal.com/Article/548 (Visited on 20 August, 2010)
25
Leon Gettler, The New Global Manager Needs To Understand Different Work Cultures, The Age, February 6,
2008, http://www.theage.com.au/business/the-new-global-manager-needs-to-understand-different-work-cultures-
20080205-1qcq.html
26
http://findarticles.com/p/articles/mi_m4467/is_10_54/ai_66499153/pg_7/?tag=content;col1 (Visited on 20
August, 2010)
Effecting the Change:27
In the pre-merger state, the first step is the identification of a team leader who can guide the
company through the contract. This is where the role of the country manger comes in. The HR
has to conduct:
a) A due diligence study involving scrutinizing the organisational culture of the companies
involved and analyze the outcome of the new mould. This is crucial when cross border mergers
are involved as the smooth blend of the two cultures is inevitable for the victory of the venture.
b) An evaluation of the employee compensation and severance policies, the industrial relations,
labour laws in the concerned countries regarding compensation and severance of contracts and
the existing HR policies has to be conducted.
c) An investigation into the existing employee litigations and their possible outcomes before the
finalization of the deal.
d) An identification of the key talents is a major task at this stage as this decides the organization
structure and employment policies of the new firm.
On the merger, the HR has to appoint an integration manager who is capable of taking up the
job of easy transition. This is where the corporate manager coordinates the efforts between the
country and business manager.
1. He has to create a new organization structure deciding on the key players of the top
management.
2. He has to create the company policies and remuneration structure taking into account the
labour laws prevalent in the country. The new structure must be capable of retaining the key
players wiping out their sense of insecurity. The degree of insecurity will be more in cross border
mergers.
3. The retention plans can be structured only after the identification of the key players. The
merger might follow a policy wherein the employees are terminated from the service over the
period of months.
27
http://www.chrmglobal.com/Articles/520/1/HR-Activities-In-Mergers-And-Acquisitions.html (Visited on 20
August, 2010)
4. The HR has to then take measures to give advance notice to the employees whose service will
be terminated. Removing the fear is crucial as it can otherwise impact the performance
adversely. A well defined plan must be communicated to all the employees for smooth
changeover.
5. Cross culture training and joint workshops must be conducted to help the employees in having
an insight to each others’ work styles.
The post merger activities include proper evaluation of the new culture and identifying the
loopholes and taking corrective action. Keeping watch over the employees can guide the HR in
solidifying its policies relating to leadership and employee retention. Measures to strengthen the
employee relationships and improving their performance must be undertaken by the HR in the
post merger period. This is where the functional manager plays a key role ensure timely
dissemination of information.
28
Isaac Dixon, Culture Management and Mergers and Acquisitions, Society for Human Resource Management case
study, March 2005
There can be various methods to culturally integrate29 like localization wherein the subsidiary
unit acquired in the other country is considered to be a separate entity and the strategies and
decisions of the subsidiary are made according to the local conditions without interference from
the core company. Another method is to Transplant the culture of the parent company. In this
model, the parent company appoints its people to manage the target company in order to
guarantee communication between the parent and subsidiary, and the parent supervises and
controls the subsidiary this method calls for a good global manager. The third model is cultural
innovation by integration. In this model, the cultures of parent and subsidiary companies coexist;
a new culture and management pattern are formed through the integration of the two cultures and
providing an opportunity for maximizing cultural innovation.
Cultural influences during an integration effort have the potential to be broad and far reaching.
Broken into these dimensions, it’s easy to see the role culture plays in issues that quickly affect
the bottom line and integrations that fail to achieve desired synergies. By understanding the
similarities and differences between the two companies early in the game, it is possible to avoid
a divorce before the marriage vows are taken. Should incompatibility be too great, it may even
be wise to call off the wedding. Thus, the global management seeks to reconcile the following
issues between organizations to culturally integrate them:
1. Decision-making Styles: While one organization engages in decision-making process
through consensus, the other may do so through a top-down model. Such a difference can lead to
slow decision-making, failure to make decisions, or failure to implement decisions and all during
a time when rapid decision-making is imperative. Customer and employee loyalty can erode
quickly if a company is perceived as unable to make decisions. The HP-Compaq merger still
suffers due to improper reconciliation with regard to such differences.
