Impact of Cultural Differences on Merger and Acquisition Performance - A Critical Research Review...

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IMPACT OF CULTURAL DIFFERENCES

ON MERGER AND ACQUISITION

PERFORMANCE: A CRITICAL

RESEARCH REVIEW AND AN

INTEGRATIVE MODEL

Gunter K. Stahl and Andreas Voigt

ABSTRACT

This paper provides a review of theoretical perspectives and empiricalresearch on the role of culture in mergers and acquisitions [M&A], with

a particular focus on the performance implications of cultural differences in

M&A. Despite theoretical and anecdotal evidence that cultural differences

can create major obstacles to achieving integration benefits, empirical

research on the performance impact of cultural differences in M&A yielded

mixed results: while some studies found national or organizational cultural

differences to be negatively related to measures of M&A performance,

others observed a positive relationship or found cultural differences to

be unrelated to M&A performance. We offer several explanations for theinconsistent findings of previous research on the performance impact of

cultural differences in M&A and develop a model that synthesizes our current

understanding of the role of culture in M&A. We conclude that the relationship

between cultural differences and M&A performance is more complex than

Advances in Mergers and Acquisitions

Advances in Mergers and Acquisitions, Volume 4, 5182

Copyright 2005 by Elsevier Ltd.

All rights of reproduction in any form reserved

ISSN: 1479-361X/doi:10.1016/S1479-361X(04)04003-7

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52 GUNTER K. STAHL AND ANDREAS VOIGT

previously thought and propose that, rather than asking if cultural differences

have a performance impact, future research endeavors should focus on howcultural differences affect M&A performance.

The cultural distance hypothesis, in its most general form, suggests that the

difficulties, costs, and risks associated with cross-cultural contact increase with

growing cultural differences between two individuals, groups, or organizations

(Hofstede, 1980). Cultural distance, as measured in terms of differences in

management style, business practices or work-related values, has been shown to

have a profound impact on processes such as the choice of foreign entry mode

and the perceived ability to manage foreign operations (e.g. Kogut & Singh,1988), organizational learning across cultural barriers (e.g. Barkema, Bell &

Pennings, 1996), the longevity of global strategic alliances (e.g. Parkhe, 1991),

and cross-cultural adjustment and effectiveness of expatriate managers (e.g. Black,

Mendenhall & Oddou, 1991).

In the context of mergers and acquisitions [M&A], it has often been argued but

less often been researched that cultural differences can be a source of confusion,

hostility and distrust between the members of merging organizations (e.g. Buono

& Bowditch, 1989; Cartwright, 1997; Krug & Nigh, 2001; Olie, 1990), and a major

contributor to the high failure rates reported in M&A literature (see Datta, Pinches& Narayanan, 1992; King, Dalton, Daily & Covin, 2004 for meta-analyses of post-

acquisition performance research). In a survey of more than 200 chief executives of

European companies conducted by Booz, Allen and Hamilton, respondents ranked

the ability to integrate culturally as more important to the success of acquisitions

than financial and strategic factors (cited in Cartwright & Cooper, 1996, p. 28).

Problems may be exacerbated in international settings. Cross-border M&A are

difficult to integrate because they require what Barkema and his colleagues have

called double layered acculturation (Barkema et al., 1996, p. 151), whereby

not only different corporate cultures, but also different national cultures haveto be combined. Fundamentally different values, goals and beliefs concerning

what constitute appropriate organizational practices may lead to conflicts and

political struggles, and limit the potential for trust to emerge between the parties

involved in an M&A (Elsass & Veiga, 1994; Olie, 1990; Stahl & Sitkin, 2005).

In international settings, such conflicts tend to be fueled by cultural stereotypes,

increasing nationalism or even xenophobia (Vaara, 2001, 2003). Foreign language

barriers, different legal systems and administrative practices, and other aspects

of organizational life that differ between countries pose additional obstacles

to integrating the different cultures and workforces in cross-border M&A. Notsurprisingly, a survey of top managers in large European acquirers showed that


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Impact of Cultural Differences on Merger and Acquisition Performance 53

61% of them believed that cross-border acquisitions are riskier than domestic ones

(Angwin & Savill, 1997).Despite anecdotal claims that cultural differences create major obstacles

to successful integration in M&A, the empirical research evidence is mixed

(Schoenberg, 2000; Schweiger & Goulet, 2000; Teerikangas & Very, 2003).

While some studies found national or organizational cultural differences to be

negatively related to different measures of M&A performance, others found

cultural differences to be unrelated or even positively related to the success of

M&A. These findings suggest that the relationship between cultural differences

and M&Aperformance is more complex than how it is portrayed in M&A literature.

More conceptual and empirical work is needed to examine how cultural differences

affect the post-combination integration process and to determine which variables

moderate the effects of cultural differences on M&A performance.

We begin with a discussion of our current understanding of the role of cultural

differences in M&A, followed by a review of previous studies that examined

the impact of cultural differences on three types of M&A outcome measures:

accounting-based performance measures, stock market returns, and socio-cultural

integration outcomes. We will offer several explanations for the inconsistent

findings that emerge from this review, and present a framework for studying the

role of cultural differences in M&A that synthesizes the extant research in this

area. We will conclude with a discussion of avenues for future research on the roleof culture in M&A.

THEORETICAL PERSPECTIVES ON THE ROLE OF

CULTURE IN MERGERS AND ACQUISITIONS

Various theories and models have been proposed to explain the role of culture in

M&A and how cultural differences may affect the integration process following

M&A. The Appendix provides a synopsis of the most widely used theoriesand models. They can be grouped into three categories: cultural fit models,

acculturation models, and models adopting a social constructivist perspective on

culture. Each of them is discussed below.

The Cultural Fit Perspective

Cultural fit models rest on the idea that the degree of culture compatibility between

the organizations involved in a merger or an acquisition is a critical determinant ofthe subsequent integration process (Cartwright & Cooper, 1996; David & Singh,


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1994; Javidan & House, 2002; Morosini & Singh, 1994). Cultural fit models focus

mainly on the relationship between pre-merger cultural differences (both nationaland organizational) and post-merger integration outcomes. They are inherently

static and do not fully capture the dynamics of the integration process.

