MANAGERIAL PREFERENCES IN INTERNATIONAL MERGER AND ACQUISITION PARTNERS REVISITED: HOW ARE THEY INFLUENCED?

Susan Cartwright and Fionnuala Price

ABSTRACT
Cross border mergers and acquisitions (M&As) are an integral part of international business. Although M&A activity is predominantly driven by a rational-economic model, cultural attitudes are likely to play a role in inuencing selection decisions and management integration practices. This Chapter reports on a study to establish whether different national managerial groups (n = 480) have similar/dissimilar attitudinal preferences towards M&As with foreign partners. Comparisons are made with an earlier study.

INTRODUCTION
The dollar value of completed mergers, acquisitions and divestitures worldwide in 2000 increased by almost 25% to more than $1.7 trillion, and set a record for the sixth consecutive year. A signicant trend in the recent pattern of merger and acquisition (M&A) activity has been the increase in foreign acquisitions. Whilst the USA continues to be a major acquirer of overseas companies, the value of these deals during the period 19912000 was signicantly less than
Advances in Mergers and Acquisitions, Volume 2, pages 8195. Copyright 2003 by Elsevier Science Ltd. All rights of reproduction in any form reserved. ISBN: 0-7623-1003-0

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the level of investment owing into the U.S. in terms of foreign acquisitions of U.S. companies. In 2000 alone, over a thousand U.S. companies were acquired by overseas buyers at a value of $340 billion. In contrast, a little over 2,000 U.S. companies were bought by foreign acquirers in a ten year period between 19781988. The U.K. has similarly seen an increase in inward foreign direct investment, mainly from the USA, Japan, Germany and France (Child et al., 2000). In 1996, foreign acquisitions of U.K. companies exceeded the combined total value of all other European Union countries (KPMG, 1997). It would seem that like their U.S. counterparts, U.K. companies are both highly acquisitive and at the same time, extremely attractive acquisition targets. The global trend in M&A activity is further supported by the increasing number and value of cross border deals in Europe (see Table 1 below). Cross border deals represent a signicant and growing aspect of global M&A activity far exceeding domestic deals in terms of average value and representing an increasing proportion of the total value of all deals done across the world 41% in 2002; compared to 24% in 1996 (KPMG, 2000). The underperformance of M&As continues to be the focal point of much debate and attention. Estimates of M&A failure range from 80% (Marks, 1988) to 50% (Hunt, 1988; Weber, 1996; Cartwright & Cooper, 1997) thus emphasising the notion that M&As invariably do not deliver what is expected in terms of increased protability or economies of scale. Whilst overall some sectors, e.g. banking and insurance, tend to record higher success rates than others in terms of enhanced shareholder value, the success of a few top

Table 1.
Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Cross Border Deals in Europe 19912000.

No. of Deals 1,097 1,030 875 1,096 1,372 1,294 1,422 1,602 2,236 2,422 Value ($ billion) 24.0 36.2 28.9 38.9 52.9 50.6 87.8 146.2 312.4 526.7

Source: Mergers and Acquisitions, 2001.

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performers often masks the failure of the majority (Financial Times, August 2000). According to a recent report (KPMG, 2000), 83% of recent deals failed to deliver shareholder value and an alarming 53% actually destroyed value. The report concludes that underperformance is the outcome of excessive focus on closing the deal at the expense of focusing on factors that will ensure its success. Hussey (1998) also cautions organisations to explore in detail the wider impact of strategies before committing to any strategic decision to acquire. According to Hussey, acquisition failure can be the outcome of any one or more of three failures of analysis: a misconceived action, failure to think through and implement actions that will enable the acquisition to deliver the intended benets or nancial over-extension. In the context of both domestic and international M&As, strategic t is obviously an important consideration in target identication. However, the recognition of synergistic potential, it would seem is no guarantee that it will be realised, particularly if there is a lack of cultural t. When Daimler and Chrysler merged in January 1999, the event was heralded as the biggest ever auto merger and the years smartest deal (Fortune, January 1999). As the partners markets scarcely overlapped the strategic t was perfect. Yet, despite the synergistic potential, within two years the combined company was worth less than Daimler Benz was before the merger and the hostile relationships between the U.S. and German management groups were widely reported in the business press (The Economist, 13 December 2000). Clearly, the challenges of marrying the entrepreneurial style of a U.S. business with the conservatism of a German company proved more difcult than was expected (Schoenberg, 2000). Experiences such as this serve to emphasise the importance of partner or target selection based on additional and different criteria from traditional practice (Jemison & Sitkin, 1986), particularly the potential problems of cultural integration. As the level of international M&A activity has increased there has been a parallel growth in the management literature on the inuence of national culture on M&A integration and outcomes, and to a lesser extent on the issue of partner/target selection. In a recent review of the literature on cross border acquisitions, Schoenberg (2000) observes that research studies conrm theoretical reasoning that the relative national cultures inuence the eventual outcome of an international acquisition. Although the interaction of organisational cultures cannot be ignored (Larsson & Risberg, 1998), it has been argued that cross border combinations between organisations with similar corporate cultures may not be sufcient if the national cultures conict. Consequently, it has been proposed

