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National Culture, a Relevant Factor in Cross-border Mergers and Acquisitions?

-How the acquirers national culture influences international mergers and acquisitions-

Maarten Versloot

National Culture, a Relevant Factor in Crossborder Mergers and Acquisitions?

-How the acquirers national culture influences international mergers and acquisitions-

Author : E-mail: ANR:

Maarten Versloot m.c.versloot@uvt.nl s490052

Supervisor: Dr. Wolfgang Sofka Co-reader: Drs. Miranda Stienstra Date of defense: 08-12-2010 Master International Management Department of Organisation & Strategy Tilburg School of Economics and Management Tilburg University

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Management summary
Different authors have provided us with different results regarding the role of national cultural distance in cross-border mergers and acquisitions. Results rank from a positive (Morosini et al., 1998) to a negative (Datta and Puia, 1995) influence. According to Reus and Lamont (2009), the effect is double sided. On the one hand, there is a negative influence on the integration capabilities and on the other hand, there is a positive influence on the relationship between the integration capabilities and post-acquisition performance. We investigate the addition of the national culture of the acquirer as a variable to their framework, since we believe it has a significant influence on the relationship between national cultural distance, the integration capabilities and post-acquisition performance. Each national culture develops its own routines and repertoires over time and these influence the companies based in that culture. This leads to certain companies having routines and repertoires that give them a higher or lower level on their ability to integrate an acquisition. Therefore a company from a culture that has developed routines and repertoires positively influencing the firms ability to integrate, should be able to offset the negative influence of an increased national cultural distance on its integration capabilities, causing it to outperform a firm from a culture that has developed such routines and repertoires to a lesser extent. To test the relevance of adding national culture to the existing framework of Reus and Lamont (2009), we have developed four hypotheses that link national culture, in the form of the Hofstede dimensions, with the integration capabilities. Next to these links that are predicted with the hypotheses, we also explore whether other links between the Hofstede dimension scores and the integration capabilities exist. In addition to that, we test whether an increased score on the Hofstede dimension uncertainty avoidance has a positive influence on post-acquisition performance of the firm, as claimed by Pursche (1990), through its influence on the relationship between the integration capabilities and post-international acquisition performance. The results of these tests showed that there are links between the national culture and the integration capabilities of the acquirer. Although only one out of four of our hypotheses was confirmed by our tests, our explorative search for links between the other dimensions and the integration capabilities did yield four more connections, involving the integration capabilities key employee retention and communication. The hypothesis predicting a positive influence of the dimension uncertainty avoidance on the relationship between the integration capabilities and performance was not confirmed, leaving the link between the Hofstede dimension scores and the integration capabilities as the most important result of this thesis.

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Preface
The thesis that you are about to read is a masters thesis of the department of Organisation & Strategy, written as a part of the Master of Science International Management at the Tilburg School of Economics and Management of Tilburg University. In this thesis, the influence of the national culture of the acquirer in a cross-border merger or acquisition, is investigated. The reason why I have opted for this subject is that I find it very interesting that there appears to be a large difference in the behavior and performance of the acquiring firms involved in such transactions. After reading several articles on the subject, I realized that the national culture of the acquirer might be causing this variance and that research investigating this influence has not yet been done. I would like to thank my girlfriend Marieke for her support during the process of writing this thesis. You helped me to stay motivated and you gave me good advices related to my thesis. Of course, I would also like to thank my parents, for their support, not only while I was writing this thesis, but also during the other years of my studies. In addition to that, I thank my sisters, my girlfriend s parents, my friends, and colleagues for their support and interest. My fellow EBT organization members also deserve a word, since their interest and questions with regard to my thesis gave me new insights and helped me a lot. Last, but certainly not least, I would like to thank Dr. Wolfgang Sofka for his ideas, remarks, and help in writing this thesis and solving theoretical and empirical issues. Tilburg, december-2010 Maarten Versloot

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Table of contents
Chapter 1 Introduction 1.1 Introduction 1.2 Problem indication 1.3 Problem statement and research questions 1.4 Relevance 1.5 Structure Chapter 2 Theoretical review 2.1 Introduction 2.2 Cross-border acquisitions, national culture and national cultural distance 2.2.1 Cross-border mergers and acquisitions 2.2.2 National culture 2.2.3 The five dimensions by Hofstede 2.2.4 National cultural distance 2.2.5 National cultural distance and post-acquisition performance 2.3 The double edged sword of cultural distance 2.3.1 The framework by Reus and Lamont (2009) 2.3.2 Integration capabilities 2.3.3 The negative influence of national cultural distance 2.3.4 The positive influence of national cultural distance 2.4 National culture and cross-border acquisitions 2.4.1 Introduction 2.4.2 The influence of national culture on business 2.4.3 National culture and international acquisitions 2.4.4 National culture and integration capabilities 2.4.5 National culture and the relationship between integration capabilities and post merger performance Chapter 3: Methodology 3.1 Introduction 3.2 Sample 3.3 Hypotheses one 3.3.1 Variables 3.3.2 Descriptive statistics 3.3.3 Correlation 3.3.3 Regression analysis Page 1 1 2 2 3 3 4 4 4 4 4 5 6 6 7 7 8 9 11 13 13 13 14 14 16 18 18 18 18 18 20 21 21

3.4 Hypothesis two 3.4.1 Variables 3.4.2 Descriptive statistics 3.4.3 Correlation 3.4.4 Regression analysis Chapter 4 Results 4.1 Introduction 4.2 Hypotheses one 4.2.1 Descriptive statistics 4.2.2 Correlation 4.2.3 Regression analysis 4.3 Hypothesis two 4.3.1 Descriptive statistics 4.3.2 Correlation 4.3.3 Regression analysis Chapter 5 Discussions, conclusions and recommendations 5.1 Introduction 5.2 Discussion 5.2.1 Hypothesis 1a 5.2.2 Hypothesis 1b 5.2.3 Hypothesis 1c 5.2.4 Hypothesis 1d 5.2.5 Hypothesis 2 5.2.6 Explorative research 5.3 Conclusions and recommendations 5.3.1 Conclusions 5.3.2 Recommendations 5.4 Limitations and suggestions 5.4.1 Limitations of this research 5.4.2 Suggestions for further research Literature list Appendices: Appendix I Appendix II

22 22 22 23 23 25 25 25 25 27 28 31 31 32 33 35 35 35 35 35 35 35 35 36 36 36 37 38 38 38 I

Tables and graphs from Chapter 3 Methodology. Tables from Chapter 4 Results.

VII IX

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Chapter 1 Introduction
1.1 Introduction
In todays economy, more and more cross-border mergers and acquisitions take place. Figure 1.1, shows the number of cross-border mergers and acquisitions, involving publicly traded companies, in the period 1985-2007. Figure 1.1: Number of cross-border mergers and acquisitions (1985-2007)

Number of cross-border mergers and acquisitions


1200 1000 800 600 400 200 0

Source: Securities Data Corporation Mergers and Acquisition Database

Behind every acquisition you can find the same goal: to create value. How this value is to be created can differ from acquisition to acquisition, but the purpose to create value remains. And most acquisitions do create value. In a lot of cases though, the value is not captured by the acquirer, but by the shareholder(s) of the acquired firm, leaving the shareholders of the acquiring firm with no gain or even a loss! When acquisitions are announced, executives proudly announce how this deal is of utter importance for their company and how the combination of both companies will create value for their shareholders. How come these plans, that appear to be well thought through by the company executives and dozens of expensive consultants, in practice turn out not to be creating value? Multiple books, articles and papers have been devoted to identify the causes of these failures. One of the identified causes in literature is the cultural distance between both firms. The larger the cultural distance between two firms, the worse the post-acquisition performance will be (Datta and Puia, 1995). However, cultural distance can also have a positive influence on post-acquisition performance (Morisini et al., 1998). This positive influence stems from the fact that the larger the cultural distance between the two companies, the more different their routines and repertoires will be, increasing the possible value to be abstracted from the combination of the routines and repertoires of both firms (Morosini et al., 1998).