Perhaps the most widely cited cultural fit model is Cartwright and Coopers

(1993, 1996) model of culture compatibility in M&A. The model is based

on a typology of organizational cultures that vary along a continuum from

high to low individual constraint: power, role, task, and person cultures, with

the former imposing the highest and the latter imposing the lowest degree of

constraint on individuals. Cartwright and Cooper propose that in mergers of equals

(collaborative marriages), the cultures of the combining firms must be similar

or adjoining types (e.g. role and task cultures) in order to integrate successfully.

The logic is that if there is a balance of power, the organizations involved in the

merger have to adapt to each others culture and create a coherent third culture.

Since organizations normally strive to retain their own culture, mergers between

culturally distant partners are proposed to result in major integration problems.

In the case of an asymmetrical relationship (traditional marriages), Cartwright

and Cooper propose that the impact of cultural differences depends primarily on

the direction of the culture change, rather than the cultural distance between the

acquirer and the target. If the degree of individual constraint increases as a result of

the takeover (e.g. a firm with a task culture is acquired by one with a power culture),this is likely to lead to employee resistance and major integration problems.

The important contribution of cultural fit models such as the one proposed by

Cartwright and Cooper (1996) is that they illustrate that cultural differences can

pose significant barriers to achieving integration benefits, and that they have to be

considered at an early stage of the M&A process as early as the evaluation and

selection of a suitable target and the planning of the integration process.

The Acculturation Perspective

Another perspective centers on the acculturation process (Elsass & Veiga, 1994;

Larsson & Lubatkin, 2001; Nahavandi & Malekzadeh, 1988; Sales & Mirvis,

1984), rather than on stable cultural differences between the parties involved in an

M&A. In anthropology, the term acculturation is defined as changes induced

in (two cultural) systems as a result of the diffusion of cultural elements in both

directions (Berry, 1980, p. 215). In the context of M&A, Larsson and Lubatkin

(2001) define acculturation as the outcome of a cooperative process whereby the

beliefs, assumptions and values of two previously independent work forces forma jointly determined culture. Acculturation is achieved through development of


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a common organizational language, mutual consideration, and values promoting

shared interests. As such, acculturation can be considered a prerequisite for M&Asuccess, especially when high levels of integration are required.

In contrast to Larsson and Lubatkins (2001) conceptualization of acculturation

as an inherently cooperative process, it has been suggested that acculturation

outcomes can be positive or negative (Elsass & Veiga, 1994; Nahavandi &

Malekzadeh, 1988; Sales & Mirvis, 1984). Nahavandi and Malekzadehs (1988)

model of acculturative stress proposes that the degree of congruence between

the acquiring and acquired firms preferred modes of acculturation will affect

the amount of stress and conflict experienced during the acculturation process.

According to this model, the acquired firms preferred acculturation mode

depends on the extent to which organizational members want to preserve their

own cultural identity and to which they feel attracted to the acquirers culture.

The acquiring firms preferred acculturation mode is largely determined by its

diversification strategy and tolerance for diversity. The model suggests a variety

of factors that moderate the impact of cultural differences on post-acquisition

integration outcomes, most notably the acquirers diversification strategy and

the integration mode chosen. If the level of attempted integration is high, this

is proposed to result in acculturative stress and disruptive culture clashes, as

the members of the acquired organization struggle to preserve their cultural

identity.Consistent with the Nahavandi and Malekzadeh model, a longitudinal case-

study conducted by Mirvis and Sales (1990) suggests that the outcome of the

acculturation process depends on the extent to which the acquired firm is allowed to

determine its preferred mode of acculturation, to which the relationships between

the members of the two companies are positive and involve reciprocity, and to

which the acquired firm desires to retain its own cultural identity.

The Social Constructivist Perspective

While the extant cultural fit and acculturation models rest on a predominantly

functionalist and objectivist understanding of culture (Morgan & Smircich, 1980),

social constructivists view culture as based on shared or partly shared patterns

of interpretation which are produced, reproduced, and continually changed by the

people identifying with them (e.g. Kleppest, 1998; Vaara, 2002). This perspective

emphasizes symbolization and communication processes and sees culture as an

essentially dynamic and emergent phenomenon that comes into existence in

relation to and in contrast with another culture (Gertsen, Sderberg & Torp,1998).


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Kleppest (1993) defines culture as constantlyongoing attempt of thecollective

to define itself and its situation (cited by Gertsen et al., 1998, p. 33). Thisview of culture as an interpretative and evolving process rather than a stable

system of norms and values differs markedly from Hofstedes (1980) widely cited

definition of culture as collective mental programming. According to Kleppest

(1998, 2005), each organization consists of numerous individuals with distinct

self-identities that are socially produced and that help create meaning at both

the individual and collective level. Organizational culture is seen as a process

by which distinct organizational identities are created and maintained. Cultural

contact can then be understood as a confrontation between different organizational

self-images and interpretation patterns which develop and unfold in interaction

with one another.

Building on social identity theory (Tajfel, 1982; Turner, 1982), the social

constructivist position suggests that the problems surrounding the integration

process after M&A may be best understood in terms of in-group out-group bias

and a quest for social identity. Under this perspective, the exaggerated view of

differences and lack of attention to similarities that can often be observed in M&A

can be interpreted as a sense-making mechanism: we cannot establish an identity

without stressing our uniqueness and their otherness (Kleppest, 1998, 2005).

In summary, extant theories and models of the role of culture in M&A have

adopted one of three perspectives to explain how cultural differences affect theM&A process: a cultural fit perspective, an acculturation perspective, or a social

constructivist perspective. Cultural fit models are rooted in a functionalist and

objectivist understanding of culture as relatively stable system of norms, values,

and behavior patterns. In contrast, the social constructivist perspective emphasizes

cultural transformation processes during which organizational self-images develop

and change through interaction, so that new socially negotiated cultural identities

are being formed. Cultural fit and acculturation models highlight the inherent

potential of M&A for culture clash and the need for cultural assessment to

predict and minimize integration problems. Social constructivists take a morenuanced view in suggesting that it is not cultural differences per se that create

problems in M&A but rather the way cultural boundaries are drawn and managed.