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that the challenge for leadership in cross border M&As is to successfully accommodate and integrate both national and organisational cultures i.e. to address what has been termed the double-layered acculturation process (Nahavandi & Malekzadeh, 1998). In the context of international business more generally, Zarkada-Fraser (2001) draws attention to the potential inuence of national stereotypes on international relationships and decision-making. Many studies (Diamantopoulos et al., 1995; Tse et al., 1996; Zang, 1996) have demonstrated the extent to which consumer purchase decisions are inuenced by country-of-origin (COO) or product country image (PCI) effects. The evaluative nature of stereotyping is considered to be a signicant barrier to international understanding and cooperation (Klineberg, 1964). Importantly, as a frame of reference, the emotional nature of stereotypes can often override logic and lead to irrational decisions. By their very nature, cultural stereotypes are a condensation of reality in that they simplify and over-generalise the characteristics of a societal group. In the absence of detailed knowledge and direct experience of a potential merger partner or acquisition target, stereotypes offer a means of reducing the cognitive complexity of a decision. It has been suggested (Cooper & Kirkcaldy, 1995) that the selection of suitable international partners or collaborators is inuenced, in part, by cultural stereotypes. This chapter reports on recent research conducted amongst senior-middle managers to investigate whether different national managerial groups have similar/dissimilar attitudinal preferences toward foreign M&A partners. In replicating an earlier study based on data collected in 1994 (Cartwright, Cooper & Jordan, 1995) it examines the extent to which attitudes may have changed in light of the continued growth in internationalisation.

ACCULTURATION AT THE NATIONAL LEVEL: DISTANCE AND ATTRACTIVENESS

National or societal culture is a pervasive inuence on the attitudes and behaviour of its members. The national culture in which an organisation operates will to a greater or lesser extent inuence the values, strategy, behaviours and style of work organisation that companies will adopt (Hofstede, 1980). Ethnocentrism is identied by many studies as a barrier to international management (Cartwright & Cooper, 1996; Hodjetts & Luthans, 1994) and is dened as a belief that ones way of doing things is superior to that of others. This perspective invokes cultural stereotyping and presents potential obstacles

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to the effective integration of diverse national cultures in an international business context, particularly when the goal of many M&As is to assimilate the acquired or smaller partner into the dominant culture. Stereotyping can inuence the way in which we interpret and classify behaviour we have observed and how subsequently we recall that behaviour, i.e. it can determine what we select to notice in the rst place and hence what we later remember. Stereotypical attitudes are enduring and difcult to displace because of our tendency to focus on information and behaviours which reinforce our stereotype and discount, as exceptional, that which is inconsistent. Many years ago, Dunning (1958), in a study of U.S. investment into British manufacturing companies identied the tendency of foreign parents to impose their management principles and practices on their acquisitions what is termed the foreign practice effect. Traditionally, the U.S. has preferred outright acquisition to merger or joint venturing. Jaeger (1983) also found a national culture pattern in ways in which organisations manage their cross border acquisitions. More recent evidence (Child et al., 2000) supports this foreign practice effect. In a study of over 200 U.K. acquisitions by U.S., Japanese, German, French and U.K. companies, it was found that the very process of being acquired led to signicant changes in management practices, particularly towards more performance-related rewards. However, foreign acquired companies tended to experience a wider range of changes than domestically acquired rms. Interestingly, U.S. and French acquirers exerted more inuence than Japanese or German acquirers. Furthermore, the French and German management approach did not conform to the accepted view of national management practice. In terms of selecting a compatible foreign merger partner or acquisition target, Larsson and Risberg (1998) note that organisations tend to prefer to invest in neighbouring territories or those with which they have the closest economic, linguistic and cultural ties. Schoenberg (2000) suggests that attractiveness in international M&As can be viewed in terms of cultural differences as well as cultural similarities. Whilst differences can lead to greater acculturation stress and integration difculties, cultural differences do not necessarily result in negative outcomes. In a study of 129 European cross border acquisitions Schoenberg and Norburn (1998) found that only differences in cultural attitudes towards risk negatively impacted on acquisition performance. In contradiction to Child et al. (2000), other researchers (Larsson & Risberg, 1998) have argued that cultural differences at the national level do not have such a negative impact as differences at the organisational level in domestic M&As, because there is a greater awareness and appreciation of

