How the Cultural Trap Deepens in Cross-Border Deals

Clashing cultures frequently bear the blame for mergers and acquisitions that don’t succeed. Sharp cultural differences are tough enough to bridge when the combining companies are located in the same country. But the threat to a successful deal is greatly compounded in cross-border transactions when the architects of integration must manage not only inter-company disparities but the divergent ways in which people from different nations approach key business issues. The virulence of unresolved cultural friction was underscored in a KPMG study, which found that 83% of all mergers over a two-year sample period failed to produce any benefit for the shareholders and more than half actually destroyed value. Interviews of more than 100 senior executives involved in some 700 deals determined that the overwhelming cause for failure was “people and the cultural differences.” This article highlights the problems encountered in the growing number of transactions linking companies based in two different nations. It also provides specific strategies to reduce the negative impact of the change on the people involved. In general terms, merger success is based on acceleration, concentration, and creation of a critical mass for operational change (or adaptation). Up to the point that the “papers” are signed, the m&a business is predominantly finance-driven, i.e., making the business case, valuing the assets, determining the price, and performing due diligence. Before the ink is dry, however, the deal becomes a human transaction filled with pitfalls of emotion, trauma, and survival behavior – the non-linear, often-irrational world of people in the midst of change. Based on these considerations, we have identified seven critical people-oriented problems in uniting companies from different countries that, if not properly addressed, can become pitfalls for dealmakers. They also serve to pinpoint the key areas where corrective action is needed. The Seven Pitfalls on the Path to Merger Success Pitfall #1:Personal Preoccupation (The financial damage of lost productivity) Pitfall #2: “List-Itis” (It’s all important!) Pitfall #3: Organizational Proliferation (“Let’s get everybody involved!”) Pitfall #4: Infrequent or Irrelevant Communication (“It’s not my fault that they’re not listening!”) Pitfall #5: Triangulation (How to create chaos) Pitfall #6: The Relatives (Time and space) Pitfall #7: The Guiding Light (Where have all the leaders gone?) The seven pitfalls represent the most critical and vulnerable areas of any m&a transaction. They must be avoided because of their potential for damaging the major success factors that drive the deal. Equally important, they form the very agenda for the organization’s action plan in the critical first 90 days of the new entity’s existence. Compound this complexity by adding the differences in national cultures when the deal is international in scope. People living and working in different countries react to the same situations or events in very different, sometimes culturally specific ways. These differences must be taken into account as early as the design stage if an international transaction is to succeed. Pitfall # 1: Personal Preoccupation Employee preoccupation with how the deal is going to impact them weakens commitment to the job at hand. This can translate into people looking for work at other companies. The record shows that firms in the midst of transition lose some of their best employees – often to the competition – because they are worried about their future. Unless these valued employees see themselves as important parts of their group or their new company, they can easily move to other organizations where they might feel more appreciated. In countries where people identify to a larger extent with groups, they tend to look for support within their group. In France and Italy, for example, people caught in the midst of a merger often turn to unions. If unions cannot provide answers because they have been excluded from the negotiating process, they are likely to go on strike, which can do extensive damage to the combined company before it even gets started. A prime illustration of union power was the strike by French railroad and subway workers in December 1995 that resulted in the demise of the Juppe government. In addition, companies can suffer a hidden cost in the pervasive loss of productivity among the workers who remain. Studies indicate that line employees and managers at all levels lose a minimum of 15% of personal effectiveness as a result of rumors, misinformation, and worry. Teams tend to break down and become less effective during mergers and acquisitions. Some years ago we tracked the performance of three global teams in a pharmaceuticals company for a two-year period. The metric that we used – a global team process questionnaire – showed an abrupt falloff in performance of all three teams. The researchers determined that the slippage was caused by the merger of the company with another pharmaceuticals firm. It was a graphic example that mergers themselves can cause real, if temporary, performance weakness. But negative impact may last longer than the immediate postmerger period. One of the authors of this article had dinner not long ago with an employee of one of the merged pharmaceuticals companies. She bitterly complained about the ill effects of the merger, which, she said, were still bothering the company five years after the deal had closed. To quantify these hidden losses, determine the number of individuals involved from both companies. Then multiply that figure by their fully loaded hourly wage. Let’s assume that only one hour per person is lost to such factors as confusion, waiting for clear direction, figuring out who should do what with whom (assuming “whom” is known), or a possible job search. The result is how much productivity is lost per day to the company and