Under this perspective, analysis of pre-combination cultural differences has little

prognostic value in predicting M&A outcomes. Despite fundamental differences

between the three paradigms, the cultural fit, acculturation, and social constructivist

perspectives seem to converge on the assumption that cultural issues cannot be

considered in isolation from other aspects of the integration process, such as the

integration approach taken by the acquirer, the degree of retained autonomy on

the part of the acquired firm, and the interventions chosen to manage culturaldifferences.


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THE PERFORMANCE IMPACT OF CULTURAL

DIFFERENCES IN MERGERS AND ACQUISITIONS:A RESEARCH REVIEW

While theoretical models of the role of culture in M&A emphasize the dark side

of cultural diversity, empirical research evidence indicates that cultural differences,

under some conditions, may be an asset rather than a liability in M&A (see

Schoenberg, 2000; Schweiger & Goulet, 2000; Teerikangas & Very, 2003 for

reviews). To explain the lack of consensus that emerged from previous research

on the role of culture in M&A, we conducted a comprehensive review of studies

that examined the performance impact of cultural differences in M&A, with thegoal of identifying key moderators of the culture-performance relationship. It was

hoped that a research review that is sensitive to potential moderating effects, as

well as differences in research design characteristics between studies, would shed

light on the complexity of the process by which cultural differences affect M&A

outcomes.

Using multiple search strategies (including computerized searches of various

databases, manual searches of published materials, and consultation of M&A

researchers to identify unpublished research), we identified a total of 36 empirical

studies with a combined sample size of 9,431 M&A, which had been consummatedover a 50-year period. The majority of the studies had been published in academic

journals while the rest were doctoral dissertations, book chapters, and unpublished

working papers.

For the purpose of this research review, we grouped the identified studies into

three categories, based on the M&A outcome variable that was examined ( Stahl &

Voigt, 2004):

Studies using accounting-based measures, such as return on assets, return on

equity, and sales growth. These measures evaluate the relatively long-termperformance of an M&A and thus capture whether envisaged synergies could

be reached. Studies using stock market-based measures. These measures reflect the

investment communities evaluations of the immediate and longer term impacts

of the M&A. They are usually measured around the time of the announcement

of the deal and can thus be considered a predictor of future performance. If

measured some time after the announcement, stock market returns may reflect

actual performance. As additional information about the M&A and its success

or failure becomes known, it is usually assimilated by the market and the valueof the firm is affected (Datta et al., 1992).


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Studies examining socio-cultural integration outcomes, such as employee

satisfaction, voluntary turnover, and acculturative stress. These variables capturethe degree of conflict and strain at the socio-cultural level and can thus

be considered an important dimension of M&A success and failure from the

perspective of the employees and the organization as a whole.

Next, we will summarize the key findings of studies that examined the impact of

cultural differences on the three types of M&A outcome measures.

Impact of Cultural Differences on

Accounting-Based Performance Measures

We identified 18 studies that examined the impact of cultural differences on

accounting-based measures of post-acquisition performance. Table 1 summarizes

the key findings of these studies. Consistent with the cultural distance hypothesis,

eight of the studies found a negative relationship between cultural differences

and M&A performance. Organizational cultural differences were found to be

negatively related to various accounting measures in samples of domestic M&A

(Datta, 1991; Datta, Grant & Rajagopalan, 1991; Weber & Pliskin, 1996).

A negative relationship between organizational cultural differences and post-acquisition performance could be observed under conditions of low and high

integration levels (Datta, 1991), and was most pronounced when the degree

of autonomy given to the target firm was low (Datta et al., 1991). Consistent

with Datta et al. (1991), Very, Lubatkin, Calori and Veiga (1997) found

that cultural incompatibility had the most negative impact on post-acquisition

performance when autonomy was removed from the target. In contrast, Schoenberg

(1996), in a study of cross-border acquisitions, found that cultural differences

were negatively associated with post-acquisition performance regardless of the

integration approach taken. This negative relationship could only be observed foracquisitions in the service industry but not in manufacturing.

Contraryto expectations, several studies revealed a positive relationship between

cultural differences and M&A performance. Krishnan et al. (1997), in a study of

domestic acquisitions, found organizational cultural differences to be positively

related to accounting-based measures of post-acquisition performance. This is

consistent with a study conducted by Zollo (2002), who found that organizational

cultural differences were significantly and positively associated with accounting

returns of the combined organization, measured over a three year period. In a

similar vein, Morosini, Shane and Singh (1998), in a survey of cross-borderacquisitions, found that national cultural differences enhanced post-acquisition


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Table 1. Studies Examining the Impact of Cultural Differences on

Accounting-Based Measures.Author(s) and

Year

Sample Cultural

Dimension

Performance

Measure

Impact of

Cultural

Differencesa

Moderator(s)

Identifiedb

Anand, Capron

and Mitchell

(2003)

Mixed Domestic vs.

cross-border

Performance

index

n.s. /

Barkema, Bell

and Pennings

(1996)

Cross-

border

Hofstede

index

Return on

equity

Pos.c /

Buhner (1991) Mixed Domestic vs.cross-border

Profitability Neg. Ownercontrol

Datta (1991) Domestic Differences in

management

style

Performance

index

Neg. /

Datta, Grant and

Rajagopalan

(1991)

Domestic Management

style incom-

patibility

Performance

index

Neg. Degree of

target

autonomy

removal

Krishnan, Miller

and Judge

(1997)

Domestic Dissimilarities

in functional

backgroundsbetween top

management

teams

Return on

assets

Pos. /

Larsson and

Finkelstein

(1999)

Mixed Management

style

dissimilarity

Synergy

realization

n.s. Integration

leveld

Domestic vs.

cross-border

n.s. Employee

resistanced

Larsson and

Risberg

(1998)

Domestice Corporate

cultural

differences

Synergy

realization

n.s.f /

Cross-

borderePos.f

Lubatkin,

Calori, Very

and Veiga

(1998)

Mixed Domestic vs.

cross-border

Growth in

sales

n.s. /

Morosini, Shane

and Singh

(1998)

Cross-

border

Hofstede

index

Growth in

sales

Pos. /

Schoenberg

(1996)

Cross-

border

Differences in

managementstyle

Performance

index

Neg. Industry


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Table 1. (Continued)

