IMPACT OF CULTURAL DIFFERENCES ON MERGER AND ACQUISITION PERFORMANCE - A CRITICAL RESEARCH REVIEW...

IMPACT OF CULTURAL DIFFERENCESON MERGER AND ACQUISITIONPERFORMANCE: A CRITICALRESEARCH REVIEW AND ANINTEGRATIVE 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], witha particular focus on the performance implications of cultural differences inM&A. Despite theoretical and anecdotal evidence that cultural differencescan create major obstacles to achieving integration benefits, empiricalresearch on the performance impact of cultural differences in M&A yieldedmixed results: while some studies found national or organizational culturaldifferences to be negatively related to measures of M&A performance,others observed a positive relationship or found cultural differences tobe unrelated to M&A performance. We offer several explanations for theinconsistent findings of previous research on the performance impact ofcultural differences inM&A and develop amodel that synthesizes our currentunderstandingof the role of culture inM&A.Weconclude that the relationshipbetween cultural differences and M&A performance is more complex than

Advances in Mergers and AcquisitionsAdvances in Mergers and Acquisitions, Volume 4, 51–82Copyright © 2005 by Elsevier Ltd.All rights of reproduction in any form reservedISSN: 1479-361X/doi:10.1016/S1479-361X(04)04003-7

52 GUNTER K. STAHL AND ANDREAS VOIGT

previously thought and propose that, rather than asking if cultural differenceshave 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 thedifficulties, costs, and risks associated with cross-cultural contact increase withgrowing cultural differences between two individuals, groups, or organizations(Hofstede, 1980). Cultural distance, as measured in terms of differences inmanagement style, business practices or work-related values, has been shown tohave a profound impact on processes such as the choice of foreign entry modeand 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 – butless 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 majorcontributor to the high failure rates reported in M&A literature (seeDatta, Pinches& Narayanan, 1992; King, Dalton, Daily & Covin, 2004for meta-analyses of post-acquisition performance research). In a survey of more than 200 chief executives ofEuropean companies conducted by Booz, Allen and Hamilton, respondents rankedthe ability to integrate culturally as more important to the success of acquisitionsthan financial and strategic factors (cited inCartwright & Cooper, 1996, p. 28).

Problems may be exacerbated in international settings. Cross-border M&A aredifficult to integrate because they require what Barkema and his colleagues havecalled “double layered acculturation” (Barkema et al., 1996, p. 151), wherebynot only different corporate cultures, but also different national cultures haveto be combined. Fundamentally different values, goals and beliefs concerningwhat constitute appropriate organizational practices may lead to conflicts andpolitical struggles, and limit the potential for trust to emerge between the partiesinvolved 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 languagebarriers, different legal systems and administrative practices, and other aspectsof organizational life that differ between countries pose additional obstaclesto integrating the different cultures and workforces in cross-border M&A. Notsurprisingly, a survey of top managers in large European acquirers showed that

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 obstaclesto 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 benegatively related to different measures of M&A performance, others foundcultural differences to be unrelated or even positively related to the success ofM&A. These findings suggest that the relationship between cultural differencesand M&A performance is more complex than how it is portrayed in M&A literature.More conceptual and empirical work is needed to examine how cultural differencesaffect the post-combination integration process and to determine which variablesmoderate the effects of cultural differences on M&A performance.

We begin with a discussion of our current understanding of the role of culturaldifferences in M&A, followed by a review of previous studies that examinedthe impact of cultural differences on three types of M&A outcome measures:accounting-based performance measures, stock market returns, and socio-culturalintegration outcomes. We will offer several explanations for the inconsistentfindings that emerge from this review, and present a framework for studying therole of cultural differences in M&A that synthesizes the extant research in thisarea. We will conclude with a discussion of avenues for future research on the roleof culture in M&A.

THEORETICAL PERSPECTIVES ON THE ROLE OFCULTURE IN MERGERS AND ACQUISITIONS

Various theories and models have been proposed to explain the role of culture inM&A and how cultural differences may affect the integration process followingM&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 onculture. Each of them is discussed below.

The Cultural Fit Perspective

Cultural fit models rest on the idea that the degree of culture compatibility betweenthe organizations involved in a merger or an acquisition is a critical determinant ofthe subsequent integration process (Cartwright & Cooper, 1996; David & Singh,

1994; Javidan & House, 2002; Morosini & Singh, 1994). Cultural fit models focusmainly on the relationship between pre-merger cultural differences (both nationaland organizational) and post-merger integration outcomes. They are inherentlystatic and do not fully capture the dynamics of the integration process.

Perhaps the most widely cited cultural fit model isCartwright and Cooper’s(1993, 1996)model of culture compatibility in M&A. The model is basedon a typology of organizational cultures that vary along a continuum fromhigh to low individual constraint: power, role, task, and person cultures, withthe former imposing the highest and the latter imposing the lowest degree ofconstraint on individuals. Cartwright and Cooper propose that in mergers of equals(“collaborative marriages”), the cultures of the combining firms must be similaror 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 themerger have to adapt to each other’s culture and create a coherent “third culture.”Since organizations normally strive to retain their own culture, mergers betweenculturally distant partners are proposed to result in major integration problems.In the case of an asymmetrical relationship (“traditional marriages”), Cartwrightand Cooper propose that the impact of cultural differences depends primarily onthe direction of the culture change, rather than the cultural distance between theacquirer and the target. If the degree of individual constraint increases as a result ofthe 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 byCartwright and Cooper (1996)is that they illustrate that cultural differences canpose significant barriers to achieving integration benefits, and that they have to beconsidered at an early stage of the M&A process – as early as the evaluation andselection 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 anM&A. In anthropology, the term “acculturation” is defined as “changes inducedin (two cultural) systems as a result of the diffusion of cultural elements in bothdirections” (Berry, 1980, p. 215). In the context of M&A,Larsson and Lubatkin(2001)define acculturation as the outcome of a cooperative process whereby thebeliefs, assumptions and values of two previously independent work forces forma jointly determined culture. Acculturation is achieved through development of

a common organizational language, mutual consideration, and values promotingshared interests. As such, acculturation can be considered a prerequisite for M&Asuccess, especially when high levels of integration are required.