2. Leadership Style: The style could vary from being dictatorial in one and consultative in the
other organization or clear or diffused. A shift in leadership style can generate turnover among
employees who object to the change. This is especially true for top talent, who are usually the
29
Zhanwen Zhu, Haifeng Huang, The Cultural Integration in the Process of Cross-border Mergers and
Acquisitions, International Management Review, 3(2) (2007)
most mobile employees. The HP-Patagonia merger suffered from the problem of the former
having a traditional leadership style contrary to the latter.30
3. Ability to change: This refers to the willingness to risk new things, compared with focus on
maintaining current state and meeting current goals. Differing attitudes and aptitudes toward
change can cause unwillingness, resistance, or passivity when it comes to implementation of new
strategies and working through the inevitable difficulties of creating a new company.31
4. How people work together: This varies based on formal structure and role definitions or is
based on informal relationships. If the values and behavior of newly merged or newly connected
functional units are inconsistent, then processes and handoffs may break down with each unit’s
employees becoming frustrated by their colleagues’ failure to understand or even recognize how
work should be done. The Stud Backer-Packard merger failed on account of problems in this
regard.32
It's important to identify cultural areas of dissonance so that people can dispel misconceptions
and begin creating a culture that's right for the new organization. That's often left until after the
merger is finalised, which is risky because culture mismatches can be the Achilles' heel of many
deals.33 One can't consider culture compatibility without touching on the different views that the
acquirer and the acquired have about the new company. The acquirer assumes that the new
company will closely resemble the original but with greater mass and capabilities. The acquired
company expects that many of its strengths will be crucial to the new company. However, that is
not the case and thus, this needs to be addressed.
34
Larsen, Trina, Bert Rosenbloom, Rolph Anderson., and Rajiv Mehta, Global Sales Manager Leadership Styles:
The Impact of National Culture, Journal of Global Marketing, 13(2), 1999, 31-48.
35
Adler, Nancy J., International Dimensions of Organizational Behavior, (Cincinnati: South-Western/Thomson
Learning, 4 th edn, 2002)
36
Building Better Global Managers, Harvard Management Update, 11(3), March 2006.
iv. “Ability to balance consistent corporate practices” – A company while globalizing has to
induce its corporate philosophy into the new market while respecting the existing regional
uniqueness. Companies should ensure that their global managers neither approach the new
market with their own stereotypical corporate philosophy nor succumb to cultural
intimidation. Teagarden suggests that the new manager's global assignment should begin by
having him work on a virtual team—that is, managing an overseas process or project while
still being stationed in one's home country.
v. “Emphasizing the importance of Emotional Intelligence”- . Emotional intelligence as a social
skill may be critical to effective global leadership. This skill is an ability to find common
ground and build rapport with others.37 It is necessary for international business operators to
acquire the knack for developing good relations with the influential and effective people in
other countries. Companies seeking to strengthen their international leaders’ effectiveness
may consider utilizing training programs directed at this particular leader attribute. Scholars
and practitioners alike have called for emotional intelligence training to help employees
recognize the underlying elements of cultural differences and backgrounds38
vi. Other general skills: On a general basis, global managers should also develop para-
managerial skills such as self motivation and resilience to face disappointments constructively
in a foreign atmosphere, the psyche of looking at problems as opportunities and challenges
and an insatiable appetite for learning, flexibility, and openness in order to succeed as an
efficient global manager.39
Conclusion:
The issue of HRM in a cross border M&A is an issue of global management and is succinctly put
by S. Devarajan, Managing Director of Cisco Systems Global Development Center in Bangalore,
India. He says,
37
Anne H. Reilly, Tony J. Karounos, Exploring the Link between emotional Intelligence and Cross-Cultural
Leadership Effectiveness, Journal of International Business and Cultural Studies, 1, February 2009
38
Ilangovan, Aarthi, Wesley A. Scroggins, and Elizabeth J. Rozell, Managerial Perspectives on Emotional
Intelligence Differences between India and the United States: The Development of Research Propositions,
International Journal of Management, 24(3), 2007, 541-548.
39
Dr. Adalat Khan, Global Management Skills, American Chronicle, July 31, 2007
"Managing in a global environment means you manage people who are separated not only by
time and distance but also by cultural, social, and language differences. The main challenge
here is to integrate and coordinate these individuals in ways that will ensure success. You need
to build a relationship and have frequent interaction and communication among your team
members".
The idea of this paper was to essentially bring out the importance of understanding the existence
of cultural variation and the need and ways to go about culturally integrating two firms which
come together in a cross border merger or acquisition. Though there is no empirical evidence,
scholars attribute maximum importance to human resource management during M&As to make
it a success. Existing patterns show that very few firms which integrate give HRM its due
importance. Though an M&A is motivated by strategic reasons, ultimately, it’s the strength of
the human resource which can pull it through.