Author(s) andYear

Sample CulturalDimension

PerformanceMeasure

Impact ofCultural

Differencesa

Moderator(s)Identifiedb

Schoenberg

(2004)

Cross-

border

Differences in

management

style

Performance

index

Neg.g Cultural

measures

Integration

Approach

Stahl,

Kremershof

and Larsson(2004)

Mixed Organizational

cultural

differences

Sales

growth and

realizedprofits

Neg. Trust

Very, Lubatkin

and Calori

(1996)

Mixed Domestic vs.

cross-border

Performance

index

n.s. Nationality

of target

Very, Lubatkin,

Calori and

Veiga (1997)

Mixed Cultural in-

compatibility

Performance

index

Neg. Degree of

target

autonomy

removal

Nationality

of Target

Weber (1996) Domestic Corporatecultural

differences

Return onassets

n.s. Degree of target

autonomy

removal

Weber and

Pliskin (1996)

Domestic Corporate

cultural

differences

Performance

index

Neg. /

Zollo (2002) Mixed Corporate

cultural

differences

Performance

index

Pos. /

Notes:a

Neg.=

negative and statistically significant; n.s.=

non-significant; Pos.=

positive andstatistically significant; b/= no moderator identified; c Based on data of acquisitions only

(joint-ventures were excluded); data was provided by first author on request; d Mediated effect

(see text); e Results separately reported for sub-samples; fNo significance levels reported, but

differences were considered meaningful by authors; g Differences in attitude towards risk were

negatively related to performance; differences in other dimensions of management style were

unrelated to performance.

performance by providing access to the targets or acquirers diverse set of routines

and capabilities.

Other studies found cultural differences to be unrelated to accounting-basedperformance measures, but found evidence of mediating or moderating effects. For


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example, Weber (1996), in a study of U.S. M&A in banking and manufacturing,

observed a moderating effect of autonomy removal on the relationship betweencultural differences and target firms financial performance. The same study found

a positive effect of autonomyremoval on financial performance but a negative effect

on commitment, suggesting that related mergers with higher levels of autonomy

removal outperform related mergers with lower autonomy removal in spite of the

associated human resource problems (pp. 11971198). Other studies suggest that

integration process variables such as the level of integration or the use of social

integration mechanisms may mediate the effects of cultural differences on M&A

performance. For example, Larsson and Finkelstein (1999) found that the effects

of organizational cultural differences on synergy realization were mediated by

the level of organizational integration and employee resistance, suggesting that

cultural differences affect M&A performance primarily through the process of

socio-cultural integration.

Impact of Cultural Differences on Stock Market-Based

Performance Measures

As in the review of studies of accounting-based performance measures, no

clear pattern of effects emerged from the review of studies that examined theimpact of cultural differences on stock market performance. Table 2 summarizes

the results of the 13 studies identified through the literature search. Only two

of them found evidence of a negative impact of cultural differences on stock

market returns. Datta and Puia (1995) found acquiring firms cumulative excess

returns to be negatively associated with national cultural distance in a sample

of cross-border acquisitions. Chatterjee, Lubatkin, Schweiger and Weber (1992),

in a study of domestic acquisitions, observed a negative relationship between

organizational cultural differences and acquiring firms cumulative abnormal

returns. Interestingly, acquirers multiculturalism (i.e. the degree to which theacquirer tolerates the acquired firms culture) was positively related to abnormal

returns, suggesting that the degree of cultural tolerance exhibited by the acquirer

may be more important in determining the success of an acquisition than pre-

acquisition cultural differences.

In direct contradiction to the cultural distance hypothesis, six studies found a

positive relationship between cultural differences and stock market performance.

For example, in a study by Harris and Ravenscraft (1991), target firms cumulative

abnormal returns were higher in cross-border acquisitions than in domestic ones,

suggesting that national cultural differences do not always have a negative impacton M&A performance. This is consistent with Swenson (1993), Wansley, Lane


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Table 2. Studies Examining the Impact of Cultural Differences on Stock

Market-Based Measures.Author(s) and

Year

Sample Cultural

Dimension

Performance

Measure

Impact of

Cultural

Differencesa

Moderator(s)

Identifiedb

Bessler and

Murtagh

(2002)

Mixed Domestic

vs.

cross-border

Cumulative

abnormal

returns

n.s. Industry

Buhner (1991) Mixed Domestic

vs.

cross-border

Cumulative

abnormal

returns

Pos. Owner control

Acquisition

experience

Chatterjee,Lubatkin,

Schweiger

and Weber

(1992)

Domestic Corporatecultural

differences

Cumulativeabnormal

returns

Neg. /

Datta and Puia

(1995)

Cross-border Hofstede

index

Cumulative

excess

returns

Neg. /

Dewenter (1995) Mixed Domestic

vs.

cross-border

Cumulative

abnormal

returns

n.s. Hostile target

maneuvering

Rival bidders

Eddy and Seifert(1984)

Mixed Domesticvs.

cross-border

Stock pricesand

dividends

n.s.c /

Harris and

Ravenscraft

(1991)

Mixed Domestic

vs.

cross-border

Average bid

premiums

Pos. Industry

Strength of

acquirers home

currency relative

to the dollar

Markides and

Ittner (1994)


index

Cumulative

abnormal

returns

n.s. /

Markides andOyon (1998)

Cross-border Masculinity Cumulative n.s. / Abnormal

returns

Olie and

Verwaal

(2004)


index

Cumulative

abnormal

returns

Pos. Host country

experience

Swenson (1993) Mixed Domestic

vs.

cross-border

Cumulative

abnormal

returns

Pos. Target growth

rate

Targets

price-earnings

ratio

Likelihood ofcompetition


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Table 2. (Coninued)

Author(s) andYear

Sample CulturalDimension

PerformanceMeasure

Impact ofCultural

Differencesa


Wansley, Lane

and Yang

(1983)

Mixed Domestic

vs.

cross-border

Cumulative

abnormal

returns

Pos. /

Zollo (2002) Mixed Corporate

cultural

differences

Cumulative

abnormal

returns

Pos. Time of

measurement

Notes:a

Neg.=

negative and statistically significant; n.s.=

non-significant; Pos.=

positive andstatistically significant; b/= no moderator identified; c The original study reported a non-

significant effect based on estimated beta coefficients for a market model; however, based on

the reported meandifferences,a negative and significant correlational effect size was calculated.