Section 1.2 will distill the problem this master thesis focuses on. The main research question will be stated in section 1.3, along with the other research questions. Section 1.4 will cover the theoretical and practical relevance of this thesis, while in section 1.5, the structure of this thesis will be discussed.

1.2 Problem indication


In their 2009 paper, Reus and Lamont discuss the effects, both positive and negative, that cultural distance has on the post-acquisition performance of the acquiring firm. In order to empirically test these effects, a sample of cross-border acquisitions made by American companies was used. The result of their research was inconclusive; cultural distance has a mixed influence on post-acquisition performance. In 1998, Morosini et al. investigated whether cultural distance has a positive influence on cross-border acquisitions. This claim was empirically tested using a sample of cross-border acquisitions, either made by Italian firms in Europe, or in Italy by European firms. This research provided empirical support for the notion that cultural distance enhances post-acquisition performance. Papers by Calori et al. (1994) and Slangen (2006) indicate that the acquirers nationality has an influence on the control mechanism used in the integration process of the acquired unit and that the level of integration of the acquired unit is influencing the future performance of that unit. Combining these conclusions, we have an indication that the national culture of the acquirer has an influence on Reus and Lamonts framework, especially with regard to the integration process, which Reus and Lamont (2009) define with the integration capabilities of the acquiring firm. Since no investigation has yet been done on the influence of national culture on the integration capabilities, and thereby the post merger performance, and since we think it is present, this will be the problem area of this thesis.

1.3 Problem statement and research questions


What is the influence of national culture in the framework by Reus and Lamont (2009)? Does and if so how, the national culture of the acquirer influence the integration capabilities of the firm, and thereby its performance? This leads to the following main research question: Is the variable national culture a relevant addition to the existing framework of national cultural distance, integration capabilities and post-acquisition performance? This main research question will be answered will with the help of the following research questions: What is national culture? What is national cultural distance and what is its role in a cross-border acquisition? What are the integration capabilities of the acquiring firm? How does national culture influence the level of integration capabilities?

1.4 Relevance
As can be seen in the graph in figure 1.1, the number of cross-border acquisitions is increasing. The performance of acquiring firms after such transactions is not always as expected. According to some authors this is due to national cultural distance, while others found a positive relationship between the cultural distance involved and the post-acquisition performance. The theoretical relevance of this thesis is that we try to explain this variance in evidence about the influence of national cultural distance on post-(international) acquisition performance by adding the variable national culture to the equation. The managerial or practical relevance is that the influence of the acquirers national culture on this, so far unexplained, variance in performance and level of integration capabilities, can give stakeholders new ideas as to how to behave in such a transaction. These practical recommendations can be found in chapter 5.

1.5 Structure
Following this introductory chapter, the second chapter of this thesis will review the relevant literature regarding the integration capabilities, national cultural distance, post-(international) acquisition performance, national culture, and the framework by Reus and Lamont (2009). In addition to that it will investigate the addition of the variable national culture to that framework. The third chapter will discuss the methodology used in order to test the hypotheses that have arisen from the second chapter. Chapter 4 will present the results of those tests, while the implications of the results for this research will be discussed in chapter 5. In addition to that, chapter 5 will present the conclusions of this research and the accompanying recommendations, as well as the limitations and possibilities for further research. Each of the chapters will begin with a short introduction on the subjects to be covered in that chapter. The main concepts in this thesis are: national cultural distance, post-(international) acquisition performance, the integration capabilities of the acquiring firm and the variable we propose to add to this framework, national culture of the acquirer. When mentioning these constructs, they will be in the form as described above, or in a variation. By using variations, we try to keep the text as varied as possible instead of repeating the same multi-worded constructs.

Chapter 2 Theoretical review


2.1 Introduction
This chapter aims at reviewing the relevant literature on the subject of national culture, national cultural distance, integration capabilities, post-(international) acquisition performance, and the relationships between these factors. More specifically, this review will focus on the role of national culture as an addition to the framework describing the influence of the integration capabilities on the relationship between national cultural distance and post-international acquisition performance (Reus and Lamont, 2009). We will start with a section (2.2), that introduces cross-border mergers and the concepts of national culture and national cultural distance. Section 2.3 will lay-out the existing framework of Reus and Lamont (2009). The final section of this chapter (2.4), will link national culture to that framework and develop hypotheses to test that link.

2.2 Cross-border acquisitions, national culture and national cultural distance


2.2.1 Cross-border mergers and acquisitions Cross-border mergers and acquisitions are happening on a frequent basis. Various reasons for such international transactions have been identified, of which some can be specifically linked to the international character of the transaction. For example access to resources not present in the acquirers own culture or country (Jemison and Sitkin, 1986). Whether or not the move across the border was initiated because the situation required a foreign target; a company involved in a cross-border merger or acquisition will encounter both opportunities and challenges related to the international character of such a deal. The performance of the newly combined firm is influenced by many factors. Some of which are exogenous to the firm and/or the transaction, such as the general worldwide economic climate, and others being endogenous, such as the quality of its management. One of the factors identified by literature, is the distance between the culture of the country of the acquirer and the culture of the country of the target, or national cultural distance. To define the concept of national cultural distance, the concept of (national) culture itself needs to be introduced first. 2.2.2 National culture No single correct answer exists to the question: what is culture? An uncountable amount of books and articles have been written to define a certain, or specific type of, culture. Even when one adds the word national to the equation, there still is no single correct definition. The construct of national culture in this research is based on work by Hofstede (1980; 1991; 2001). Hofstede defined culture as: the collective programming of the mind, which distinguishes members of one category from another. This collective programming is not forced upon the members of a national culture, but should be regarded as a treatment, conditioning a group of people in the form of a shared language, religion, history, education, and life experiences, giving them similar norms and values. 4