In contrast toLarsson and Lubatkin’s (2001)conceptualization of acculturationas an inherently cooperative process, it has been suggested that acculturationoutcomes can be positive or negative (Elsass & Veiga, 1994; Nahavandi &Malekzadeh, 1988; Sales & Mirvis, 1984). Nahavandi and Malekzadeh’s (1988)model of acculturative stress proposes that the degree of congruence betweenthe acquiring and acquired firms’ preferred modes of acculturation will affectthe amount of stress and conflict experienced during the acculturation process.According to this model, the acquired firm’s preferred acculturation modedepends on the extent to which organizational members want to preserve theirown cultural identity and to which they feel attracted to the acquirer’s culture.The acquiring firm’s preferred acculturation mode is largely determined by itsdiversification strategy and tolerance for diversity. The model suggests a varietyof factors that moderate the impact of cultural differences on post-acquisitionintegration outcomes, most notably the acquirer’s diversification strategy andthe integration mode chosen. If the level of attempted integration is high, thisis proposed to result in acculturative stress and disruptive culture clashes, asthe members of the acquired organization struggle to preserve their culturalidentity.

Consistent with the Nahavandi and Malekzadeh model, a longitudinal case-study conducted byMirvis and Sales (1990)suggests that the outcome of theacculturation process depends on the extent to which the acquired firm is allowed todetermine its preferred mode of acculturation, to which the relationships betweenthe members of the two companies are positive and involve reciprocity, and towhich 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 predominantlyfunctionalist and objectivist understanding of culture (Morgan & Smircich, 1980),social constructivists view culture as based on shared or partly shared patternsof interpretation which are produced, reproduced, and continually changed by thepeople identifying with them (e.g.Kleppestø, 1998; Vaara, 2002). This perspectiveemphasizes symbolization and communication processes and sees culture as anessentially dynamic and emergent phenomenon that comes into existence inrelation to and in contrast with another culture (Gertsen, Søderberg & Torp,1998).

Kleppestø (1993)defines culture as “constantly ongoing attempt of the collectiveto define itself and its situation” (cited byGertsen et al., 1998, p. 33). Thisview of culture as an interpretative and evolving process rather than a stablesystem of norms and values differs markedly fromHofstede’s (1980)widely citeddefinition of culture as “collective mental programming.” According toKleppestø(1998, 2005), each organization consists of numerous individuals with distinctself-identities that are socially produced and that help create meaning at boththe individual and collective level. Organizational culture is seen as a processby which distinct organizational identities are created and maintained. Culturalcontact can then be understood as a confrontation between different organizationalself-images and interpretation patterns which develop and unfold in interactionwith one another.

Building on social identity theory (Tajfel, 1982; Turner, 1982), the socialconstructivist position suggests that the problems surrounding the integrationprocess after M&A may be best understood in terms of in-group out-group biasand a quest for social identity. Under this perspective, the exaggerated view ofdifferences and lack of attention to similarities that can often be observed in M&Acan be interpreted as a sense-making mechanism: “we” cannot establish an identitywithout stressing “our” uniqueness and “their” otherness (Kleppestø, 1998, 2005).

In summary, extant theories and models of the role of culture in M&A haveadopted one of three perspectives to explain how cultural differences affect theM&A process: a cultural fit perspective, an acculturation perspective, or a socialconstructivist perspective. Cultural fit models are rooted in a functionalist andobjectivist understanding of culture as relatively stable system of norms, values,and behavior patterns. In contrast, the social constructivist perspective emphasizescultural transformation processes during which organizational self-images developand change through interaction, so that new socially negotiated cultural identitiesare being formed. Cultural fit and acculturation models highlight the inherentpotential of M&A for culture clash and the need for cultural assessment topredict and minimize integration problems. Social constructivists take a morenuanced view in suggesting that it is not cultural differences per se that createproblems in M&A but rather the way cultural boundaries are drawn and managed.Under this perspective, analysis of pre-combination cultural differences has littleprognostic value in predicting M&A outcomes. Despite fundamental differencesbetween the three paradigms, the cultural fit, acculturation, and social constructivistperspectives seem to converge on the assumption that cultural issues cannot beconsidered in isolation from other aspects of the integration process, such as theintegration approach taken by the acquirer, the degree of retained autonomy onthe part of the acquired firm, and the interventions chosen to manage culturaldifferences.

THE PERFORMANCE IMPACT OF CULTURALDIFFERENCES 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 (seeSchoenberg, 2000; Schweiger & Goulet, 2000; Teerikangas & Very, 2003forreviews). To explain the lack of consensus that emerged from previous researchon the role of culture in M&A, we conducted a comprehensive review of studiesthat examined the performance impact of cultural differences in M&A, with thegoal of identifying key moderators of the culture-performance relationship. It washoped that a research review that is sensitive to potential moderating effects, aswell as differences in research design characteristics between studies, would shedlight on the complexity of the process by which cultural differences affect M&Aoutcomes.