and Yang (1983), and Olie and Verwaal (2004), whose findings suggest that cross-

border acquisitions may generate higher returns than domestic ones. However,

several studies (e.g. Dewenter, 1995; Eddy & Seifert, 1984; Markides & Ittner,

1994) found acquirers stock market performance to be unrelated to national

cultural differences, thus making it impossible to draw any firm conclusion about

the relationship between cultural differences and stock market returns.In interpreting these findings, it is important to note that seven of the

thirteen studies that examined the impact of cultural differences on stock market

performance used a dichotomous measure of domestic versus cross-border M&A

as a proxy for national cultural differences. In these studies, the effects of national

cultural differences are confounded with the effects of other variables on which

international M&A differ from domestic ones. Rather than assuming a causal

effect of cultural differences on stock market returns, a more likely explanation is

that the investment communities evaluate cross-border M&A differently (in some

instances, more favorably) than domestic deals, e.g. because they open up newforeign market opportunities, provide greater economies of scale, and so forth.

Impact of Cultural Differences on Socio-Cultural Integration Outcomes

Table 3 summarizes the results of 14 studies that examinedthe relationship between

cultural differences and socio-cultural integration outcome variables, such as

employee stress, commitment, and voluntary turnover. Only one of them (Krishnan

et al., 1997) found unambiguous evidence of a positive relationship betweencultural differences, measured in terms of dissimilarities in functional backgrounds


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Table 3. Studies Examining the Impact of Cultural Differences on

Socio-Cultural Integration Outcomes.Author(s) and Year Sample Cultural

Dimension

Performance

Measure

Impact of

Cultural

Differencesa

Moderator(s)

Identifiedb

Krishnan, Miller

and Judge

(1997)

Domestic Dissimilarities

in functional

backgrounds

between top

management

teams

Top management

turnover

Pos. /

Krug and Hegarty

(1997)

Mixed Domestic vs.

cross-border

Top management

turnover

Neg. Combination year

Krug and Hegarty

(2001)

Mixed Domestic vs.

cross-border

Top management

turnover

Neg.c Relative standing

of target executives

Krug and Nigh

(1998)

Cross-Border Hofstede

Index

Top management

turnover

Neg. International and

country-specific

acquisition

experience

Larsson and

Finkelstein

(1999)

Mixed Management

style

dissimilarity

Employee

resistance

Neg. /

Domestic vs.

Cross-border

Neg.

Larsson and

Lubatkin (2001)

Mixed Domestic vs.

cross-border

Degree of

acculturation

n.s. Nationality of

acquirer

Larsson and

Risberg (1998)

Domesticd Corporate

cultural

differences

Degree of

acculturation

Neg.e /

Cross-borderd Employee

resistance

Neg.e

Degree of

acculturation

Pos.e

Employee

resistance

Neg.e

Lubatkin,

Schweiger and

Weber (1999)

Domestic Corporate

cultural

differences

Top management

turnover

Neg. Combination year

industry

Schoenberg (2004) Cross-border Differences in

management

style

Top management

turnover

Neg.c /

Stahl, Kremershof

and Larsson

(2004)

Mixed Organizational

cultural

differences

Trust, job

satisfaction,

commitment,

acceptance of

change, intention to

stay, willingness to

cooperate, Job

performance, and

opencommunication

Neg. /


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Table 3. (Continued)

Author(s) and Year Sample CulturalDimension

PerformanceMeasure

Impact ofCultural

Differencesa


Van Oudenhoven

and van der

Zwee (2002)

Cross-border National and

corporate

cultural

differences

Cooperation

success

Neg.g Country-specific

acquisition

experience

Very, Lubatkin and

Calori (1996)

Mixed Domestic vs.

cross-border

Acculturative stress n.s. Attractiveness of

acquirers culture

Weber (1996) Domestic Corporate

cultural

differences

Effectiveness of

integration process

Neg. /

Top management

commitment

Neg.

Weber, Shenkar

and Raveh

(1996)

Domesticd Corporate

cultural

differences

Top management

commitment,

cooperation, stress,

and negative

attitudes toward

organization

Neg. Degree of target

autonomy removal

Cross-borderd Corporate

cultural

differences

Pos.

Hofstede

dimensionsf

Pos.

Notes: a Neg. = negative and statistically significant; n.s. = non-significant; Pos. = positive and

statistically significant; b/= no moderator identified; c Data provided by the author(s) on

request; d Results separately reported for sub-samples of study; e No significance levels

reported, but differences were considered meaningful by authors; fThe four Hofstede

dimensions were analyzed separately; g Based on data of acquisitions only (joint-ventures

and strategic alliances were excluded); data was provided by first author on request.

between the top management teams of the two companies, and socio-cultural

integration outcomes (in this case, top management turnover). Weber, Shenkar

and Raveh (1996) found national cultural differences to be positively associatedwith various aspects of the socio-cultural integration process in a sample of cross-

border M&A, but found organizational cultural differences to be negatively related

to socio-cultural integration outcomes in a sample of domestic M&A. The same

pattern emerged in a case survey conducted by Larsson and Risberg (1998). Largely

consistent with these findings, Very et al. (1996), in a study of acculturative stress in

European cross-border M&A, observed that national cultural differences elicited

perceptions of attraction rather than stress, depending on the nationalities of the

buying and acquiring firms.

As indicated by Table 3, the bulk of empirical studies found a negativerelationship between cultural differences and socio-cultural integration outcomes.


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For example, Weber (1996), in a study of U.S. acquisitions, found that differences

in corporate culture were negatively associated with target firm managers levelof commitment and the perceived effectiveness of the integration process. Largely

consistent with Weber (1996), research conducted by Larsson and his colleagues

suggest that differences in organizational culture lead to employee resistance and

poor acculturation outcomes, and may thus create obstacles to synergy realization

(Larsson & Finkelstein, 1999; Larsson & Risberg, 1998).

