International mergers: lost in translation?

Culture clashes that arise between managers in different countries can become quite expensive, explains Strategy & Business. This can affect the level of foreign direct investment, equity, the flow of venture capital, and stock market value. Less evident is that divergent cultural backgrounds have an impact on another increasingly important aspect of global business: cross-border take over activities.

Their number is rising, after all, their proportion nearly doubled between 1998 and 2007, from 23 per cent of all mergers to 45 per cent.

It seems only logical that culture crashes between managers at merging firms could make it harder to extract value from the deal. After all, success of M&A activities often relies on synergy effects such as reduced costs, increased revenues, and streamlined operations. And those rely on employees working together in the postmerger period. Employees who don’t have similar cultural backgrounds could misunderstand one another, dampening their willingness to cooperate.

Surprisingly, after analysing a large set of mergers that occurred in 52 countries between 1991 and 2008, the new study “Lost in Translation? The Effect of Cultural Values on Mergers around the World,” found that international deals produce higher stock returns (an increase of 3.64 per cent) than domestic mergers (2.52 per cent). In fact, cross-border mergers have become increasingly tempting because they offer a larger selection of potential partners and provide opportunities in new markets.

But the authors also found that strong similarities in national culture, though often overlooked, can prove to be a significant factor in determining the likelihood and eventual success of mergers. And the wider the cultural chasm between two countries, the lower the number of cross-border mergers undertaken by firms operating in those nations. Some deals apparently get “lost in translation,” as the authors say.

The nations most frequently targeted in cross-border mergers — the U.S., the U.K., Canada, Germany, and France — have seen an uptick in acquisitions, and so have many emerging markets not commonly touted as economic powerhouses.

Barbara Bierach