Members of one national culture will approach a problem or a situation differently compared to members of another national culture (Reus and Lamont, 2009). One could argue, and be right, that cultures do not necessarily have to obey country borders and that different cultures within a nation exist (Lenartowicz and Roth, 1999). However, significant differences between countries, influencing the way people act and interact, have been proven by different studies on national culture (Hofstede, 2001; House et al., 2004). Another type of culture that is of importance in business in general, and in (cross-border) mergers specifically, is corporate culture. Corporate culture can be seen as the national culture of a company or the character of the company (Montana and Charnov, 2008). However, with employees being more deeply embedded in their national, rather than their corporate culture, national culture plays a more important role in international mergers compared to corporate culture (Very et al., 1996; Weber et al., 1996; Very and Sweiger; 2001). Therefore we will not further investigate the construct of corporate culture in this research. 2.2.3 The five dimensions by Hofstede In the seventies, Geert Hofstede, an IBM employee, started a study that aimed to identify and measure dimensions of cultures. In other words, Hofstede wanted to measure national culture by comparing the attitudes and values of the members of different national cultures. The data for his original study (1980) came from 116.000 questionnaires filled in by IBM employees in 40 countries. The respondents were all selling and servicing IBM products, thus doing the same task within the same company. Since the respondents used the same technology, had comparable job content, and shared formal procedures, a number of factors could be controlled for. The only thing setting them apart was their nationality, leading to Hofstedes claim that variations in attitudes and values would be related to differences in national culture (Koen, 2005: 63). From the collected data, Hofstede distilled four dimensions. The dimension scores indicate in what direction the norms and values of members of a national culture point. The first dimension Power Distance, describes to what extent the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally (Hofstede, 1991: 262). Hofstedes second dimension is Uncertainty Avoidance. This dimension describes the extent to which the members of a culture feel threatened by uncertain or unknown situations (Hofstede, 1991: 263). The third dimension is Individualism versus Collectivism, a dimension describing whether the ties between individuals are loose, with everyone being expected to look after himself or herself and his or her immediate family only (individualism) or whether people from birth onwards are integrated in strong, cohesive in-groups, which throughout peoples lifetime continue to protect them in exchange for unquestionable loyalty (collectivism) (Hofstede, 1991: 260-1). The fourth dimension, discovered by Hofstede, is Masculinity versus Femininity. This dimension describes whether social gender roles are clearly distinct: men are supposed to be assertive, tough, and focused on material success; women are supposed to be more modest, tender, and concerned with the quality of life or whether the social roles of both genders overlap (Hofstede, 1991: 261-2). 5

Later, a fifth dimension, Long Term Orientation versus Short Term Orientation, was added to this framework, in response to work by Bond et al. (Chinese Culture Connection, 1987). Hofstede gathered the data for his first study (1980) using questionnaires made by western scientists. This created a western bias since the values of non-western respondents would possibly not be fully captured by the questionnaires. This bias was recognized by Bond, who decided to let eastern colleagues prepare an alternative questionnaire; thereby deliberately adding an eastern bias to his research. Based on that research, Hofstede added the fifth dimension long-term orientation to his framework. Long term orientation is related to the fostering of virtues oriented towards future rewards, in particular perseverance and thrift (long term orientation) versus the fostering of virtues related to the past and present, in particular respect for tradition, preservation of face, and fulfilling social obligations (short term orientation) (Hofstede, 1991; 261-3). 2.2.4 National cultural distance Each culture has its own unique set of routines and repertoires due to the unique collective programming that the members of a national culture have undergone. The difference between the shared cultural norms and values in one country and those in another country is called national cultural distance (Kogut and Singh, 1998; Hofstede, 1980). National cultural distance can be estimated as a composite index on the difference in scores on each of Hofstedes (1980) dimensions (Kogut and Singh, 1988). The greater the national cultural distance between two countries, the greater the difference in routines and repertoires (Hofstede, 1980), for example in routines and repertoires related to innovations, the degree of entrepreneurship, working styles, and decision making practices (Morosini et al., 1998). When placing national cultural distance in the context of a cross-border merger, it represents the difference between the shared norms and values of the country of the acquirers national culture and those of the target companys country national culture (Kogut and Singh, 1988). Thus, when two companies from different countries merge, two groups from different cultures meet. Along the way, they will encounter situations and problems together and members from both groups will act and react differently to these situations. 2.2.5 National cultural distance and post-acquisition performance There is no clear cut empirical answer to the question what the influence of national cultural distance on post-international acquisition performance is. According to Slangen (2006), it is contingent upon the level of post-acquisition integration. When the national cultural distance between the acquired unit and the acquirer rises and the acquired unit is being tightly integrated into the acquiring firm, the severity of cultural difficulties is likely to increase (Kogut and Singh, 1988; Very et al., 1997), causing a negative effect on post-international acquisition performance. When the acquired firm is left with a relatively high level of autonomy, it results in a drop in cultural difficulties, to a level that its effect on post acquisition performance is negligible (Hofstede, 2001; Neal, 1998; Slangen, 2006), whether the cultural differences are very large or very small. When combining this knowledge with Morosini et al.s (1998) statement that national cultural distance has a positive influence on post-international acquisition performance, it can be argued that an increased level of 6

national cultural distance has a positive effect when the acquired unit is left with considerable autonomy, since the firm can enhance its routines and repertoires with diverse sets of routines and repertoires from distant cultures, without being harmed by the cultural difficulties (Slangen, 2006). Since a large national cultural distance will increase the chance of these routines and repertoires being significantly different from their own set (Kogut and Singh, 1988), the performance of companies acquiring culturally more distant units should be better than that of those acquiring culturally closer firms (Morosini et al., 1998; Slangen, 2006). Summarizing, it can be said that the influence of national cultural distance is depended upon the steps taken during the post-international acquisition integration period (Haspeslagh and Jemison, 1991). In contrast with Slangen (2006), Haspeslagh and Jemison (1991), argued that an effective integration of operations enhances post-acquisition performance as the combined firm has lower costs, due to increased scale economies in production, marketing, and distribution (Rappaport, 1979; Datta, 1991). Since Slangen (2006), proved empirically that a tight integration of the acquired firm leads to a negative influence of national cultural distance on post-international acquisition performance, the word effective seems to be the key, it might be that the cases investigated by Slangen where ineffective integrations. Concluding these mixed statements about the influence of national cultural distance on the performance of the newly combined firm, we can say that international mergers and acquisitions, present both challenges and opportunities to firms. This was further investigated by Reus and Lamont (2009). Their framework regarding the influence of national cultural distance on post-acquisition performance, will be reviewed in the next section.

2.3 The double edged sword of cultural distance


2.3.1 The framework by Reus and Lamont (2009) In their 2009 paper, The double edged sword of cultural distance, Reus and Lamont, presented a framework depicting the influence of national cultural distance on the post-international acquisition performance of the newly combined firm. The framework is depicted in figure 2.1. Figure 2.1: The framework by Reus and Lamont (2009) National Cultural Distance (NCD) Existing framework

Reus and Lamont (2009)

Integration Capabilities (ICs)

+
Post-International Acquisition or Merger Performance (PIAP) 7

On top of the framework the variable national cultural distance, can be seen. This concept is presented in the previous section. On the left side of this framework, the integration capabilities of the acquiring firm can be found. These will be covered in subsection 2.3.2. The direct relationship between national cultural distance and the integration capabilities is believed to be negative, while an increased national cultural distance makes the integration capabilities more useful, therefore having a positive effect on the relationship between the integration capabilities and post-international acquisition performance. These effects will be further reviewed in subsections 2.3.3 and 2.3.4. The relationship between the integration capabilities and the post-acquisition performance of the newly combined firm is depicted as positive since it is assumed that the higher a firms integration capabilities are, thus the better a firm is at integrating an acquired unit, the better the its results are expected to be. 2.3.2 Integration capabilities The real challenge in an (international) merger or acquisition starts after the deal has been closed. Now it is time for the acquiring companys management to fulfill all the promises they made to their shareholders, employees and other stakeholders when announcing the acquisition. However, just closing the deal is not going to fulfill those promises. Whether the acquired unit will be seamlessly integrated in to the acquiring firm or whether it will remain as a relatively independent unit, some level of integration will have to take place, in order to make sure that the routines and repertoires of both firms can be put to the best use. This integration following an acquisition takes place at a technical, cultural, and political level and is a very crucial issue for the success of the acquisition (Shirvastava, 1985; Buono and Bowditch, 1989; Haspeslagh and Jemison, 1991). All decisions and actions regarding the integration process are influenced by the capacity of the acquiring firm to integrate, or in other words its integration capabilities. Integration capabilities can be seen as routines and repertoires used in the integration process. The higher the level of a firms integration capabilities, the better the firm will be able to make use of the acquired unit and the better the post-acquisition performance will be. The level of integration capabilities the acquiring firm brings to every integration process is influenced by multiple factors, for example previous (international) acquisition experience (Calori et al., 1994; Johanson and Vahlne, 1977; Markides and Ittner, 1994). In addition to the factors that are influencing the acquirers integration capabilities at the firm level, the cross-border acquisition itself also influences the level of integration capabilities of the acquiring firm. The process view of acquisition research has emphasized several integration capabilities. Examples of work in this direction are papers written by Haspeslagh and Jemison (1991) and Jemison and Sitkin (1986). Since this research studies the influence of national culture on the relationship between national cultural distance and post-(international) acquisition performance, relevant integration capabilities are those that are influenced by national cultural distance and which are deemed to be critical for the newly combined firms performance. Reus and Lamont (2009) identified three integration capabilities that fit this description. The three capabilities are: understandability, communication, and key employee retention.