A sizable number of studies have documented a negative effect of cultural

differences on top management turnover. Lubatkin, Schweiger and Weber (1999)

found that organizational cultural differences were associated with higher top

management turnover in the first year after acquisition. Krug and his colleagues

observed a similar effect in both domestic and cross-border acquisitions (Krug &

Hegarty, 1997, 2001; Krug & Nigh, 1998). In general, executives were more likely

to depart when their firm was acquired by a foreign firm, as opposed to a domestic

firm. The negative impact of cultural differences on turnover was less pronounced

in the short-term when the acquirer had international acquisition experience, and

it was less pronounced in the long-term when the acquirers acquisition experience

was in the targets home country (Krug & Nigh, 1998). However, cultural distance

was only one of several factors that affected turnover in these studies. For example,

executives were more likely to stay when they were offered challenging positions

with greater status and when they viewed the long-term effects of the combinationto be positive (Krug & Hegarty, 2001).

Interestingly, the accumulated research evidence suggests that in cross-border

M&A, cultural differences may have a positive effect on aspects of the socio-

cultural integration process such as the cultural sensitivity and tolerance exhibited

by the acquiring firm managers (Larsson & Risberg, 1998; Very et al., 1996; Weber

et al., 1996). In contrast, (organizational) cultural differences were generally found

to have a negative impact in domestic settings. The only exception is the Krishnan

et al. (1997) study, which used a cultural distance measure that is incompatible with

the ones used in other studies, namely dissimilarities in functional backgroundsbetween top managers. These findings support the conclusion that national cultural

differences are more salient than organizational cultural differences, thereby

increasing managers awareness of the significance of cultural factors in the

integration process and possibly leading to more culturally sensitive integration

management (Larsson & Risberg, 1998; Schweiger & Goulet, 2000; Teerikangas

& Very, 2003).

In summary, the foregoing research review suggests that cultural differences are

more closely associated with socio-cultural integration outcomes than financial

performance measures. However, it is important to note that the studies includedin the literature review differ widely in terms of sample characteristics, geographic


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regionscovered, methodologies used, dimensions of cultural differences examined,

and degree of control for potential moderators, thereby making it difficult to drawany firm conclusion about the impact of cultural differences on M&A outcomes.

IMPACT OF CULTURAL DIFFERENCES ON MERGER

AND ACQUISITION PERFORMANCE TENTATIVE

EXPLANATIONS AND AN INTEGRATIVE MODEL

Several possible explanations for the lack of consensus that emerged from previous

research on the performance impact of cultural differences in M&A have been

offered (e.g. Cartwright, 1997; Gertsen et al., 1998; Schoenberg, 2000; Schweiger

& Goulet, 2000), and sources of complexity underlying the culture-performance

relationship in M&A have been discussed (Teerikangas & Very, 2003). Building

on and extending this research, we will offer several explanations for the anomalies

observed in previous research on the performance impact of cultural differences

in M&A and develop a framework that synthesizes our current understanding of

the role of culture in M&A.

The Impact of Cultural Differences Depends on

the Outcome Variable Examined

M&A performance can be assessed in various ways. While the majority of

existing post-acquisition performance research uses stock market-based measures,

researchers have also relied on accounting measures to evaluate post-acquisition

performance (see Datta et al., 1992; King et al., 2004 for meta-analyses). Recently,

M&A researchers have called for a more inclusive definition of M&A success

that also encompasses non-financial variables in order to overcome some of

the problems associated with accounting- and stock market-based measures, tofacilitate cumulating research across disciplines, and to bring the dependent

variable of interest closer to the phenomenon under investigation (Larsson &

Finkelstein, 1999; Schweiger & Walsh, 1990). For the purpose of this review,

we expanded the definition of M&A success to include socio-cultural integration

outcome measures. They capture the degree of conflict and strain at the socio-

cultural level and represent an often neglected, but critical indicator of M&A

success and failure from the perspective of the employees and the organization as

a whole.

Accounting-based performance measures, stock market returns, and socio-cultural integration outcome measures represent very different dimensions of


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M&A success. How the investment communities react to the announcement of a

merger or an acquisition may differ significantly from the reactions of employeesor customers if for no other reason than the interests of these constituencies are

different, and sometimes at odds. Also, these measures vary in terms of unit of anal-

ysis (individuals or groups versus the organization), the objectivity and reliability

of measurement (self-report measures or objective data), and time of measurement

(assessed shortly or some time after the announcement). Thus, they may share little

commonvariance. Of thethree categories of M&Aoutcome variables considered in

the present research review, socio-cultural integration outcomes were the ones most

strongly and consistently related to cultural differences. In contrast, accounting-

and stock market-based measures of post-acquisition performance showed no clear

pattern of correlations with cultural differences. This finding is not surprising, as

socio-cultural integration outcomes are much closer to the phenomenon under

investigation than financial performance measures.

Cultural Issues Cannot be Viewed in Isolation from Other Variables

M&A performance may be subject to many other influences aside from those that

arise from cultural differences. Variables that potentially moderate the relationship

between cultural differences and M&A performance, and that must be controlledfor in studies of the performance impact of cultural differences in M&A, include the

degree of relatedness and the integration level chosen (e.g. Datta, 1991; Larsson

& Lubatkin, 2001), differences in power and size (e.g. Larsson & Finkelstein,

1999; Schoenberg, 1996), the degree of retained autonomy on the part of the

acquired firm (e.g. Datta & Grant, 1990; Haspeslagh & Jemison, 1991), the mode

of takeover (e.g. Hambrick & Cannella, 1993; Stahl, Chua & Pablo, 2003), prior

acquisition experience of the acquirer (e.g. Finkelstein & Haleblian, 2002; Singh

& Zollo, 2004), and the interventions chosen to manage cultural differences (e.g.

Cartwright & Cooper, 1996; Stahl, Pucik, Evans & Mendenhall, 2004).Based on the present research review, the single most important factor

influencing the relationship between cultural differences and M&A performance

is the degree of relatedness between the acquiring firm and the acquired firm,

which, in turn, determines the level of integration, the extent of inter-firm contact,

and the degree of retained autonomy and change in the acquired firm (Pitkethly,

Faulkner & Child, 2003). M&A can be part of a strategy of related diversification

in which the acquired business is expected to provide new resources, product

lines, and managerial expertise, or foster growth through unrelated diversification

with no intention of achieving synergies (Chatterjee et al., 1992; Haspeslagh &Jemison, 1991; Larsson & Finkelstein, 1999). While more closely related M&A


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usually require a higher degree of operational integration, integration efforts in

unrelated M&A tend to be minimal. Cultural differences are unlikely to be ascritical an issue for M&A that require low levels of integration due to minimal

interdependencies between the acquiring and target firms businesses (Javidan &

House, 2002; Larsson & Lubatkin, 2001).