Using multiple search strategies (including computerized searches of variousdatabases, manual searches of published materials, and consultation of M&Aresearchers to identify unpublished research), we identified a total of 36 empiricalstudies 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 academicjournals while the rest were doctoral dissertations, book chapters, and unpublishedworking papers.

For the purpose of this research review, we grouped the identified studies intothree categories, based on the M&A outcome variable that was examined (Stahl &Voigt, 2004):

� Studies usingaccounting-based measures, such as return on assets, return onequity, and sales growth. These measures evaluate the relatively long-termperformance of an M&A and thus capture whether envisaged synergies couldbe reached.

� Studies usingstock market-based measures. These measures reflect theinvestment communities’ evaluations of the immediate and longer term impactsof the M&A. They are usually measured around the time of the announcementof the deal and can thus be considered a predictor of future performance. Ifmeasured some time after the announcement, stock market returns may reflectactual performance. As additional information about the M&A and its successor failure becomes known, it is usually assimilated by the market and the valueof the firm is affected (Datta et al., 1992).

� Studies examiningsocio-cultural integration outcomes, such as employeesatisfaction, voluntary turnover, and acculturative stress. These variables capturethe degree of conflict and strain at the socio-cultural level and can thusbe considered an important dimension of M&A success and failure from theperspective of the employees and the organization as a whole.

Next, we will summarize the key findings of studies that examined the impact ofcultural differences on the three types of M&A outcome measures.

Impact of Cultural Differences onAccounting-Based Performance Measures

We identified 18 studies that examined the impact of cultural differences onaccounting-based measures of post-acquisition performance.Table 1summarizesthe key findings of these studies. Consistent with the “cultural distance” hypothesis,eight of the studies found a negative relationship between cultural differencesand M&A performance. Organizational cultural differences were found to benegatively 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 highintegration levels (Datta, 1991), and was most pronounced when the degreeof autonomy given to the target firm was low (Datta et al., 1991). Consistentwith Datta et al. (1991), Very, Lubatkin, Calori and Veiga (1997)foundthat cultural incompatibility had the most negative impact on post-acquisitionperformance when autonomy was removed from the target. In contrast,Schoenberg(1996), in a study of cross-border acquisitions, found that cultural differenceswere negatively associated with post-acquisition performance regardless of theintegration approach taken. This negative relationship could only be observed foracquisitions in the service industry but not in manufacturing.

Contrary to expectations, several studies revealed a positive relationship betweencultural differences and M&A performance.Krishnan et al. (1997), in a study ofdomestic acquisitions, found organizational cultural differences to be positivelyrelated to accounting-based measures of post-acquisition performance. This isconsistent with a study conducted byZollo (2002), who found that organizationalcultural differences were significantly and positively associated with accountingreturns of the combined organization, measured over a three year period. In asimilar vein, Morosini, Shane and Singh (1998), in a survey of cross-borderacquisitions, found that national cultural differences enhanced post-acquisition

Table 1. Studies Examining the Impact of Cultural Differences onAccounting-Based Measures.

Author(s) andYear

Sample CulturalDimension

PerformanceMeasure

Impact ofCulturalDifferencesa

Moderator(s)Identifiedb

Anand, Capronand Mitchell(2003)

Mixed Domestic vs.cross-border

Performanceindex

n.s. /

Barkema, Belland Pennings(1996)

Cross-border

Hofstedeindex

Return onequity

Pos.c /

Buhner (1991) Mixed Domestic vs.cross-border

Profitability Neg. Ownercontrol

Datta (1991) Domestic Differences inmanagementstyle

Performanceindex

Neg. /

Datta, Grant andRajagopalan(1991)

Domestic Managementstyle incom-patibility

Performanceindex

Neg. Degree oftargetautonomyremoval

Krishnan, Millerand Judge(1997)

Domestic Dissimilaritiesin functionalbackgroundsbetween topmanagementteams

Return onassets

Pos. /

Larsson andFinkelstein(1999)

Mixed Managementstyledissimilarity

Synergyrealization

n.s. Integrationleveld

Domestic vs.cross-border

n.s. Employeeresistanced

Larsson andRisberg(1998)

Domestice Corporateculturaldifferences

Synergyrealization

n.s.f /

Cross-bordere

Lubatkin,Calori, Veryand Veiga(1998)

Growth insales

n.s. /

Morosini, Shaneand Singh(1998)

Cross-border

Hofstedeindex

Growth insales

Pos. /

Schoenberg(1996)

Cross-border

Differences inmanagementstyle

Performanceindex

Neg. Industry

Table 1. (Continued)

Author(s) andYear

PerformanceMeasure

Schoenberg(2004)

Cross-border

Differences inmanagementstyle

Performanceindex

Neg.g Culturalmeasures

IntegrationApproach

Stahl,Kremershofand Larsson(2004)

Mixed Organizationalculturaldifferences

Salesgrowth andrealizedprofits

Neg. Trust

Very, Lubatkinand Calori(1996)

Performanceindex

n.s. Nationalityof target

Very, Lubatkin,Calori andVeiga (1997)

Mixed Cultural in-compatibility

Performanceindex

Neg. Degree oftargetautonomyremovalNationalityof Target

Weber (1996) Domestic Corporateculturaldifferences

Return onassets

n.s. Degree oftargetautonomyremoval

Weber andPliskin (1996)

Domestic Corporateculturaldifferences

Performanceindex

Neg. /

Zollo (2002) Mixed Corporateculturaldifferences

Performanceindex

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;f No significance levels reported, butdifferences were considered meaningful by authors;g Differences in attitude towards risk werenegatively related to performance; differences in other dimensions of management style wereunrelated to performance.

performance by providing access to the target’s or acquirer’s diverse set of routinesand capabilities.