Understandability is the extent to which employees are able to learn and codify the practices and routines that underlie potential resource advantages during the integration process (Zander and Kogut, 1995; Zollo and Singh, 2004). Access to these new routines, repertoires and resources, does not guarantee that the acquirer will be able to profit from them (Marcus and Nichols, 1999). They need to understand them. When important knowledge from the acquired company is understood, its transfer and combination with the acquirers own pool of routines, repertoires and resources will go easier and better (Contractor, 2000). According to Zollo and Singh (2004), post-(international) acquisition performance is positively related to the ability of an acquirer to codify and learn the routines and repertoires of the acquired unit (Reus and Lamont, 2009). Communication is the ability of both workforces to correspond with each other during the acquisition and integration period (Larsson and Finkelstein, 1999; Ranft and Lord, 2002). The role of communication during the acquisition and integration period and its influence on the success or failure has been a popular item for authors (Bastien, 1987; Bresman, Birkinshaw and Nobel, 1999; Ranft and Lord, 2002; Schweiger and DeNisi, 1991). The post-acquisition period is seen as the merger of the routines and repertoires which are rooted in both workforces. In order to realize the opportunities the merger presents, both workforces need to develop rich communication with each other (Reus and Lamont, 2009). Even if the routines and repertoires of the acquired firm seem to be easily understood and learned, communication still plays an important role in the post-acquisition periods since a cross-border merger is usually characterized by intense volatility (Ranft and Lord, 2002). In addition to that, communication fosters the development of trust and commitment within the combined firm. Communication is also important in the reduction of negative employee level attitudes about the acquisition and thereby helps to increase firm level success (Schweiger and DeNisi, 1991). Rich communication provides employees with the information they need to accept and understand the necessary changes that follow acquisitions and influences how employees perceive the fairness of an acquisitions by providing them with opportunities to share their viewpoints on the new situation after the acquisition (Ellis, Reus and Lamont, 2009). Key employee retention is the extent to which the acquiring firm is able to retain employees who fulfill a key role in realizing the opportunities the acquisition presents (Ranft and Lord, 2002; Reus and Lamont, 2009). The importance of retaining top-management in order to realize the opportunities that the merger presents has been emphasized by several studies (Jemison and Sitkin, 1986; Bergh, 2001; Canella and Hambrick, 1993; Ranft and Lord, 2002). 2.3.3 The negative influence of national cultural distance In the framework by Reus and Lamont (2009), the integration capabilities of the acquiring firm are impeded by national cultural distance, due to the cultural differences between both groups. The larger the national cultural distance, the larger its negative influence on the integration capabilities will be (Reus and Lamont, 2009). When two domestic firms merge, there is also a chance for cultural difficulties, due to the different corporate cultures that exist amongst companies, and corporate cultural difficulties are comparable with difficulties related to national cultural distance. However, the differences are much bigger, and the chance for difficulties related to culture as well, in an international merger (Very et al., 1996; Weber et al., 1996; Very and Sweiger; 2001), since employees are more deeply embedded in their national culture than their corporate culture (Hofstede, 1980). 9

The strain national cultural distance puts on the integration capabilities of the acquiring firm increases the costs of integration and makes a cultural distant acquisition more expensive to manage compared to a domestic one (Kogut and Singh, 1988). This is caused by the cultural ambiguity and process losses due to the collision of cultures during the post-acquisition period, which a high level of cultural distance is likely to cause (Jemison and Sitkin, 1986; Buono et al., 1985). A higher level of cultural distance between the acquirer and the acquired firm is associated with a higher degree of conflict during the post acquisition integration period (Jemison and Sitkin, 1986). Since a lot of differences exists between companies from two different cultures, there will differences in organizational practices (Child et al., 2001), such as decision making practices (Cushman and King, 1985). The differences in organizational culture and management practices between both firms may become a source of conflicts (Buono and Bowditch, 1989), impeding the implementation of synergies and thereby limiting the benefits of the merger (Haspeslagh and Jemison, 1991; Chatterjee et al., 1992). The larger the cultural distance between the country of the acquirer and the country of the acquired unit is, the more complicated the integration and transfer of routines and repertoires will be (Geringer et al., 1989). Inter firm contact, as a result of an acquisition, leads to misunderstandings and misattributions of motives and intentions, impeding smooth interactions between employees from both companies (Buono and Bowditch, 1989). These misunderstandings and misattributions lead to problematic interactions, which on their part lead to negative feelings amongst the members of the involved workforce. Examples of those are stress, discomfort, hostility, confusions, uncertainty, and helplessness (Elsass & Veiga, 1994; Hofstede, 2001). The disruptive tension that members of one culture feel when they are forced to interact with members of another culture is called acculturative stress (Very et al., 1996). It is argued that this stress decreases loyalty, commitment, satisfaction, cooperation, and employee productivity (Very et al., 1996; Buono and Bowditch, 1989), increases conflict potentials and hinders the agreement over management issues. It also results in communication breakdowns, management underperformance, and resistance to directives from the parent company (Neal, 1998). Generally, it is said that the larger the cultural differences between the acquirer and the acquired unit is, the larger the acculturative stress and its consequences will be (Very et al., 1996). Acquiring firms often try to tackle or avoid these issues by replacing the acquired firms management with management of their own (Cannella and Hambirck, 1993). In other cases, the acquiring firm may have no other choice than to bring in its own management since the managers of the acquired unit leave on their own account (Krug and Nigh, 2001). These problems lead to a destruction of human resources, which is a destruction of financial resources as well (Hofstede, 2001; Slangen, 2006). These findings are confirmed by researchers of KPMG: according to one third of the executives they interviewed, acquisition failures where caused by cultural differences (Kelly et al., 1999). The problems caused by national cultural distance in a cross-border merger that are described above can be linked to the negative direct influence that national cultural distance has on the integration capabilities that we have introduced earlier: understandability, communication, and key employee retention. National cultural distance has a direct impeding effect on understandability. This is caused by the lack of insight in the local culture and business practices in the culturally distant market where the acquired firm is based, from which local knowledge originates (Luo, 2002, Zaheer, 1995). Since culturally disparate knowledge is established by the unique treatment that the local national culture has 10