Shift in Focus from the Initial Conditioning Factors

to the Integration Process

With a few notable exceptions, the theoretical models and empirical studies

reviewed in this chapter have taken a rather static approach to understanding the

role of culture in M&A. In focusing on either pre-acquisition cultural differences

or the situation at the time of the takeover, these models and studies essentially

treat integration as a black box. In contrast, relatively little attention has been

paid to the dynamics of the integration process and the potentially critical role that

the acquirers integration decisions and actions play in determining the success

of an M&A.

A process perspective on M&A (Birkinshaw, Bresman & Hakanson, 2000;

Haspeslagh & Jemison, 1991; Jemison & Sitkin, 1986) suggests that the extent

to which projected synergies are realized in an M&A depends on the ability ofthe acquirer to manage the integration process in an effective manner. One of the

implications of this perspective is that the strategic, financial and organizational

conditioning factors at the time of the merger or acquisition including cultural

differences can only predict the long-term success if integration process variables

are taken into consideration. While factors such as buyer strategy, acquisition

premium paid, or organizational fit determine the value creation potential of an

M&A, the acquirers integration decisions and actions determine the extent to

which that potential is realized (Morosini, 1998; Stahl, Mendenhall, Pablo &

Javidan, 2005). Future research on the performance impact of cultural differencesin M&A and management practice as well would benefit from opening up

the black box and paying greater attention to the integration processes and

management actions that affect M&A success and failure.

Culture as a Multi-Level Construct and Emergent Process

The use of non-traditional concepts of culture and multiple measures of cultural

differences has consistently been encouraged by M&A scholars (e.g. Gertsen et al.,1998; Teerikangas & Very, 2003; Vaara, 2003) to improve the understanding of


20/32


how various dimensions and levels of culture interact in influencing the integration

process in M&A. Despite the call for a more sophisticated conceptualizationof culture and a more fine-grained analysis of cultural differences, the bulk of

empirical research relies on a rather simplistic and one-dimensional approach

to understanding the performance implications of cultural differences in M&A.

Practically all of the studies reviewed in this chapter focused on organizational

or national cultural differences (or sometimes both), but few studies looked at

other dimensions of cultural differences. This is despite evidence that differences

in professional, functional, and industry cultures play a critical role in the M&A

process (David & Singh, 1994; Schweiger & Goulet, 2000).

The majority of existing M&A integration research has adopted the notion

of a monolithic and stable culture, implicitly assuming that all members of

an organization share the same cultural orientation and that this orientation

is relatively stable over time. M&A researchers have recently challenged both

of these assumptions (e.g. Gertsen et al., 1998; Kleppest, 2005; Schreyogg,

2005; Vaara, 2002), arguing instead that culture is an essentially dynamic and

emergent phenomenon that comes into existence in relation to and in contrast

with another culture, and that each organization consists of numerous individuals

with distinct self-identities that are socially and contextually produced. A more

sophisticated understanding of culture in research on the performance impact

of cultural differences in M&A would require researchers to focus on multiplelevels of analysis, pay attention to the interplay between different culture levels,

acknowledge the existence of subcultures within merging organizations, and

conceptualize culture as a dynamic and emergent phenomenon.

Towards an Integrative Framework

The model depicted in Fig. 1 synthesizes theoretical perspectives and empirical

findings on the role of culture in M&A. It accounts for some of the complexityunderlying the culture-performance relationship in M&A and can guide future

research by delineating the main mechanisms through which cultural differences

may affect M&A performance. Although it is rooted in a predominantly function-

alist and objectivist understanding of culture as a relatively stable system of norms,

values, and patterns of behavior, it recognizes the existence of multiple layers or

dimensions of culture andcaptures some of the dynamics of the integration process.

The model builds on a conceptual split between the sub-processes of task

integration (or value creation), measured in terms of transfers of capabilities

and resource sharing between the acquiring and the acquired firm (Birkinshawet al., 2000); and socio-cultural integration (or human integration), which involves


21/32


Fig. 1. Framework for Studying the Role of Culture in Mergers and Acquisitions. Note:Dotted arrows indicate moderating effects.

generating satisfaction, commitment and a shared identity among the employees

from both companies (Birkinshaw et al., 2000; Shrivastava, 1986). Proceeding

from left to right, it proposes that cultural differences affect M&A performance

through their impact on task integration and socio-cultural integration. Previous

research has shown that effective management of these integration sub-processes

is critical in determining the extent to which envisaged synergies can be reaped

(Haspeslagh & Jemison, 1991; Hitt et al., 2001; Morosini, 1998). To the extentthat information about the post-acquisition financial performance, as reflected in

accounting measures such as sales growth and return on assets, is assimilated by

the market, the sub-processes of task integration and socio-cultural integration

may also affect stock market returns (Datta et al., 1992).

Although task integration and socio-cultural integration are conceptually

distinct, they are not independent of one another. Aspects of socio-cultural

integration such as employee commitment, trust, and shared identity facilitate the

transfer of strategic capabilities and resource sharing (Birkinshaw et al., 2000).

Successful task integration, in turn, is likely to enhance employee satisfaction,commitment, and the quality of the interpersonal relationships between the


22/32


members of the combining organizations (Haspeslagh & Jemison,1991; Schweiger

& Goulet, 2000). At the same time, it is possible for task integration andsocio-cultural integration to diverge, for example, when synergies are realized

at the expense of the employees (Cartwright & Cooper, 1996; Marks &

Mirvis, 2001).