the new owner. Finally, multiply the daily loss by 65 (the number of working days per quarter) and compare the result with the amount of gross sales that the firm must generate to offset the loss in productivity. Corrective Strategy: Acceleration Speed the integration to reduce uncertainty and anxiety. Communicate to your best employees that they are valuable to the organization or group. Delayed communications to employees about decisions that are designed to “ease the pain” only magnify and sustain the pain and prevent the company, the individuals, and the groups from getting on with the work and their lives. In the case of international transactions, assure them that individual (e.g., “you are important”) and collective (e.g., “the group needs you”) concerns are acknowledged. Address the concerns of those who have a group identity through departmental meetings and, when unions are involved, through meetings with their leaders. Pitfall # 2: List-Itis In the face of overpowering uncertainty and a rising fear of insecurity, many people make exhaustive to-do lists. Making comprehensive lists is a very logical response when one’s world is turned upside down. Lists organize thinking and suppress anxieties. But they don’t have any affect on the bottom line and the economic drivers that are the very bases of the merger. As soon as the merger is announced and the first calls to action are proclaimed, the reality sinks in. The list is overwhelming. Local concerns often drive the allocation of resources, and as the days build, a widening disconnect develops between the financial and market-based goals of the merger and the real-time allocation of effort. There is more to do and more pressure to do it quickly, which requires the ability to prioritize, make quick decisions, and take responsibility to do both. Tolerance for uncertainty varies widely around the world, and the variations can create havoc in international acquisitions. Mexicans, for example, tend to require more structure and definition of their roles and responsibilities than U.S. workers do. When an American firm merges with a Mexican company, the Mexican employees often are looking for information and structure that is not forthcoming because their new U.S. managers deem it unnecessary. The Mexican organization often grinds to a halt because employees fear that requesting information may be viewed as questioning management’s authority. In Europe, especially France and Germany, employees tend to need more certainty about how the merger will lead to differences in approaches and structures. The need for certainty is embodied in labor laws that have much higher levels of employee protection than American laws have with respect to layoffs. In turn, this causes headaches for U.S.-based firms which, like Euro-Disney in the early ’90s, were surprised when they were unable to trim their labor forces to match business conditions. The American “employment at will” concept provides great employment agility for U.S. firms but it drastically diminishes the loyalty between employee and employer that is common in other parts of the world. These differences always emerge in cross-border mergers. Corrective Strategy: Concentration During the first 90 days, keep the focus on the customers and the economic goals. Get everyone to focus on how their work impacts those 20% of the merger goals that yield 80% of the economic value. If people do not tolerate ambiguity well, revise their work goals and state them as smaller and more specific tasks. Help define the highest priorities. Meet with these people more often. Manage the employee’s performance more closely by initiating meetings to help define priorities. The real economic value of a foreign organization may not be where its U.S. partners expect it. For example, a U.S. company that acquires a company in a nation where the government controls much of the economy, such as China, may find that value lies more in the personal ties between the managers and high-level government officials than in the product pipeline, manufacturing capabilities, or quality of service. In countries where the need for certainty and structure is high, considerable detail about the merger should be provided to employees. Pitfall # 3: Organizational Proliferation In the initial stages of a merger many task forces, committees, and integration teams are created to handle all the lists and to plan new lists. The work assigned to integration structures and transition teams may be designed to be all-inclusive and to represent a sign of “new partnership.” But it can divert an organization from keeping its eyes on its customers and markets. More effort may be placed on temporary rules and reporting relationships than on the work itself. With international deals, this inside-outside tension is compounded by the fact that organizational change is initiated in different ways in different countries. In countries such as France and Mexico, the sense of hierarchy is much stronger than it is in the U.S. Change is initiated from the top, and employees at all levels expect new directions from their managers. Failure to reconcile that communications gap may paralyze a cross-cultural deal. U.S. managers, who may be more participative, expect input from their teams and committees, while French members expect direction from the managers. Conversely, a French company whose strategy was to increase market share in the U.S. by acquisition found that American district managers continued to go about their business and ignored what the French management defined as new directions. When a crisis arose, the U.S. division heads challenged French leaders, providing “real” reasons for why they decided not to follow the new strategy. The French were baffled as to why the Americans did not just follow orders. The misunderstanding was cross-cultural, compounded by a power struggle between the previously independent companies and their new