undergone, is pretty complicated to be able to understand it (Zander and Kogut, 1995). Not being familiar with the culture in which a certain knowledge is rooted, makes it more difficult to understand its functional attributes and benefits, and in addition to that, makes it also more difficult to explain and or teach how the knowledge has to be used in order to realize the full learning potential an international acquisition of a cultural distant firm presents. A shared set of norms and values and a shared approach to business fosters and facilitates the understandability of knowledge throughout an organization because they facilitate the identification and interpretation of knowledge (Dhanaraj et al., 2004). Communication also suffers from a direct negative influence by national cultural distance. Very distinct styles and expectations from communication among different national cultures impede the communication between two groups from different cultures. Therefore, cultural distance makes it more difficult for members of both workforces to interact or share an idea. Even though language differences need not to be present due to training and education, organization members are still likely to prefer, and be better able, to communicate with members from national cultures similar to their own, as opposed to members from distant national cultures (Lane et al., 2004). It therefore can be said that an increased national cultural distance has a negative influence on communication. The third integration capability, key employee retention, is also directly negatively influenced by an increased cultural distance. Cultural differences between two groups can lead to us versus them situations between both groups (Huntington, 1993), and are likely to restrain the extent to which members from both groups will be developing strong relations (Luo, 2001). The differences in culture between both groups can cause clashes about what each group considers being appropriate behavior, which in turn increases the likelihood of mistrust and conflict among them (Cartwright and Cooper, 1992; Datta and Puia, 1995). Acquired employees may perceive the acquisition as a threat to their status due to the us versus them idea (Krug and Hegarty, 1997) and will be less willing to adjust or accept practices that are very different compared to their own cultures norms and values. (Reus and Lamont, 2009). 2.3.4 The positive influence of national cultural distance The outcome and severity of the negative effects of national cultural distance is dependent upon the actions taken and decisions made during the post-(international) acquisition integration period (Haspeslagh and Jemison, 1991), meaning that the firms management has a direct influence on controlling the severity of the negative effect national cultural distance has on post-acquisition performance through its negative effect on the integration capabilities. When the acquiring firm is able to successfully diminish its negative effect, cultural distance can even have a positive influence on the post-acquisition performance, since it strengthens the positive relationship the integration capabilities have with post-acquisition performance. This is caused by the fact that the extra learning opportunities an increased national cultural distance provides can be made use of with integration capabilities. The better these capabilities, the more learning opportunities can be turned in to competitive advantages for the acquiring firm (Reus and Lamont, 2009). The positive effect may be able offset the negative impact of the cultural difficulties (Ghoshal, 1987). The ability to develop certain routines and repertoires is dependent on the national culture of the country in which the company is operating. By acquiring a company from a cultural distant country, a company is able to obtain routines and repertoires that are not easily reproduced in its own national 11

culture (Barney, 1991). Combining these newly obtained routines and repertoires with the ones already existing within the firm, potentially enhances the combined firms competitive advantage (Jemison and Sitkin, 1986). The opportunity to learn from and make use of these previously unknown and unavailable routines and repertoires increases when the cultural distance between the acquirer and the acquired unit increases, suggesting a positive relation between cultural distance and post-international acquisition performance (Reus and Lamont, 2009). In other words, national cultural distance enriches the newly formed combination of firms with unique capabilities. In addition to this viewpoint, other authors have argued that in culturally diverse organizations, managers will be more likely to consider different viewpoints, and alternative solutions to business problems critical to the firm, and therefore have the ability to enhance their comprehensiveness in decision-making (Gomez-Mejia and Palich, 1997). When looking at cultural heterogeneity in a company in the domestic context, it is argued that this encourages creativity and innovative behavior among organization members, and more successful marketing to different customer types (Cox, 1991). Cultural heterogeneity may also help to break rigidities in the acquiring firm and help to develop new and richer resources (Barkema and Vermeulen, 1998). National cultural distance strengthens the positive relationship between the integration capabilities and the post-acquisition performance of the newly combined firm. Understandability becomes more important, the more culturally distant a merger partner is, since the ability to understand foreign routines and repertoires that are unique to that culture, plays a crucial role in reaping the potential rewards of a cultural distant acquisition. Communication helps organization members to send and receive critical information about the routines and repertoires rooted in the acquired companys culture (Reus and Lamont, 2009). In addition to that, communication enhances trust between groups (Citera and Rentsch, 1999), and therefore has the ability to function as an important source of common glue or shared identity that is critical for the transfer of uniquely held routines and repertoires during the post-acquisition integration period (Morosini, 2005). Rich communication allows for greater cross-cultural learning of routines and repertoires that are rooted in cultures distant from the acquirers culture (Reus and Lamont, 2009). The importance of the capability to retain key employees also increases when cultural distance does, since these employees possess valuable knowledge and are instrumental in the process of learning across firm boundaries, and the further development, advancement, and functioning of these routines and repertoires (Ranft and Lord, 2002). When acquirers are able to retain key employees after a merger with a high level of national cultural distance, this will lead to greater opportunities to realize learning and combine more diverse viewpoints (Reus and Lamont, 2009). It is important to notice, that the access to different routines and repertoires provides an opportunity for success, not a guarantee, that can be realized by having strong integration capabilities (Ghoshal, 1987).

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2.4 National Culture and cross-border acquisitions


2.4.1 Introduction In the previous section (2.3), existing literature on the relationship between national cultural distance, the integration capabilities of the acquiring firm and post merger performance was reviewed. Special attention was paid to the framework of Reus and Lamont (2009). In this section, we argue that the variable national culture should be added to the existing framework. The adapted framework, which now includes the variable national culture, and the effects it has on the existing framework, can be seen in figure 2.2. In the following subsections (2.4.2 and 2.4.3) of this section, the concept of national culture will be linked to both cross-border mergers in general and to the framework. At the end of subsections 2.4.4 and 2.4.5, we develop hypotheses based on the literature. The hypotheses that will be developed in subsection 2.4.4 are depicted in the framework by the arrow that is denoted with an A, while the hypothesis that is covered in subsection 2.4.5 is depicted with the arrow that is denoted with a B in figure 2.2. Figure 2.2: Adapted framework Variable and effects added to framework National Culture (NC) National Cultural Distance (NCD) Existing framework

A B +

Reus and Lamont (2009)

Integration Capabilities (ICs)

+
Post-International Acquisition or Merger Performance (PIAP) 2.4.2 The influence of national culture on business With each treatment that members of a national culture undergo, being unique, it means that members in each national culture develop specific routines and repertoires, which are significantly different from those of members from other national cultures (Haspeslagh and Jemison, 1991; Hofstede, 2001; Jemison and Sitkin, 1986). These routines and repertoires do not just influence what its members eat or how they express their feelings, but they also influence their way of organizing business activities. An extensive amount of research has shown the influence of national culture on management: work related values (Hofstede, 1980), cognitive frames and attitudes (Haire et al., 1966; Laurent, 1983), HRM policies (Pascala and 13