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

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 founda positive effect of autonomy removal on financial performance but a negative effecton commitment, suggesting that “related mergers with higher levels of autonomyremoval outperform related mergers with lower autonomy removal in spite of theassociated human resource problems” (pp. 1197–1198). Other studies suggest thatintegration process variables such as the level of integration or the use of socialintegration mechanisms may mediate the effects of cultural differences on M&Aperformance. For example,Larsson and Finkelstein (1999)found that the effectsof organizational cultural differences on synergy realization were mediated bythe level of organizational integration and employee resistance, suggesting thatcultural differences affect M&A performance primarily through the process ofsocio-cultural integration.

Impact of Cultural Differences on Stock Market-BasedPerformance Measures

As in the review of studies of accounting-based performance measures, noclear pattern of effects emerged from the review of studies that examined theimpact of cultural differences on stock market performance.Table 2summarizesthe results of the 13 studies identified through the literature search. Only twoof them found evidence of a negative impact of cultural differences on stockmarket returns.Datta and Puia (1995)found acquiring firms’ cumulative excessreturns to be negatively associated with national cultural distance in a sampleof cross-border acquisitions.Chatterjee, Lubatkin, Schweiger and Weber (1992),in a study of domestic acquisitions, observed a negative relationship betweenorganizational cultural differences and acquiring firms’ cumulative abnormalreturns. Interestingly, acquirer’s multiculturalism (i.e. the degree to which theacquirer tolerates the acquired firm’s culture) was positively related to abnormalreturns, suggesting that the degree of cultural tolerance exhibited by the acquirermay 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 apositive relationship between cultural differences and stock market performance.For example, in a study byHarris and Ravenscraft (1991), target firms’ cumulativeabnormal 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 withSwenson (1993), Wansley, Lane

Table 2. Studies Examining the Impact of Cultural Differences on StockMarket-Based Measures.

Author(s) andYear

PerformanceMeasure

Bessler andMurtagh(2002)

Mixed Domesticvs.cross-border

Cumulativeabnormalreturns

n.s. Industry

Buhner (1991) Mixed Domesticvs.cross-border

Pos. Owner controlAcquisitionexperience

Chatterjee,Lubatkin,Schweigerand Weber(1992)

Neg. /

Datta and Puia(1995)

Cross-border Hofstedeindex

Cumulativeexcessreturns

Neg. /

Dewenter (1995) Mixed Domesticvs.cross-border

n.s. Hostile targetmaneuveringRival bidders

Eddy and Seifert(1984)

Stock pricesanddividends

n.s.c /

Harris andRavenscraft(1991)

Average bidpremiums

Pos. IndustryStrength ofacquirer’s homecurrency relativeto the dollar

Markides andIttner (1994)

n.s. /

Markides andOyon (1998)

Cross-border Masculinity Cumulative n.s. /Abnormalreturns

Olie andVerwaal(2004)

Pos. Host countryexperience

Swenson (1993) Mixed Domesticvs.cross-border

Pos. Target growthrateTarget’sprice-earningsratioLikelihood ofcompetition

Table 2. (Coninued)

Author(s) andYear

PerformanceMeasure

Wansley, Laneand Yang(1983)

Pos. /

Zollo (2002) Mixed Corporateculturaldifferences

Pos. Time ofmeasurement

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 onthe reported mean differences, a negative and significant correlational effect size was calculated.

and Yang (1983), andOlie 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 nationalcultural differences, thus making it impossible to draw any firm conclusion aboutthe relationship between cultural differences and stock market returns.

In interpreting these findings, it is important to note that seven of thethirteen studies that examined the impact of cultural differences on stock marketperformance used a dichotomous measure of domestic versus cross-border M&Aas a proxy for national cultural differences. In these studies, the effects of nationalcultural differences are confounded with the effects of other variables on whichinternational M&A differ from domestic ones. Rather than assuming a causaleffect of cultural differences on stock market returns, a more likely explanation isthat the investment communities evaluate cross-border M&A differently (in someinstances, 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 3summarizes the results of 14 studies that examined the relationship betweencultural differences and socio-cultural integration outcome variables, such asemployee stress, commitment, and voluntary turnover. Only one of them (Krishnanet al., 1997) found unambiguous evidence of a positive relationship betweencultural differences, measured in terms of dissimilarities in functional backgrounds

Table 3. Studies Examining the Impact of Cultural Differences onSocio-Cultural Integration Outcomes.

Author(s) and Year Sample CulturalDimension

PerformanceMeasure

Krishnan, Millerand Judge(1997)

Domestic Dissimilaritiesin functionalbackgroundsbetween topmanagementteams

Top managementturnover

Pos. /

Krug and Hegarty(1997)

Neg. Combination year

Krug and Hegarty(2001)

Neg.c Relative standingof target executives

Krug and Nigh(1998)

Cross-Border HofstedeIndex

Neg. International andcountry-specificacquisitionexperience

Larsson andFinkelstein(1999)

Mixed Managementstyledissimilarity

Employeeresistance

Neg. /

Domestic vs.Cross-border

Larsson andLubatkin (2001)

Degree ofacculturation

n.s. Nationality ofacquirer

Larsson andRisberg (1998)

Domesticd Corporateculturaldifferences

Neg.e /

Cross-borderd Employeeresistance

Employeeresistance

Lubatkin,Schweiger andWeber (1999)

