Cross-Border M&A: Insulating Against Culture Shock

The dollar's long slide has sent many U.S. companies to the sidelines of the global mergers-and-acquisitions game, but chances are it'll be only a short breather. In the longer term, the opportunities for revenue growth and value creation are too good to ignore. In a new study of senior executives around the world from Marsh, Mercer and Kroll, nearly two-thirds of respondents said that their last cross-border transaction had enhanced shareholder value. Twenty-seven percent said the effect was neutral; only 9 percent said it was negative. The findings were similar across all geographies.

Survey respondents identified China, India, and South East Asia as the most attractive destinations globally for M&A activity over the next 18 months, with 57 percent describing their potential interest in this region as significant or very significant. "Organizations that want to continue to grow, build revenue, and expand their business need to go into these high growth areas," says Len Gray, Americas head of Mercer's global M&A consulting business. And they'll need to do so despite the risks. China, India, and South East Asia received a high risk rating of 5.3 out of a maximum 8 -- not much better than the 5.5 rating for Africa, the riskiest region.

U.S. companies bent on acquisitions in developing economies are usually on their guard against well-known risks such as questionable business practices, environmental exposures, and lack of intellectual property protection. But they're less well prepared to handle a range of risks around cultural and organizational differences.

In Japan, for example, organizations value the well-being of employees as highly as that of shareholders. If an acquisition is pushed through over the objections of workers, it might face post-deal resistance from the shop floor. In China, some of the most attractive acquisition targets are family-controlled conglomerates; potential buyers must understand the importance of political connections within the business operations.

"A mistake that was made historically was that companies might go marching in doing one acquisition after another, automatically assuming that the things that made them successful in their home territory would make them successful in another geography. And that simply is not the case," says Gray. "We have to understand the cultural differences and work within them, and at the same time create a common focus and vision for where the organization is going to maximize, within the culture of the local geography, those things that will allow it to be successful."

The Marsh, Mercer and Kroll study offers ample evidence for the importance of cultural and human relations issues in international M&A. When deal-makers were asked to identify the most significant issues they faced in their most recent transaction, the top two responses were organizational cultural differences, cited by 50 percent of respondents, and human capital integration issues (35 percent). Leadership/management retention issues and lack of employee engagement also made the top six.

Integrating companies with markedly different cultures is a thorny challenge even when they're close neighbors, but the difficulties are hugely amplified when they're from different parts of the world. Marsh, Mercer and Kroll recommend that organizations overhaul their due diligence processes to scope out cultural and human capital integration issues and pay close attention to those challenges at every step of the transaction.

A good place to start is by understanding the cultural differences of the parties involved, which may be shaped by national and regional cultures. Leaders in a company with a highly consensual, collaborative culture might find themselves at odds with their counterparts in an organization where "command and control" is the cultural norm. A company that typically doesn't communicate frequently with its employees may alienate a new acquisition's workforce by failing to explain the goals and benefits of the deal.

To manage cultural integration proactively, companies should:

• Clarify the deal's context and the desired outcomes.
• Determine the ideal future culture.
• Assess the degree to which business and cultural integration are needed.
• Identify the behavioral patterns needed to produce desirable outcomes.
• Pull the right levers to drive those behaviors.
• Actively manage employee engagement and change.
• Track progress toward the ideal culture.

Access a summary of the Marsh, Mercer and Kroll research or request the complete report