Maguire, 1980; Child, 1981), negotiation practices, leadership styles (Smith et al., 1992), organizational structures (Chandler, 1986) and control mechanisms (Bartlett and Ghoshal, 1989; Child, 1990). Calori et al. (1994) share the view that cultural factors have to be taken in to account in management theories, and that characteristics of the administrative heritage of firms are rooted in their original national culture. The national culture of the firms founders and the national circumstances of their foundations shape the routines and repertoires of a firm (Pettigrew, 1979), or as Barney (1988) put it: a firms institutional environment and the historical path of development of routines and repertoires that generate a firms competitive advantage appear to be embedded in national culture, meaning that certain routines are more in common and stronger developed in some national cultures than in others (Shane, 1992; Schneider and DeMeyer, 1991; Kreacic and Marsh, 1986; Hofstede, 1980). The differences in routines and repertoires of firms that can be attributed to national culture are very broad and can be found amongst Hofstedes (1980) dimensions. 2.4.3 National culture and international acquisitions When a firm acquires a firm abroad, it will bring along its own administrative heritage, including its routines and repertoires (Kogut, 1991; Calori et al., 1994). Specific routines and repertoires that are identified as being critical to post-acquisition performance have also been shown to vary across national cultures (Jemison and Sitkin, 1986; Hofstede, 1980). Examples of such routines and repertoires are related to innovation effectiveness (Shane, 1993), degree of entrepreneurship (McGrath et al, 1992), decision making practices (Kreacic and Marsh, 1986), administrative practices, incentive routines, and working styles (Hofstede, 1980; Shane, 1992). 2.4.4 National culture and integration capabilities National culture is the collective programming of the mind (Hofstede, 1980; 2001). Due to this collective programming each culture has its own routines and repertoires and the organization of business activities is influenced by these routines and repertoires, some of which have shown to be crucial to the post-acquisition performance (Jemison and Sitkin, 1986; Hofstede, 1980). It thus seems to be that the routines and repertoires of a firm, among which the integration capabilities, are, at least partially, influenced by the national culture of the country where the acquiring firm is based. Research that studies the influence of national culture on the integration and control of newly acquired units was done by Calori et al. (1994). Their research looked at the differences between French, British and American acquirers when integrating and controlling a foreign acquired unit. In Anglo Saxon cultures, an organization is primarily seen as a network of relationships between individuals, who get things done and influenced by communication and negotiating, while its is seen as a hierarchical structure by the French. Due to this difference in view points, American firms rely more on team-work as an informal control mechanism to control their foreign subsidiaries, compared to French companies (Laurent, 1983), who exercise higher formal control by centralizing operations. French, British and American buyers differ in their ways of controlling acquired foreign firms, with these differences being in line with their respective national culture (Calori et al., 1994). Now that we have established a link between culture and the behavior of the acquiring firm in an international acquisition, we need to find hypotheses allowing us to test the influence of national 14

culture on the ability to integrate an acquired unit. We measure national culture using the scores of the acquirers home country on the Hofstede dimensions. From the literature we were able to establish four links between these factors, three which involve the dimension power distance in combination with all three integration capabilities and one involving the dimension individualism versus collectivism and the integration capability communication. For all other (eleven) possible combinations between the five Hofstede dimensions and the three integration capabilities, no indications hinting in the direction of a probable relation were found. Routines and repertoires that are influenced by national culture are unique and not easily replicated (Barney, 1988). Learning is one of them and the ability, or drive, to learn is more developed in certain cultures than others. This influences the level of the integration capability understandability, since people from cultures who lack the habit, ability, or drive to learn from others will be less able to fully understand the acquired routines and repertoires from the acquired foreign firm. When looking at the Hofstede dimensions one can argue that in a culture with a high score on power distance, where information is constrained by hierarchy, understandability is less developed amongst employees lower in the hierarchy since they possess less information, compared to employees in lower power distance cultures who will possess more information, and are used to using it. Also, in high power distance cultures, companies are very centralized. This will lead to the acquired company having to deal much more with the acquiring firm, which in turn leads to acquired employees having to perform tasks according to rules and procedures that were made in another culture and chances are that these are not in line with their own culture, which makes them harder to perform for them and understand (Fiol, 1991; Shane, 1993), therefore impeding understandability. This leads to hypotheses 1.a: The relationship between the acquirers home country score on the Hofstede dimension power distance and the integration capability understandability is negative. A high power distance will lead to less sharing of information and higher boundaries for inferiors to communicate with their superiors (Hofstede, 2001: 107-8; Koen, 2005: 64). This impedes within firm communication, especially between the different layers of the firm, thereby impeding the general communication level within the firm. After the acquisition or merger has become a fact, this lower level of within firm communication within the acquiring firm will make it more difficult for members of both firms to communicate across former firm boundaries, since the communication structure is not as developed as it would have been with a lower score on power distance. This way the restricted information flows and the higher communication barriers between the layers of the organization, caused by a high score on the Hofstede dimension power distance will have a negative effect on the acquirers integration capability communication, leading to hypothesis 1.b: The relationship between the acquirers home country score on the Hofstede dimension power distance and the integration capability communication is negative. Cross-cultural communication research found that in collectivistic cultures, mothers are more prone to encourage their children to listen and have empathy, compared with mothers from individualistic cultures, who rather encourage self-expression (Singlis and Brown, 1995). Because of this increased focus on listening and empathy by mothers in collectivistic cultures, members of such cultures are believed to be better able to communicate with members of another culture. This, in theory, should mean that acquiring companies which are based in a country that has a collectivistic culture, are better at communicating with members of the workforce from the acquired foreign unit, compared to those in 15

a company from a individualistic culture. The hypothesis accompanying this claim is formulated negatively since the Hofstede dimension measures the individualistic level of the culture, rather than the collectivistic level, leading to hypothesis 1.c: The relationship between the acquirers home country score on the Hofstede dimension individualism and the integration capability communication is negative. When the acquiring firm is from a country that has a national culture which scores low on powerdistance, its management will be more democratic which will make them more prone to listen to the thoughts and opinions of the acquired employees, which will in turn make those employees feel better about the newly combined firm and their position within it. A high score on power distance leads to centralization, meaning that more rules and procedures will be coming towards the acquired unit from the acquiring firm. This will make them feel less useful since they only have to execute orders. In addition to that centralization forces the culture and its rule and procedures of the acquirer on the employees of the acquired unit, making the performing employees unhappy (Fiol, 1991; Shane, 1993). Therefore a high score on power distance impedes the integration capability key employee retention, leading to hypothesis 1.d: The relationship between the acquirers home country score on the Hofstede dimension power distance and the integration capability key employee retention is negative. 2.4.5 National culture and the relationship between integration capabilities and post merger performance The national culture of the acquiring company also plays a role in the post-acquisition performance of the firm. If the acquirers home country national culture has a relatively high score on uncertainty avoidance, then the acquirer is expected to have a preference for rules and procedures favoring monitoring, planning and control (Hofstede, 1980). Such rules and procedures have proven to influence post-acquisition performance positively (Achtmeyer and Daniell, 1988). In addition to that it has been proven that companies and employees from cultures with a high score on uncertainty avoidance favor short-term feedback (Hofstede, 1980), leading to post-merger management approaches that usually can be implemented quickly and lead to quick sales growth (Pursche, 1990; Morosini et al., 1998). The question is, how does this fit within the adapted framework, especially with regard to the integration capabilities of the acquiring firm. The relationship between these integration capabilities and post-(international) acquisition performance is positive by default, since the higher the ability of the acquiring firm is to integrate the acquired company the best way possible, the better the result. Thus we assume that, when leaving everything else equal, an above average score on an integration capability leads to a better post-merger performance compared with a situation in which the score on the integration capability is below average. Now add a high score on the Hofstede dimension uncertainty avoidance to the equation. This high score means that there is a rather tight control of the acquiring firm on the acquired unit (Hofstede, 1991; Koen, 2005). This means that the acquiring firms actions, in the integration process, which are influenced by their integration capabilities, will have a larger impact on the acquired firm than when this relationship would be less intense. Thus, making the effect of the level of integration capabilities on the post-acquisition performance of the firm, and thus the relationship between both variables, stronger. This is visualized in the framework depicted in figure 2.2 by arrow B and leads to hypothesis two: 16

The acquirers home country score on the Hofstede dimension uncertainty avoidance has a positive influence on the relationship between the integration capabilities of the acquiring firm and post(international) acquisition performance. The effects of other dimension scores on the relationship between the integration capabilities and the post-acquisition performance have not yet been investigated in existing literature, making it difficult to build hypotheses on them.