Neg. Combination yearindustry

Schoenberg (2004) Cross-border Differences inmanagementstyle

Neg.c /

Stahl, Kremershofand Larsson(2004)

Mixed Organizationalculturaldifferences

Trust, jobsatisfaction,commitment,acceptance ofchange, intention tostay, willingness tocooperate, Jobperformance, andopencommunication

Neg. /

Table 3. (Continued)

Author(s) and Year Sample CulturalDimension

PerformanceMeasure

Van Oudenhovenand van derZwee (2002)

Cross-border National andcorporateculturaldifferences

Cooperationsuccess

Neg.g Country-specificacquisitionexperience

Very, Lubatkin andCalori (1996)

Acculturative stress n.s. Attractiveness ofacquirer’s culture

Weber (1996) Domestic Corporateculturaldifferences

Effectiveness ofintegration process

Neg. /

Top managementcommitment

Weber, Shenkarand Raveh(1996)

Domesticd Corporateculturaldifferences

Top managementcommitment,cooperation, stress,and negativeattitudes towardorganization

Neg. Degree of targetautonomy removal

Cross-borderd Corporateculturaldifferences

Hofstededimensionsf

Notes: a Neg. = negative and statistically significant; n.s.= non-significant; Pos.= positive andstatistically significant;b / = no moderator identified;c Data provided by the author(s) onrequest;d Results separately reported for sub-samples of study;e No significance levelsreported, but differences were considered meaningful by authors;f The four Hofstededimensions were analyzed separately;g Based on data of acquisitions only (joint-venturesand strategic alliances were excluded); data was provided by first author on request.

between the top management teams of the two companies, and socio-culturalintegration outcomes (in this case, top management turnover).Weber, Shenkarand 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 relatedto socio-cultural integration outcomes in a sample of domestic M&A. The samepattern emerged in a case survey conducted byLarsson and Risberg (1998). Largelyconsistent with these findings,Very et al. (1996), in a study of acculturative stress inEuropean cross-border M&A, observed that national cultural differences elicitedperceptions of attraction rather than stress, depending on the nationalities of thebuying and acquiring firms.

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

For example,Weber (1996), in a study of U.S. acquisitions, found that differencesin corporate culture were negatively associated with target firm managers’ levelof commitment and the perceived effectiveness of the integration process. Largelyconsistent withWeber (1996), research conducted by Larsson and his colleaguessuggest that differences in organizational culture lead to employee resistance andpoor 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 culturaldifferences on top management turnover.Lubatkin, Schweiger and Weber (1999)found that organizational cultural differences were associated with higher topmanagement turnover in the first year after acquisition. Krug and his colleaguesobserved a similar effect in both domestic and cross-border acquisitions (Krug &Hegarty, 1997, 2001; Krug & Nigh, 1998). In general, executives were more likelyto depart when their firm was acquired by a foreign firm, as opposed to a domesticfirm. The negative impact of cultural differences on turnover was less pronouncedin the short-term when the acquirer had international acquisition experience, andit was less pronounced in the long-term when the acquirer’s acquisition experiencewas in the target’s home country (Krug & Nigh, 1998). However, cultural distancewas only one of several factors that affected turnover in these studies. For example,executives were more likely to stay when they were offered challenging positionswith 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-borderM&A, cultural differences may have a positive effect on aspects of the socio-cultural integration process such as the cultural sensitivity and tolerance exhibitedby the acquiring firm managers (Larsson & Risberg, 1998; Very et al., 1996; Weberet al., 1996). In contrast, (organizational) cultural differences were generally foundto have a negative impact in domestic settings. The only exception is theKrishnanet al. (1997)study, which used a cultural distance measure that is incompatible withthe ones used in other studies, namely dissimilarities in functional backgroundsbetween top managers. These findings support the conclusion that national culturaldifferences are more salient than organizational cultural differences, therebyincreasing managers’ awareness of the significance of cultural factors in theintegration process and possibly leading to more culturally sensitive integrationmanagement (Larsson & Risberg, 1998; Schweiger & Goulet, 2000; Teerikangas& Very, 2003).

In summary, the foregoing research review suggests that cultural differences aremore closely associated with socio-cultural integration outcomes than financialperformance measures. However, it is important to note that the studies includedin the literature review differ widely in terms of sample characteristics, geographic

regions covered, 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 MERGERAND ACQUISITION PERFORMANCE TENTATIVEEXPLANATIONS AND AN INTEGRATIVE MODEL

Several possible explanations for the lack of consensus that emerged from previousresearch on the performance impact of cultural differences in M&A have beenoffered (e.g.Cartwright, 1997; Gertsen et al., 1998; Schoenberg, 2000; Schweiger& Goulet, 2000), and sources of complexity underlying the culture-performancerelationship in M&A have been discussed (Teerikangas & Very, 2003). Buildingon and extending this research, we will offer several explanations for the anomaliesobserved in previous research on the performance impact of cultural differencesin M&A and develop a framework that synthesizes our current understanding ofthe role of culture in M&A.

The Impact of Cultural Differences Depends onthe Outcome Variable Examined

M&A performance can be assessed in various ways. While the majority ofexisting post-acquisition performance research uses stock market-based measures,researchers have also relied on accounting measures to evaluate post-acquisitionperformance (seeDatta et al., 1992; King et al., 2004for meta-analyses). Recently,M&A researchers have called for a more inclusive definition of M&A successthat also encompasses non-financial variables in order to overcome some ofthe problems associated with accounting- and stock market-based measures, tofacilitate cumulating research across disciplines, and to bring the dependentvariable 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 integrationoutcome measures. They capture the degree of conflict and strain at the socio-cultural level and represent an often neglected, but critical indicator of M&Asuccess and failure from the perspective of the employees and the organization asa whole.