French management. Consultants put into a place a process whereby the cross-cultural differences could be understood and overcome, allowing a more straightforward resolution of the postacquisition integration issues. Corrective Strategy: Accelerate, concentrate, and adapt Form small, agile, quick-acting integration teams composed of people from both sides, give them clear missions, and provide team managers with direct access to senior managers who will support them. Transitions do not need to be demonstrations of democracy in action. Carefully selecting members from the talent pool as merger team members has two benefits. It provides an opportunity to get high-potential employees involved and committed to organizational change while demonstrating the company’s recognition of their value. Clear leadership and strong support are essential to these teams. Otherwise, they often break down into sub-teams, one for each side of the transaction. This is particularly common in international deals because language and cultural differences create significant communication issues. Focus on the impact of potential cultural differences. Careful attention to human process interactions can help these teams avoid splitting into sub-groups. Cross-cultural overviews and establishment of communications protocols as teams form mitigate problems as the work proceeds. Sometimes people in different countries use culture as a weapon in power struggles. This can be defused by helping the group disentangle power and cultural issues, working on the power issues in a straightforward manner, and focusing on cultural differences in communications, objective setting, and conflict resolution at the same time. Pitfall # 4: Infrequent or Irrelevant Communication Fear and a lack of all the answers deter top management from providing the information that customers, shareholders, and employees need to redirect their action to the value-added aspect of the deal. Rumor stokes mystery and fills vacuums. When there is communication, it often is bereft of the information and substance that explain and support stakeholders’ interests. In many international deals, the working languages of the two organizations are different. Communications can break down even when the employees of the foreign partner speak English. Consider the case of a Norwegian/American joint venture. Because Norwegians tend to be more relationship-oriented and Americans tend to focus on tasks, the parties almost came to blows over when and how to conclude discussions. The Norwegians complained that they had not built up enough trust to negotiate final details and needed more time. The Americans responded that they could not waste valuable time on further meetings and suggested that the legal teams settle the matter. Tension decreased only when the teams realized that while their goals were the same, their ways of achieving them were quite different. A deal was eventually struck. Corrective Strategy: Say a lot and be visible Communicate early and often. Frequent communication, repeated at least seven times through multiple avenues – print, voice mail, e-mail, meetings, and video – can help. In times of stress, fear, the “noise” of the job, position and income survival, and discomfort over uncertainty drown out the message. Over-communicate and remember that responsibility for a message lies with the sender as well as with the receiver. A recent PricewaterhouseCoopers survey of 124 mergers determined that firms that implemented effective communication strategies showed better results in customer focus, employee commitment, and productivity than companies that delayed a communication strategy. An open-door policy, i.e., “managing by walking around,” and weekly meetings to answer employee questions can reduce the flow of rumors. Good transition managers explain what they know, what they are at liberty to share, and what they do not know. They create opportunities for employees to ask questions. Cross-company and cross-culture meetings help the players get to know each other and can ease the transition even before the personnel decisions are announced. Remember that international communications often require translation as well as adaptation and that the best ways to make presentations and reach audiences differ from country to country. The strategy needs to take communications style preferences into account. One-on-one communication between managers and employees also should take cultural preferences into account. An employee from a culture that prefers hierarchy, such as Russia, the Philippines, and some Arab countries, may expect the manager to explain what and how to do something. An employee with a preference for a more participative style, say from Denmark or Sweden, may want to talk to the manager and plan the outcomes and priorities together. Pitfall # 5: Triangulation Without clear lines of authority and clear understanding of where they fit in, employees and managers are caught in a web of conflicting objectives and old loyalties. This type of “organizational and personal strangulation” robs the new entity of the very energy it needs to overcome the aforementioned decline in productivity. The tolerance for “fuzzy,” temporary organizational charts and decisionmaking processes varies by country. In hierarchical countries like the Philippines, both the chart and chain of command need to be clearly defined. If employees do not understand them, paralysis often results. Filipino employees reporting to two managers, as in a matrix organization, may regard the situation as so ambiguous that they may believe that they must meet two different sets of expectations and literally do two separate jobs. Filipinos would likely view discussions with upper-level managers to clear up the perceived discrepancy as insubordination. Corrective Strategy: Concentrate on substance rather than form Focus on helping people adapt. Management must provide the