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Chapter 3 Methodology
3.1 Introduction
Reus and Lamont (2009) argued that the integration capabilities of the firm should be added to research investigating the effect of national cultural distance on post-(international) acquisition performance. Their paper was the first paper to do so and since the framework of this thesis is based upon theirs, the research framework of this thesis will also be based upon theirs. The most important difference is that they gathered their data using questionnaires. For this thesis however, this is not an option, thus secondary data will be used. Section 3.2 will cover the sample that we will be using in this research. Section 3.3 covers the tests of the first set of hypotheses, while section 3.4 will cover hypothesis two.

3.2 Sample
The hypotheses will be tested with using a sample containing 167 observations of mergers and acquisitions made by public companies, collected using the Securities Data Corporation (SDC) Mergers and Acquisitions Database. The observations are form the period 1998-2000, since this was a period in which the number of mergers and acquisitions was at its highest. If a company has been involved in more than one cross-border acquisitions in the indicated period, only the last acquisition will be taken in to consideration. Also, only acquisitions involving the acquirer buying a 100% equity stake of the target are in the sample. In the case of missing information, the inability to compute one or more integration capabilities, or obtain the targets or the acquirers home country scores on a certain Hofstede dimension, the observation was deleted. Although this means that the sample used in this research is not equal to the population, it is still a usable sample since the values of the key statistics, such as average and standard deviation are relatively equal for the population and the sample, just as the percentage of observations from a certain year. In comparison with existing studies, such as Reus and Lamonts (2009), this sample has not just observations involving companies from one co untry. In order to measure the influence of national culture, we needed observations from multiple countries. In appendix I, table A.I.1 we present some basic information about the distribution of acquirers and targets among countries, while the distribution of the transactions over the years can be found in table A.I.2.

3.3 Hypotheses one


3.3.1 Variables The first set of hypotheses test the relationship between the acquirers country score on the Hofstede dimension and the level of a certain integration capability of the acquiring firm. The dependent variable will be the score of the acquirer on the respective integration capability. The integration capabilities were calculated by Reus and Lamont (2009) using data from a questionnaire. Since this thesis will not use questionnaires, these variables will be computed differently, using proxies. The proxy for understandability is calculated by taking the ratio of the acquired companys industry codes that the acquiring company already possessed before the acquisition. This method of measuring does not capture the actual level of understandability that did happen, it merely measures what, based on information available without using questionnaires, is expected to be the level of understandability 18

between the acquiring and the acquired firm of each others unique routines and repertoires. We argue that companies who have matching sic-codes, codes describing their business activities, should have a better understandability, compared to companies not having, or having less, matching sic-codes. This argument is based on a claim by Singh and Montgomery (1987). They demonstrated that related acquisitions yield higher returns for shareholders compared to unrelated acquisitions, due to the fact that both companies have more in common and will therefore understand each others routines and repertoires better. The sic-codes where obtained from the SDC Mergers and Acquisitions Database. The proxy for communication is calculated by taking the number of nationalities that the senior management of the acquiring firm is composed of. This information was obtained by reviewing either documents that the respective company had filed with the SEC (American companies only) or by reviewing the annual report of the company in question. It is important to notice that this is not a method to actually measure communication. It is merely a proxy estimating the level of communication that is to be expected from this situation, using the data that is publically available. We argue that this is an estimation for communication across firm boundaries after the acquisition since companies who have senior managers from different nationalities will be better able to communicate with employees from foreign (acquired) units compared to companies that have only one nationality amongst senior management. The proxy for key employee retention is calculated by taking the number of senior managers from the acquired firm who have been given a place in the newly combined firms senior management. This information was obtained from the SEC database or by reviewing the annual report of the company in question. Although this will certainly not capture all key employees within the acquired firm, we argue that it should give a good indication as to how the employees of the acquired firm are viewed within the newly combined firm. The independent focus variable is the country of the acquirers score on the respective Hofstede dimension. These scores are obtained from the website of Geert Hofstede, www.geerthofstede.com. Since other factors also influence the level of the integration capabilities of the firm in a certain acquisition, we have to control for these influences as well. The control factors used are based on the model used by Reus and Lamont (2009). This has as a consequence that several factors endogenous to the firm, influencing these capabilities are left out. Even though this may negatively influence the research, we are of the opinion that collecting and analyzing these factors is beyond the scope of this research and that without them the question whether the Hofstede dimensions have an influence on the integration capabilities can still be investigated. The following control variables where used in testing the hypotheses: National Cultural Distance between two countries, calculated using the formula Kogut and Singh (1988) developed based on Hofstedes (1980) national culture scores on all five dimensions. The formula is: national cultural distance = the sum of all squared differences on the dimensions (divided by the variance of that dimension), divided by the number of dimensions used. The data for the national scores on Hofstedes dimensions comes from the website of Geert Hofstede, www.geerthofstede.com.

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Size: Measured as the dollar value of the targets net sales in the year of the acquisition. It is shown by Kusewitt (1985) and Kitching (1967) that the size of an acquisition has an influence on post-acquisition performance. This information is obtained from the SDC database. Year: Economic, financial and political conditions vary by year and have an impact on the performance of acquisitions (Morosini et al., 1998). A big difference is observed between 2000 and the other two years, due to the dot-com bubble, major changes in the telecommunications industry (Reus and Lamont, 2009) and a dramatic increase in cross-border acquisition activities (Hansen, 2001). That is why we have included two dummy variables in this research, one representing acquisitions from 1998 and 1999, another one representing acquisitions from 2000. Country GDP development: Since economic conditions can vary from country to country, the model will control for this. For both the acquirers and the targets country, the development of the GDP in the two years following the merger is calculated, giving an indication as to how the economic situation in the respective countries developed. Ideally we would have done this for every country in which the newly combined firm operates, but that was beyond the scope of this research. This information was obtained from the World Bank. Industry: Just as economic conditions can vary from country to country, or year to year, they can also vary from industry to industry (Morosini et al., 1998). That is why we control for the industry in which the company operates. Ideally we would use a detailed breakdown. However, it turned out that this would add many variables to the model, most of which would only have a small number of observations, therefore impeding the reliability of the measure. We therefore distinguish between high-tech industry, low-and medium-tech industry, and the services industry. An example of a high-tech industry is the biotechnology industry, while the paper producing industry is an example of a low-and medium-tech industry. A bank is an example of a company belonging to the services industry. Other Hofstede dimensions: In addition to the Hofstede dimension score that acts as the focus variable in the hypothesis, the other four dimensions are also included in the model to control for any effect they might have. In addition to that, they help with the explorative part of this thesis, in finding other culture related influences on the integration capabilities. 3.3.2: Descriptive statistics For all variables within this model, the following descriptive statistics will be calculated and presented: mean, standard deviation, variance, and the minimum and maximum observation. For dummy variables, we will present the number of observations for each dummy. In addition to that, we checked the dependent variables, in this case the integration capabilities, for outliers. When detected, we analyzed these outliers and need for them to be removed from the dataset. For the variable understandability, no outlier was detected. However, we did detect outliers for the dependent variables communication and key employee retention, but the nature of the calculation of the variables gives good reasons not to delete outliers, since these were observations that, although more than 1,5 standard deviation away from the mean, are possible outcomes. Since a lot of companies only had one or two nationalities amongst senior management, the few that did have more than three, became outliers. It also turned out that, in a lot of cases, no former senior managers of the acquired firm were part of senior management of the newly combined firm two years later. Therefore, 20