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

M&A success. How the investment communities react to the announcement of amerger or an acquisition may differ significantly from the reactions of employeesor customers – if for no other reason than the interests of these constituencies aredifferent, and sometimes at odds. Also, these measures vary in terms of unit of anal-ysis (individuals or groups versus the organization), the objectivity and reliabilityof measurement (self-report measures or objective data), and time of measurement(assessed shortly or some time after the announcement). Thus, they may share littlecommon variance. Of the three categories of M&A outcome variables considered inthe present research review, socio-cultural integration outcomes were the ones moststrongly and consistently related to cultural differences. In contrast, accounting-and stock market-based measures of post-acquisition performance showed no clearpattern of correlations with cultural differences. This finding is not surprising, associo-cultural integration outcomes are much closer to the phenomenon underinvestigation 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 thatarise from cultural differences. Variables that potentially moderate the relationshipbetween cultural differences and M&A performance, and that must be controlledfor in studies of the performance impact of cultural differences in M&A, include thedegree 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 theacquired firm (e.g.Datta & Grant, 1990; Haspeslagh & Jemison, 1991), the modeof takeover (e.g.Hambrick & Cannella, 1993; Stahl, Chua & Pablo, 2003), prioracquisition 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 factorinfluencing the relationship between cultural differences and M&A performanceis 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 diversificationin which the acquired business is expected to provide new resources, productlines, and managerial expertise, or foster growth through unrelated diversificationwith no intention of achieving synergies (Chatterjee et al., 1992; Haspeslagh &Jemison, 1991; Larsson & Finkelstein, 1999). While more closely related M&A

usually require a higher degree of operational integration, integration efforts inunrelated 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 minimalinterdependencies between the acquiring and target firms’ businesses (Javidan &House, 2002; Larsson & Lubatkin, 2001).

Shift in Focus from the Initial Conditioning Factorsto the Integration Process

With a few notable exceptions, the theoretical models and empirical studiesreviewed in this chapter have taken a rather static approach to understanding therole of culture in M&A. In focusing on either pre-acquisition cultural differencesor the situation at the time of the takeover, these models and studies essentiallytreat integration as a “black box.” In contrast, relatively little attention has beenpaid to the dynamics of the integration process and the potentially critical role thatthe acquirer’s integration decisions and actions play in determining the successof an M&A.

A “process perspective” on M&A (Birkinshaw, Bresman & Hakanson, 2000;Haspeslagh & Jemison, 1991; Jemison & Sitkin, 1986) suggests that the extentto 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 theimplications of this perspective is that the strategic, financial and organizationalconditioning factors at the time of the merger or acquisition – including culturaldifferences – can only predict the long-term success if integration process variablesare taken into consideration. While factors such as buyer strategy, acquisitionpremium paid, or organizational fit determine the value creation potential of anM&A, the acquirer’s integration decisions and actions determine the extent towhich 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 upthe “black box” and paying greater attention to the integration processes andmanagement 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 culturaldifferences has consistently been encouraged by M&A scholars (e.g.Gertsen et al.,1998; Teerikangas & Very, 2003; Vaara, 2003) to improve the understanding of

how various dimensions and levels of culture interact in influencing the integrationprocess in M&A. Despite the call for a more sophisticated conceptualizationof culture and a more fine-grained analysis of cultural differences, the bulk ofempirical research relies on a rather simplistic and one-dimensional approachto understanding the performance implications of cultural differences in M&A.Practically all of the studies reviewed in this chapter focused on organizationalor national cultural differences (or sometimes both), but few studies looked atother dimensions of cultural differences. This is despite evidence that differencesin professional, functional, and industry cultures play a critical role in the M&Aprocess (David & Singh, 1994; Schweiger & Goulet, 2000).

The majority of existing M&A integration research has adopted the notionof a monolithic and stable culture, implicitly assuming that all members ofan organization share the same cultural orientation and that this orientationis relatively stable over time. M&A researchers have recently challenged bothof these assumptions (e.g.Gertsen et al., 1998; Kleppestø, 2005; Schreyogg,2005; Vaara, 2002), arguing instead that culture is an essentially dynamic andemergent phenomenon that comes into existence in relation to and in contrastwith another culture, and that each organization consists of numerous individualswith distinct self-identities that are socially and contextually produced. A moresophisticated understanding of culture in research on the performance impactof 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, andconceptualize culture as a dynamic and emergent phenomenon.

Towards an Integrative Framework

The model depicted inFig. 1 synthesizes theoretical perspectives and empiricalfindings 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 futureresearch by delineating the main mechanisms through which cultural differencesmay 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 ordimensions of culture and captures some of the dynamics of the integration process.

The model builds on a conceptual split between the sub-processes of taskintegration (or value creation), measured in terms of transfers of capabilitiesand resource sharing between the acquiring and the acquired firm (Birkinshawet al., 2000); and socio-cultural integration (or human integration), which involves

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 employeesfrom both companies (Birkinshaw et al., 2000; Shrivastava, 1986). Proceedingfrom left to right, it proposes that cultural differences affect M&A performancethrough their impact on task integration and socio-cultural integration. Previousresearch has shown that effective management of these integration sub-processesis 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 inaccounting measures such as sales growth and return on assets, is assimilated bythe market, the sub-processes of task integration and socio-cultural integrationmay also affect stock market returns (Datta et al., 1992).