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national culture differences and a greater tolerance for multi-culturalism. In particular, a number of studies (Very et al., 1997; Calori, Lubatkin & Very, 1994; Cartwright & Cooper, 1993) have found irrespective of nationality if the buyers culture is perceived as being relatively less controlling then it is more likely to be perceived as being more attractive. The issue of compatibility of national cultures is frequently discussed and studied within the framework of Hofstedes (1980) and Trompenaars (1993) classications. The country indices for Power Distance, Uncertainty Avoidance, Individualism and Masculinity developed by Hofstede have provided a means of representing cultural distance between collaborating companies. Most research studies on M&As have tended to focus on the dimensions of Power Distance and Uncertainty Avoidance with equivocal results (Schoenberg, 2000). Very, Lubatkin and Calori (1998) incorporated all four dimensions into their study of the performance of U.K. and French mergers and found that French companies acquired by the British performed signicantly poorer than domestic acquisitions. However, overall the results were not straightforward, making it difcult to generalise. The results of the survey conducted in 1994 (Cartwright, Cooper & Jordan, 1995) on which the following study is based, found that the mainly Northern European sample of managers showed stronger preferences for merging with other Northern European and American organisations. In addition, they ranked Japan, Italy and Spain amongst their least preferred partners. In terms of Hofstedes (1980) classication, Northern European countries and the USA tend to cluster in terms of their orientation towards individualism as opposed to collectivism which is highly characteristic of both Japan and Spain. Furthermore, the preferences expressed were found to map the pattern of actual M&A activity during the previous year. Individualism pertains to societies in which ties between individuals are loose and where an individual is expected to look after his or herself and their own immediate family. Typically, the concept of I and short-term individual self-interest dominates over the wider and longer term implications of we. In contrast, collectivism pertains to societies in which individuals from birth onwards are integrated into strong cohesive groups, which throughout their lives, continue to protect them in exchange for loyalty. In a business context, this translates into very different employer-employee contracts and attitudes towards organisational relationships. In highly individualistic cultures like the USA and the U.K., this contractual relationship between employer-employee is based on supposed mutual advantage and

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reciprocal exchange. Similarly, partnerships between organisations are predominantly founded on the opportunity to capitalise on a situation of immediate strategic advantage irrespective of the quality of the interpersonal relationship between the partners. In collectivist cultures like Japan, the relationship between employer-employee is more familial and developmental with a heavier moral foundation and more linear approach to career progression. Decisions about interorganisational collaborations are carefully and extensively considered with the focus as much on the trust and ongoing quality of the relationship between the parties as the potential strategic advantage. As individualism is strongly linked to the capitalist system, M&A activity is very individualistic in cultural orientation. This apparent tendency of managers to prefer national cultures which are to be perceived to be more like us suggests that M&A selection decisions may be inuenced by an underlying desire to reduce cultural differences and avoid cultural distance. However, increased globalisation and an expansion in international management education may lead to a greater acceptance and appreciation of the potential value of cultural differences.

METHODOLOGY
The questionnaire which formed the basis of this study was adapted from the 1994 survey and consisted of three parts: (i) Biographical/organisational information: items relating to nationality of respondent, nationality of parent company, organisational activity, size and experience of M&A. (ii) Attitudinal preference this section invited respondents to place in rank order (13) their preferred/least preferred choice of foreign merger partner or acquirer and the rationale for their choice. (iii) Compatibility this section required respondents to indicate which foreign country they considered was most/least compatible in terms of managerial style. In addition, data was collected on managerial expectations concerning their organisations future involvement in M&A activity over the next three years. Following negotiation with airport authorities at a major international U.K. airport, access was granted to the Executive lounges over a two week period during summer 2001. During this period questionnaires were distributed and

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collected from business passengers awaiting ights. A total of 480 questionnaires were collected and analysed using SPSS for Windows.