information that people need to be comfortable with the new organization. The information to be disseminated depends on cultural backgrounds. Often the new structures are temporary, which must be communicated along with the expected time frame of the change. In the U.S., people need to know how they fit with the value drivers rather than with short-lived organizational charts. That may not be the case in other countries. Pitfall # 6: The Relatives This refers to the relative forces of time and space. Time in a merger is accelerated, compressed, and merciless. Publicly held companies often need to show clear results by the end of the first quarter after the deal closing. Individuals have to work at an accelerated pace at the same time that the inner adaptation of change – the personal and psychological transition – weighs them down and operates on personal rather than linear time. Change is easy; inner adaptation is not. And time is relative. Top management who worked out the deal started adapting to the new reality well before those who learned of the merger on announcement day. The leaders have ridden the wave and are well in front of the shock wave now crashing down on the others. They wonder about why “people don’t seem to get it” and often mistake shock and confusion for resistance. Individuals often go through phases similar to the grief process – denial, disbelief, and anger – before acceptance. These phases need time to play out. The concept of time is also related to culture. Long-term in North America tends to mean three years but may be defined as up to 30 or even 100 years in Japan. Japanese strategy discussions are likely to consider events that U.S. managers regard as irrelevant because they will occur far beyond the usual U.S. planning horizon. Space is also relative. In an increasingly virtual world, those not “connected” in the same space and time feel disconnected from the decisions and the center of the action. Irregular and incomplete communications from headquarters are vexing to those who live in different time zones, regions, countries, and organizational units. Companies unwittingly send messages that people remote from the center or the power base are not important, and employee anxiety grows. Corrective Strategy: Adapt to the realities of change and transition Change and transition are different experiences and each person will have his or her own way of going through them. Offer guidance and support to employees to help them accept the new world. Provide temporary structures to enable people and departments to navigate between the old ways and the new. Actively manage the merger across time, space, and organizations, and recognize the different concepts of time and space that may be at play. Create the appropriate communication tools and the accountabilities and standards that will enable the organization to better operate across time and space. For international mergers, reach out to the locations removed from the headquarters. Make sure that top managers visit them early and often. Bring key people to the headquarters for briefings and to enlist their support. Most important: Create virtual teams within the newly merged organization to implement the new structure and coordinate the teams with a single global unit backed by a strong sense of mission and support from the highest levels. Pitfall # 7: The Guiding Light At a time when leadership and active management is required most, the stress and uncertainties associated with the merger can cause an inward focus and a retreat to safe and high ground. More leadership, not less, is vital. One of the primary roles of a leader is to articulate a vision and inspire others to join in. Simply proclaiming a new vision and handing out laminated cards does not create the new vision for the new entity. A clear new vision captures the critical success factors and economic drivers that brought the entities together. With an international acquisition, the need for leadership remains but the nature of leadership changes. Being a good leader requires different skills and attributes in different countries. Charisma and a positive personal image are more important attributes of leadership in the U.S. than in Canada and France. Corrective Strategy: Adapt Only a new culture can create the context for true change to happen and hold. Changing culture means changing behavior. One of the quickest ways to effect change and create the new company is to assign the key positions to individuals who are true representatives of the new culture and who effectively can lead people on both sides of the cultural divide. They are the role models who demonstrate, with the visibly active support of senior management, what the new culture is. Remember that leadership styles differ in different cultures, as do leadership role models. George Washington and Martin Luther King Jr. are important leadership models in the U.S. but Charles de Gaulle is a much more potent figure for the French. Being a take-charge leader works well in the U.S. but not as well in Japan, where nuance and a drive to consensus are among the prized qualities of leadership. These pitfalls of mergers and acquisitions challenge leaders of combining companies to a new standard of managing change. The strategy is clear: Accelerate, lead, concentrate, and adapt. With international transactions, take cultural differences into account early and monitor teams and divisions critical to meeting customer and economic goals. Gene Gitelson, President of Individuals & Systems, a New York-based consulting firm, has more than 25 years of experience as a line manager, COO, and CEO and advises on managing the human side of organizational change. John Bing is President of ITAP International, a consulting firm focused on improving human performance in global business. Lionel Laroche, President of ITAP Canada, helps organizations overcome challenges associated with cultural differences.