Although task integration and socio-cultural integration are conceptuallydistinct, they are not independent of one another. Aspects of socio-culturalintegration such as employee commitment, trust, and shared identity facilitate thetransfer 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

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 realizedat the expense of the employees (Cartwright & Cooper, 1996; Marks &Mirvis, 2001).

The M&A integration process is subject to several other factors aside from thosethat arise from cultural differences. The model depicted inFig. 1proposes that thesub-processes of task integration and socio-cultural integration are affected by a setof conditioning factors, particularly ones related to the nature of the relationshipbetween the acquirer and the target, as well as integration process variables thatare directly related to the acquirer’s integration decisions and actions. Researchevidence indicates that factors such as prior acquisition experience of the acquirer(Finkelstein & Haleblian, 2002; Singh & Zollo, 2004), the mode of takeover orsocial 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 theacquirer (Birkinshaw et al., 2000; Larsson & Lubatkin, 2001), and the quality andquantity of communication (Schweiger & DeNisi, 1991;Stahl & Sitkin, 2005) areall likely to affect the extent to which synergies are realized and a shared identityis established in M&A.

In addition to the proposed direct effects on task integration and socio-culturalintegration, the conditioning factors and integration process variables proposedby the model constitute potential moderators of the relationship between culturaldifferences and integration outcomes. Factors such as the degree of relatednessbetween the acquiring and the acquired firm, differences in power and size, andthe mode of takeover or social climate surrounding an acquisition are likely tomoderate the effects of cultural differences on task and socio-cultural integrationoutcomes. For example, there is evidence to suggest that the potentially negativeeffects of cultural differences on trust building and the creation of a shared identityare 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 thischapter suggest that cultural differences, if properly understood and managed, canbe an asset rather than a liability in M&A, and that cultural differences may affectthe sub-processes of task integration and socio-cultural integration in differentways. National cultural differences, which are more salient than organizationalcultural differences, may increase the awareness of the significance of culturalfactors in the integration process and lead to more culturally sensitive integrationmanagement (e.g. greater use of social integration mechanisms, lower levels ofimposed control, etc.). In addition, national cultural differences may enhance the

combination potential and boost performance by providing access to the target’sor acquirer’s diverse set of practices and capabilities (Morosini et al., 1998). Forexample,Olie and Verwaal (2004)found that acquisitions in unfamiliar marketscan trigger new solutions, foster innovation and enhance the development oftechnological skills. Thus, cultural differences can be a source of value creation andlearning in M&A, but they can also create obstacles to reaping projected synergiesby exacerbating social integration problems and diminishing the firms’ capacityto absorb capabilities from the other party (Stahl, Bjorkman & Vaara, 2004).

CONCLUSION

This chapter provided a review of theoretical perspectives and empirical researchon the role of culture in M&A, with a particular focus on the performanceimplications of cultural differences in M&A. Consistent with the “culturaldistance” hypothesis and extant cultural fit and acculturation models, empiricalevidence indicates that national and organizational cultural differences are oftenassociated with negative outcomes at the socio-cultural level, such as increasedtop management turnover, reduced employee commitment, and acculturativestress. However, the impact of cultural differences on post-acquisition financialperformance is less clear. While some studies found cultural differences tobe negatively associated with accounting- or stock market-based performancemeasures, others observed a positive relationship or found cultural differencesto be unrelated to post-acquisition performance.

These findings lead us to conclude that the relationship between culturaldifferences and M&A outcomes is more complex than previously thought. Whethercultural differences have a positive or a negative impact on M&A performance, orany performance impact at all, depends on the performance measures examinedand 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 askingif cultural differenceshave a performance impact in M&A, future research endeavors should focus onhow cultural differences affect the integration process, and what other factorsfacilitate 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

helpful comments on earlier drafts of this paper. We would also like to thankHarry Barkema, Laurence Capron, Jeffrey Krug, Constantinos Markides, RichardSchoenberg, and Maurizio Zollo for providing us with unpublished data forinclusion 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 CulturalDifferences

Proposed Moderators

Cartwright andCooper (1996)

The attractiveness andacceptability of acombination partner’s cultureis dependent on whether thatculture is perceived asincreasing or reducingemployee participation andautonomy.

In traditional combinationsdifferences in organizationalculture are accepted by thetarget as long as employeeautonomy is increased.Diminishing autonomy mayresult in strong employeeresistance.

Direction of culturalchangePower differential

The success of traditionalcombinations depends onaccepted assimilation; that ofcollaborative combinations(e.g. mergers of equals) onsmooth integration.

Cultural differences incollaborative combinations aresupposed to lead to integrationproblems no matter what thedirection of cultural change is.The greater the dissimilaritybetween cultural types, thelonger the integration period.

David and Singh(1994)

Strategic, legal, and culturalissues can be integrated in amulti-level system of sourcesand loci of culturaldifferences to determine thedegree of acquisition culturalrisk.Cultural distance canoriginate from differences inorganisational, professional,or national culture.

Post-acquisition cultural riskvaries depending on severalcontingencies, e.g. divisionsand functions of the targetfirm. Post-acquisition regimesimposed on the target by theacquiring firm have asignificant influence onintegration outcomes asperceptions of injustice(relative deprivation) caneasily lead to employee stressand resistance.

External conditions(e.g. legal systems)Integration levelIntegration modePost-acquisitionregime of acquirerCultural risk of targetfirm operations

Elsass and Veiga(1994)

Organizational acculturationcan be described as dynamicinteraction between theopposing forces of culturaldifferentiation (the desire ofgroups to maintain theircultural identity), andorganizational integration(the organizational need forcultural groups to worktogether).