RESULTS
Biographical and Organisational Information Completed questionnaires were returned by 22 different nationalities. The majority of respondents were Northern European. Not surprisingly, given that the data were collected at a U.K. airport, 45% of the sample was British (n = 217). Swedish managers comprised 11% (n = 54) of the sample as did Dutch managers (n = 51), with U.S. managers (n = 24) and Irish managers (n = 24) both accounting for 5% of the sample. The majority of the sample worked for British (25%) or American organisations (24%). As the majority of the sample (66%) worked for organisations whose nationality was different from their own, the sample could be satisfactorily described as being international. Almost three-quarters (72%) worked for very large organisations with over 1,000 employees and in the main described their responsibilities as being in the area of strategy (34%) or operations (48%). Their organisations represented a broad spectrum of industries including manufacturing, pharmaceuticals, telecoms, healthcares, energy and nancial services. As Table 2 illustrates, the respondents were representative of organisations that were highly active in M&As and were particularly acquisitive. Over half had acquired another organisation and one-third had merged during the last ve years. Furthermore, 62% indicated that it was likely/extremely likely that they would make further acquisitions within the next three years. In the same period Table 2. Type of Activity in Which Organisation Had Been Involved During the Last 5 Years (19962001).
No. Merged Acquired another organisation Been taken over Target of an unsuccessful bid Party to a joint venture Entered some other form of strategic alliance 153 276 69 33 145 159 % 32 58 14 7 30 33

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86% indicated that they expected to become involved in joint ventures/strategic alliances, while 20% expected to merge. Compared with 1994 data, the pattern indicates a further signicant increase in M&A activity. Attitudinal Preferences Table 3 shows the overall and highest ranking preference dimension choices for each of the analysed nationalities. This analysis was restricted to national groups which contained at least 10 respondents. It is notable that the total sample selected the U.S. as the most popular (28%) 1st preference, with the U.K. being a close second (25%). Forty-seven percent of German respondents chose their own nationality, a similar percentage of U.S. respondents (46%) also chose their own nationality; with 40% of U.K. respondents choosing their own nationality. All these respondents were currently working for organisations of different national parentage to their own. In 69% of cases the reasons given for their choices was perceived cultural compatibility, which was cited as being at least four times as important as market potential or management approach. Finally, an analysis was conducted to investigate the combined frequency of the 1st, 2nd and 3rd ranking. The results found that the U.S. remains the most preferred merger choice for the total sample (18%) with the U.K. again a close second (16%). However, the France (4%), German (10%) and Switzerland (5%) also entered the rankings. Table 4 shows the least preferred choices of merger partner or acquirer for the overall sample and the subset of national groups. While Japan emerged as the least preferred choice for the overall sample and the nationality subsets, it is interesting to consider the second preferences which tend to mirror the 1994 survey data. Table 3. Most Preferred Merger Partner or Acquirer.
No. of Cases Total Sample USA U.K. Danish Dutch German Irish Swedish 480 24 217 19 51 15 24 54 1st Preference U.S. U.S. U.S. U.S. U.S. German U.S. U.K.

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Table 4.

Least Preferred Merger Partner or Acquirer.

No. of Cases Least Preferred Japan Japan Japan Japan Japan Japan Japan Japan 2nd Least Preferred France France France France Italy/France France Ireland Italy/USA

Total Sample USA U.K. Danish Dutch German Irish Swedish

480 24 217 19 51 15 24 54

A range of issues relating to incompatible culture and differences in working practices, e.g. lack of directness, slow decision-making, dominate the reasons given by respondents in choosing Japan. Further analysis was conducted to investigate the combined frequency of the 1st, 2nd and 3rd rankings. The results found that Japan remained the least preferred partner followed closely by France and Italy. Finally, the results were examined using the country indices for the four dimensions developed by Hofstede (1980). Table 5 relates to the Power Distance dimension. The data shows a uniform clustering of nationalities choosing either their own nationality (hence an identical power distance rating) or nationalities with very similar positions on the Power Distance Index. It is notable that Danish managers expressed a preference for merging or being acquired by a national

Table 5.
Subset Nationality U.S. U.K. Danish Dutch German Irish Swedish Power Distance 40 35 18 38 35 28 31

Power Distance.
1st Preference U.S. U.K. U.S. U.S. German U.S. U.K. Power Distance 40 35 40 40 35 40 35