The M&A integration process is subject to several other factors aside from those

that arise from cultural differences. The model depicted in Fig. 1 proposes that the

sub-processes of task integration and socio-cultural integration are affected by a set

of conditioning factors, particularly ones related to the nature of the relationship

between the acquirer and the target, as well as integration process variables that

are directly related to the acquirers integration decisions and actions. Research

evidence indicates that factors such as prior acquisition experience of the acquirer

(Finkelstein & Haleblian, 2002; Singh & Zollo, 2004), the mode of takeover or

social climate surrounding the acquisition (Hambrick & Cannella, 1993; Hitt et al.,

2001), the pattern of dominance between the acquiring and the acquired firm

(Jemison & Sitkin, 1986; Pablo, 1994), the socialization mechanisms used by the

acquirer (Birkinshaw et al., 2000; Larsson & Lubatkin, 2001), and the quality and

quantity of communication (Schweiger & DeNisi, 1991; Stahl & Sitkin, 2005) are

all likely to affect the extent to which synergies are realized and a shared identity

is established in M&A.

In addition to the proposed direct effects on task integration and socio-culturalintegration, the conditioning factors and integration process variables proposed

by the model constitute potential moderators of the relationship between cultural

differences and integration outcomes. Factors such as the degree of relatedness

between the acquiring and the acquired firm, differences in power and size, and

the mode of takeover or social climate surrounding an acquisition are likely to

moderate the effects of cultural differences on task and socio-cultural integration

outcomes. For example, there is evidence to suggest that the potentially negative

effects of cultural differences on trust building and the creation of a shared identity

are augmented by hostile takeover tactics and imposition of control by the acquirer(Angwin, 2001; Datta & Grant, 1990; Stahl, Chua & Pablo, 2003).

Interestingly, the theoretical perspectives and empirical findings reviewed in this

chapter suggest that cultural differences, if properly understood and managed, can

be an asset rather than a liability in M&A, and that cultural differences may affect

the sub-processes of task integration and socio-cultural integration in different

ways. National cultural differences, which are more salient than organizational

cultural differences, may increase the awareness of the significance of cultural

factors in the integration process and lead to more culturally sensitive integration

management (e.g. greater use of social integration mechanisms, lower levels ofimposed control, etc.). In addition, national cultural differences may enhance the


23/32


combination potential and boost performance by providing access to the targets

or acquirers diverse set of practices and capabilities (Morosini et al., 1998). Forexample, Olie and Verwaal (2004) found that acquisitions in unfamiliar markets

can trigger new solutions, foster innovation and enhance the development of

technological skills. Thus, cultural differences can be a source of value creation and

learning in M&A, but they can also create obstacles to reaping projected synergies

by exacerbating social integration problems and diminishing the firms capacity

to absorb capabilities from the other party (Stahl, Bjorkman & Vaara, 2004).

CONCLUSION

This chapter provided a review of theoretical perspectives and empirical research

on the role of culture in M&A, with a particular focus on the performance

implications of cultural differences in M&A. Consistent with the cultural

distance hypothesis and extant cultural fit and acculturation models, empirical

evidence indicates that national and organizational cultural differences are often

associated with negative outcomes at the socio-cultural level, such as increased

top management turnover, reduced employee commitment, and acculturative

stress. However, the impact of cultural differences on post-acquisition financial

performance is less clear. While some studies found cultural differences tobe negatively associated with accounting- or stock market-based performance

measures, others observed a positive relationship or found cultural differences

to be unrelated to post-acquisition performance.

These findings lead us to conclude that the relationship between cultural

differences andM&Aoutcomes is more complex than previously thought. Whether

cultural differences have a positive or a negative impact on M&A performance, or

any performance impact at all, depends on the performance measures examined

and is also likely to depend on the nature and extent of cultural differences,

the integration approach taken, the interventions chosen to manage culturaldifferences, and a variety of other factors. Rather than asking ifcultural differences

have a performance impact in M&A, future research endeavors should focus on

how cultural differences affect the integration process, and what other factors

facilitate or constrain successful socio-cultural and task integration in M&A.

ACKNOWLEDGMENTS

We extend our gratitude to Harry Barkema, Ingmar Bjorkman, Chei HweeChua, Olivier Irrmann, Philip Goulet, Eero Vaara and Yaakov Weber for their


24/32


helpful comments on earlier drafts of this paper. We would also like to thank

Harry Barkema, Laurence Capron, Jeffrey Krug, Constantinos Markides, RichardSchoenberg, and Maurizio Zollo for providing us with unpublished data for

inclusion in the research review.

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APPENDIX

Theoretical Perspectives on the Role of Culture in Mergers and Acquisitions

Author(s) Basic Assumptions Proposed Impact of Cultural

Differences

Proposed Moderators

Cartwright and

Cooper (1996)

The attractiveness and

acceptability of a

combination partners culture

is dependent on whether that

culture is perceived as

increasing or reducing

employee participation and

autonomy.

In traditional combinations

differences in organizational

culture are accepted by the

target as long as employee

autonomy is increased.

Diminishing autonomy may

result in strong employee

resistance.

Direction of cultural

change

Power differential

The success of traditional

combinations depends on

accepted assimilation; that of

collaborative combinations

(e.g. mergers of equals) on

smooth integration.

Cultural differences in

collaborative combinations are

supposed to lead to integration

problems no matter what the

direction of cultural change is.

The greater the dissimilarity

between cultural types, the

longer the integration period.

David and Singh(1994)

Strategic, legal, and culturalissues can be integrated in a

multi-level system of sources

and loci of cultural

differences to determine the

degree of acquisition cultural

risk.

Cultural distance can

originate from differences in

organisational, professional,

or national culture.

Post-acquisition cultural riskvaries depending on several

contingencies, e.g. divisions

and functions of the target

firm. Post-acquisition regimes

imposed on the target by the

acquiring firm have a

significant influence on

integration outcomes as

perceptions of injustice

(relative deprivation) can

easily lead to employee stress

and resistance.

External conditions(e.g. legal systems)

Integration level

Integration mode

Post-acquisition

regime of acquirer

Cultural risk of target

firm operations

Elsass and Veiga

(1994)

Organizational acculturation

can be described as dynamic

interaction between the

opposing forces of cultural

differentiation (the desire of

groups to maintain their

cultural identity), and

organizational integration

(the organizational need for

cultural groups to work

together).

Cultural differences between

combining organizations

strengthen the forces of

cultural differentiation, which

tend to resist the

post-combination integration

forces.

Degree of acculturative

tension

The resulting acculturative

t

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