Cultural differences betweencombining organizationsstrengthen the forces ofcultural differentiation, whichtend to resist thepost-combination integrationforces.

Degree of acculturativetension

The resulting acculturativetension can causecross-cultural conflicts.

Proposed Moderators

Javidan and House(2002)

National cultural differencesaffect the post-merger firm’sstrategic intent andorganizational alignment incross-border mergers.

Cultural differences betweenmerging organizationscomplicate communication,decision-making, and theformulation of a joint strategicintent.

Country specificexternal conditionsIntegrationmanagement

Country specific externalconditions make externaladaption more difficult.To overcome these difficultiesorganizational alignment mustbe reached by successfulintegration management.

Kleppestø (1998) Organizational culture is seenas a process which is shapedby the highly contextualcreation of (narrated)meaning.

Cultural differences reinforcethe creation of ingroup vs.outgroup bias and strengthenthe claim for distinction inboth organizations.

Inter-organizationalcommunication

In M&A the need of thecombined organizations for a(re)negotiation of meaning,identity, and relationsincreases and descriptions ofthe situation at hand arefrequently exchanged torenegotiate their meaning andreveal implications fororganizational identities andinter-organizationalrelationships.

Consequently, the notion ofbeing culturally different isstressed when communicatingwith each other as the need toidentify differences is anessential part of the dynamicprocess of identification andsense-making.Images of culture clashes maybe used to maintain andlegitimize organizationalidentities, which can lead toserious integration problems.

Larsson (1990) Acculturation, defined as thedevelopment of jointly sharedmeanings fosteringco-operation between joiningfirms, is a key process inM&A.

Cultural differences reinforceall barriers to acculturation:Initial dilution as lessmeanings will be shared bymembers of the combinedorganization;

Management ofacculturation barriers

The development ofproductive jointorganisational cultures inM&A is complicated bybarriers to constructivecultural cooperation.

Lack of joint socialisationmechanisms;Separate cultural maintenancemechanisms as the ownculture is glorified by bothcombination partners.

Proposed Moderators

Marks and Mirvis(1998)

The extent ofpost-combination changetaking place in the acquiringand acquired firms definedifferent integration types.

The degree of culturaldifferences determineswhether these are beneficial ordetrimental.

Degree of culturaldifferences

Two identical organizationalcultures can be no better thanthe sum of its parts while toomuch distinction in underlyingvalues and ways ofapproaching work isunhealthy.A medium degree of culturaldifferences is beneficial as itprompts positive debate aboutwhat is best for thepost-combinationorganization.

Nahavandi andMalekzadeh(1988)

Both acquired and acquiringfirm choose preferred modesof acculturation which haveto be congruent for successfulintegration.The acquired firm’s preferredmode of acculturation isdetermined by the desire topreserve its own culturalpractices and theattractiveness of the acquirer.The acquiring firm’spreferred mode ofacculturation is determinedby its multiculturalism andthe degree of relatednessbetween the firms.

When the integration level ishigh cultural differences areconsidered to be an obstacle.Perceptions of culturaldifferences create a strongdesire to preserve its ownculture in the targetorganization, which makes theacquirer’s culture lessattractive.The resulting incongruence ofpreferred acculturation modesleads to acculturative stressand puts successful M&Aimplementation at risk.

Integration levelRelatednessMulticulturalism ofacquirerTarget’s desire topreserve own cultureAttractiveness ofacquirer

Olie (1990) M&A integration approachesdepend on the level ofintegration, the degree ofcultural exchange, the extentto which the own culturalidentity is valued and theother firm’s culture isregarded as attractive, andexternal conditions.

As long as the acquiringorganization is able to exert“asymmetric power” toimpose its culture on thetarget, cultural differences willnot endanger M&A success.Serious integration problemsare expected in mergers ofequals due to power“symmetry” and the need tocreate a coherent “thirdculture.”

Integration levelDegree of culturalexchangeStrength of culturalidentitiesAttractiveness ofcombination partnersExternal conditionsPower differential

The “symmetry” of powerbetween combinationpartners plays a major role inpredicting combinationoutcomes.

Proposed Moderators

Sales and Mirvis(1984)

Acculturation form and typedepend on the powerdifferential betweencombining firms, the natureof relations between them,and whether the acquired firmis allowed to keep its owncultural identity.

Given two differentorganizational cultures,whether the M&A will besuccessful depends on thequality of the relationshipbetween the parties and theacquired firm’s chance toparticipate in selecting theacculturation approach.

Nature of relationsbetween combinationpartnersPower differentialDegree of targetautonomy removal

Tension is created whencultural differences arecombined with powerimbalances.

Vaara (2003) Post-acquisitiondecision-making is acontextual process which ischaracterized by uncertaintyand ambiguity while beingcharged with political tension.

Cultural differences increasethe degree of ambiguitysurrounding an acquisition aspeople of differentbackgrounds and socialidentities are brought together.

Integrationmanagement

Different social identities ofdecision-makers are createdthrough the responsibility forthe acquisition and previousorganizational and culturalbackgrounds. These distinctsocial identities lead todifferent frames forinterpreting integrationissues.

Cultural confusion is createddue to problems of socialinteraction andcommunication which in turndrives organizationalhypocrisy when integrationrhetoric is only looselycoupled with actions.Cultural confusion andambiguity facilitatepoliticization of significantintegration issues.

IMPACT OF CULTURAL DIFFERENCES ON MERGER AND ACQUISITION PERFORMANCE - A CRITICAL RESEARCH REVIEW...

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