Why intercultural competence is decisive for M&A success
Cultural differences are often the blind spot in international M&A processes. If you underestimate the human factor, you risk a lot – and gain little.
By Petra Fischer, M&A Partner at Translink Corporate Finance in Germany, in conversation with Christina Röttgers, Culture Expert
Many M&A deals fail, not because of strategy or financial risks, but because the people involved lack the knowledge and sensitivity to deal with cultural differences. The cultural factor is not a soft factor, but a strategic success factor. Differences in leadership, communication, target setting and decision-making have a direct impact on day-to-day business.
International transactions bring together different national, regional and company-specific cultures. What harmonises well in the initial discussions between individuals can later lead to massive friction within the groups in the post-merger phase. Different perceptions of delegation, control and dealing with conflicts have a particular impact on cooperation.
What many people don’t realise is that the cost of building a cultural bridge can be estimated and priced in even before the M or A is reached.
As the national culture has a significant influence on the organisational culture, it makes sense to involve a culture expert in the potential transaction. Petra Fischer, our M&A consultant at Translink Corporate Finance Germany, therefore asked Christina Röttgers, who has been a consultant for intercultural competence since 2005, advising across over 25 countries worldwide, for her insights on cultural integration.
PF: How do national cultures influence the cultures of organisations?
CR: All organisations need to find answers to two questions in particular: Who has the power to decide what? And what rules and processes are followed to achieve the desired goal? The answers to these questions are largely determined by an organisation’s national culture of origin. Geert Hofstede has described these topics as dimensions and, thus, made cultural differences measurable and comparable.
In national cultures, for example, we recognise higher or lower power distance – the extent to which people accept or expect power to be distributed unequally. From this, we can deduce whether decisions are made solely at the top of a company and, above all, whether tasks are delegated or whether decisions are also made at other levels. A higher or lower level of uncertainty avoidance (the extent to which people feel threatened by ambiguous situations and have created beliefs and institutions to avoid these situations) explains, among other things, the need for more or less structure and categorisation, and the degree of acceptance for disruptive action, innovation and risk. This aspect plays a central role in change management.
Combining higher and lower power distance and higher and lower uncertainty avoidance results in four implicit organisational models for country groups worldwide, from which many potential challenges for M&As can already be forecasted.
PF: How do the dimensions affect takeovers or mergers in concrete terms?
CR: The greatest effects can be attributed to differences in power distance. Different management styles and the associated vertical communication channels are decisive for this. For example, there are many countries where a matrix structure does not work well, yet Western acquirers often try to introduce it
Power distance also plays a major role in the purchase negotiations, insofar as the decision-making powers at the various levels often are not comparable.
Cultural preferences regarding communication are also particularly important. If the parties communicate with a lot or little context, this can have a significant impact on the negotiations: how the meetings are held, how much time is allowed for informal familiarisation and informal discussions.
If a party comes from a less individualistic country, relationship building or, even better, pre-existing relationships are of particular importance. This aspect is sometimes described as “it is the contact, not the contract that counts.”
PF: What other cultural aspects have an influence on the integration process?
CR: The dimension of individualism has a particular impact on post-merger collaboration, for example, the question of how much trust is placed in unknown people. There are cultures that tend to grant a leap of faith at work and those where this trust must first be earned.
Another question that can be derived from the value in the achievement orientation dimension is the extent to which competition between team members is acceptable or not. Accordingly, different types of motivation are recommended.
Ultimately, all known dimensions have an influence on both the acquisition negotiations and the PMI. With cultural mapping, all aspects can be clearly identified, and suitable measures can then be defined and quantified more precisely, depending on the strategy.
PF: Intercultural differences in takeovers and mergers can cause considerable costs – both directly and indirectly. Misunderstandings, communication problems and divergent work and management cultures often lead to friction losses, employee turnover, productivity losses, and the failure of synergy effects. These ‘costs of non-integration’ have a long-term negative impact on the economic success of the merger. How can these costs be avoided? Or how can they be quantified?
CR: Firstly, these investments in intercultural competence can quickly pay for themselves through other effects. Studies show, for example, that well-managed multicultural teams, where the manager recognises and actively manages cultural differences, are more creative and innovative than monocultural teams. They also show that the top quarter of the most ethnically diverse companies are 35% more likely to be financially successful than the bottom quarter with the least ethnically diverse companies.
Secondly, the costs of developing intercultural competence at employee and organisational level cannot be avoided (either you invest or you pay the price), but they can be kept to a minimum. The following generally applies:
The earlier intercultural competence is developed, the lower the costs.
Costly decisions that do not work from a cultural perspective can be avoided. I am thinking of a specific case in which a multinational company outsourced all its bookings to Romania. The aim was to create a kind of black box: Invoices were sent there, a booking was to come out, queries were expressly undesirable in order to minimise the numerous exceptions up to that point. This much can be said: it didn’t work and was completely cancelled after a while. From a cultural perspective, this was predictable as it is essential in a country like Romania to give employees the opportunity to make queries.
On the other hand, intercultural competence should be developed as early as possible because it can then be used strategically and multiplier effects can be achieved.
The costs can be quantified more precisely if you know the intended degree of integration, the number of employees, the original cultures and the commitment of top management. Intercultural due diligence is available for this purpose. However, if the costs are planned for at an early stage, they are always only a fraction of the costs incurred due to unwanted staff turnover, for example.
PF: What is intercultural due diligence?
CR: Intercultural DD means systematically identifying and evaluating cultural differences and integrating them into the transaction strategy. This includes questions such as:
- How strong should the integration of the target company be?
What challenges can be expected due to the different national cultures in terms of management and processes? - How is the target company and the acquiring company managed?
What values and practices characterise day-to-day work? - How do they communicate – directly, indirectly, formally or informally?
What expectations are there in terms of co-operation, control and innovation?
Answers to these questions provide important insights for the integration concept – and help to avoid typical mistakes.
PF: The biggest success factor for post-merger integration?
CR: The findings from the IDD should not disappear into a drawer. They form the basis for a culturally sensitive integration strategy, e.g., through customised communication formats, leadership training or mixed integration teams. This builds cultural bridges instead of deepening rifts.
Companies that incorporate intercultural aspects into their M&A process from the outset benefit in several ways:
- More reliable cost planning in advance
- active shaping of the organisational culture by top management as a prerequisite for successful implementation
- Fewer frictional losses in operational cooperation
- Greater employee loyalty and lower staff turnover
- Faster realisation of synergies
- Realisation of the benefits of cultural diversity, such as more creativity and innovation
- Long-term cultural solidarity
Culture matters: A lack of cultural understanding can jeopardise M&A deals
Intercultural due diligence is not a soft factor, but a strategic tool and a hard reality. In a globalised economy, where cooperation across national and cultural borders is part of everyday life, the quality of cultural integration often determines the long-term success of a merger or takeover. Those who only look at balance sheet figures forget the decisive success factor; the people behind them.
Theoretical foundation – practically relevant
Scientific models such as the cultural dimensions of Geert Hofstede, E.T. Hall, Trompenaars’ cultural concepts or the GLOBE study offer well-founded approaches to making cultural differences tangible. They provide a language and structure for making soft factors measurable and comparable. Geert Hofstede was the first to write about the implicit organisational models of national cultures.
A successful intercultural assessment combines these models with practical tools: Interviews, surveys, observations or so-called culture mappings help to evaluate the actual cultural fit between buyer and target.
Translink International AG