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Table 6.
Subset Nationality U.S. U.K. Danish Dutch German Irish Swedish

Individualism/Collectivism.
1st Preference U.S. U.K. U.S. U.S. German U.S. U.K. Index Score 91 89 91 89 67 89 89

Individualism/ Collectivism Index 91 89 74 80 67 70 71

culture which is associated with rather more formality and greater power distance. However, Danish culture scores very low on this dimension comparative to most other countries. It is notable that the Power Distance Index for Japan, the least preferred nationality, is 54 which is very much higher than the nationalities sampled. Table 6 presents the results in terms of the Individualism/Collectivism dimension. In the context of partner preference the results support the notion that there is a cultural attraction amongst countries which are high on individualism and an avoidance of highly collectivist cultures such as Japan which has a score of 46 on this index. Table 7 compares the results in terms of the Masculinity/Femininity dimension.

Table 7.
Subset Nationality U.S. U.K. Danish Dutch German Irish Swedish

Masculinity/Femininity.
1st Preference U.S. U.K. U.S. U.S. German U.S. U.K. Index Score 62 66 62 62 66 62 66

Masculine/ Feminine Index 62 66 16 14 66 68 5

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Table 8.
Subset Nationality U.S. U.K. Danish Dutch German Irish Swedish

Uncertainty Avoidance.
1st Preference U.S. U.K. U.S. U.S. German U.S. U.K. Index Score 46 35 46 46 65 46 35

Uncertainty/ Avoidance Index 46 35 23 53 65 35 29

The countries represented in the sample differ signicantly in their orientation on this dimension. Denmark, The Netherlands and Sweden are all regarded as feminine cultures which place a high value on relationships, caring and the quality of life. In contrast, the USA, U.K. and Germany are considered to be high on masculinity, although Japan is the most macho culture with a score of 95. Table 8 relates to the Uncertainty Avoidance dimension. Low scores are indicative of a greater propensity to tolerate uncertainty and to take risk. With the exception of Germany, all the countries represented in the sample are considered to be relatively high risk takers. In contrast, Japan has an extremely high Uncertainty Avoidance index of 92 and is risk averse preferring to plan carefully and take a longer-term perspective.

SUMMARY AND CONCLUSIONS

Over the last decade, considerable effort has been expended in increasing the awareness of both researchers and practitioners to the importance of human factors in M&As. Certainly the potential importance of culture is increasingly recognised as a factor which inuences M&A integration and subsequent outcomes. However, the complex interplay between national and organisational culture and its level and direction of inuence is still perplexing in light of the current and still limited research evidence. Rather than focussing on the inherent characteristics of different national cultures, it may also be fruitful to focus more on their inherent attitudes and strategies towards M&A activity and their level of cultural tolerance. For example, it is feasible to hypothesise that some cultures may be more inclusive and less ethnocentric than others. It has been argued that better M&A outcomes could be achieved if more attention was paid to culture at the selection stage. In the context of

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international M&As, culture may already inuence partner selection decisions. The results of this study show that, given a choice, managers would choose to merge or be acquired by a foreign national culture which they perceive to be similar and hence compatible with their own, and are highly avoidant of cultural distance. The evidence of this study suggests that managerial attitudes have changed little over the last 7 years or so. The highly individualistic cultures of the USA, U.K. and Northern Europe tend to prefer to enter M&As with each other rather than with Southern European or Japanese partners. Perhaps because as highly individualistic cultures, they are perceived more likely to recognise and accept the instrumentality of a merger or acquisition and are more familiar, so to speak, with the rules of the game. This study is based on a limited sample of European nationalities. It would be interesting to conduct a similar study with a sample drawn predominantly from more collectivist cultures. It is impossible to determine to what extent the decisions made by the managers in this study were inuenced by cultural stereotypes, management education (e.g. exposure to Hofstedes theories) or direct experience. Without doubt, management educators and researchers have a role to play in inuencing international management practice. Consequently, there is a pressing need for further research in this area. Existing studies have heavily relied upon the Hofstede (1980) model of national culture despite its acknowledged limitations (Very et al., 1998). Although not a direct replication, the later work of Trompenaars (1993) suggests that the relative position of some countries, particularly the developing economies, in respect of certain dimensions may have shifted over time. Therefore, it may be an appropriate time to conduct a large-scale study to review and possibly revise the index scores. Alternatively, it may be helpful to develop new cultural measures specically tailored for use in M&A research.

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