observations representing one or more acquired senior managers in the senior management of the newly combined firm have become outliers. The distribution for the variables can be found in figures A.I.1 to A.I.3 in appendix I. Furthermore, we will use the descriptive statistics to check for any relationships between the focus and dependent variables. We will divide the dataset in two, dividing between the observations that score below the mean on the independent variable and those above the mean. We will then compare the means of the dependent variables from both groups. Since a negative relation is expected in all hypotheses, the group with the higher scores for the independent variable is expected to have a lower mean on the dependent variable, compared to the group with the lower score. After the calculating both means, we will use a t-test to find out whether these means are significantly different from each other. The outcome of this comparison has to be viewed with caution since it does not capture whether the independent variable in question solely influences the dependent, or whether other variables are (also) involved. 3.3.3 Correlation In addition to presenting the descriptive statistics, we will calculate and present the correlations between all variables in the model, using the Pearsons product-moment correlation coefficient. This will tell us if variables correlate significantly with each other. Special attention will be given to the correlation between the focus and dependent variables, since this will indicate whether a relationship exists between both variables. Again we have to be careful in interpreting the outcome, since it is just the correlation between two variables, not taking any other influences into account. Not only will we look at these correlations to find clues about the relationship between those variables, helpings us to predict whether our hypotheses might be correct, we also use these correlations to check for multicollinearity between the variables that in the model. This is important since multi-collinearity distorts the outcome of a regression. We will check for multi-collinearity using the variance inflation factors measures (or VIF). If the VIF score is larger than 10, the variable will be dropped. In the models used for this hypotheses, no multi-collinearity (VIF>10) was detected. 3.3.4 Regression analysis The hypotheses will be tested using a regression with the variables that are mentioned in section 3.3.1. Four regressions will be ran, one for each hypothesis. Each regression will be ran twice. The first time without, and the second time with the focus variable. This way we can check whether the R square, defining the amount of variance explained by the model, increases when the focus variable is added to the model. It should be noted that due to the distribution of the dependent variables that are based on counting (communication and key employee retention), a linear regression is not the best way to test them. However we feel that it is beyond the scope of this thesis to test them differently and are aware of the implications for the reliability of the results, caused by this choice. Since this thesis also has it as a goal to explore other links between the acquirers culture and its integration capabilities, besides those covered with the hypotheses, we will also present any other links that are found with the regression analysis.

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3.4 Hypothesis two


3.4.1 Variables Hypothesis two tests the influence of the acquirers home country score on the Hofstede dimension uncertainty avoidance on the relationship between the integration capabilities of the acquiring firm and the post-international acquisition performance of the newly combined firm. The dependent variable will be post-(international) acquisition performance. This will be measured using the development of the acquiring companys stock price in the two years after the transaction, as opposed to the method Reus and Lamont (2009) used, who obtained the value for this variable from questionnaires. The two year period is chosen, since the first two years after the transaction are critical (Jemison and Sitkin, 1986) and within these years, the integration process is usually completed (Jemison and Sitkin, 1986). According to Woo et al. (1992), market based performance measures are superior to any other performance measures and this method has been used for this purpose before (Chatterjee et al., 1992; Singh and Montgomery, 1987). The data to calculate the variable is obtained from the Thomson Reuters DataStream database. The variable is calculated by dividing the average price two years after the acquisition, by the average price in the year of the acquisition. The independent focus variables will be the country of the acquirers score on the integration capabilities, which are described in section 3.3.1. The home country of the acquirers score on the Hofstede dimension score on uncertainty avoidance will be used to divide the sample in two groups. Since other factors also influence post-international acquisition or merger performance of the firm in a certain acquisition, we have to control for other factors as well. The control factors used are the same as those used to test the first set of hypotheses one and can be found in section 3.3.1. 3.4.2 Descriptive statistics For the variable performance, the descriptive statistics will be calculated and presented and the variable will be checked for outliers. We detected four outliers. However, the nature of the calculation of the variable gives us good reasons not to delete the outliers, since these were observations that are possible and reasonable outcomes for this variable. The variable post-(international) acquisition performance is measured by dividing the average annual stock price two years after the acquisition with the average annual stock price from the year of the acquisition. For companies that saw a decline in their stock price over these two years, the variable takes a value between zero and one, while companies that saw a rise in their stock price, have values above one. This means that companies doing much better than the rest of the sample have a chance to become outliers, since, in theory, there is no upper limit. On the other hand, companies doing much worse than other companies will never be outliers, since there is a lower limit, zero. This is, in combination with the fact that we want to find differences in performances by companies from different cultures, is the reason that the observations belonging to these outliers are not deleted from the sample. The distribution of the variable performance can be seen in appendix I, figure A.I.4. Just as it is the case with the hypotheses from set one, we will also for hypothesis 2 use the descriptive statistics to check for any relationships. However, hypothesis two involves an influence on a relationship 22

between two variables, by a third variable, making it impossible to search for a relation between the focus and dependent variables, using means. In this case we will divide the dataset in two, by grouping the variables below the mean of the variable uncertainty avoidance and those above the mean of that variable. We will then compare the means of the dependent variables from both groups and investigate whether a difference in the performance of both groups exists. The comparison of the means will be done by a t-test, checking whether these means are significantly different from each other. Since this is not the same model as stated in the hypothesis, it only gives us a hint as to whether a relationship exists between uncertainty avoidance and performance, for descriptive purposes. The group with the higher scores for uncertainty is expected to have a better post-(international) acquisition performance. 3.4.3 Correlation In addition to presenting the descriptive statistics for the variable performance, we will also calculate the correlations between that variable and all the others variables involved in the model, using the Pearsons product-moment correlation coefficient. In addition to that, we will also calculate the correlations for a group with a higher than average score on uncertainty avoidance and a group with a below average score on that dimension. Since the hypothesis states that an increased uncertainty avoidance strengthens the relationship between the integration capabilities and performance, we expect the correlations to be stronger for the group with a higher score on uncertainty avoidance. We also check for multi-collinearity between the variables in the model. This is important since multicollinearity distorts the outcome of a regression. We will check for multi-collinearity using the variance inflation factors measures (or VIF). If VIF is larger than 10, the variable will be dropped. For the variables involving this regression, problems with multi-collinearity (VIF>10) were detected, forcing us to change the model. The final model can be found in subsection 3.4.4. 3.4.4 Regression analysis The original model to check this hypothesis measured the influence of the level of uncertainty avoidance on the relationship between the integration capabilities of the firm and the post-acquisition performance, using three multiplier variables as focus variables. These variables were composed of the predicted integration capabilities, multiplied with uncertainty avoidance score of the acquirers home country. The predicted values were used since, according to this thesiss framework, the integration capabilities are influenced by the national culture of the acquiring firm. This of course has negative implications for the reliability of the regression analysis results and we are aware of these problems and therefore regard these results as indicative, rather than as a test result. However, we found that the multiplier variables suffered from multi-collinearity, thus a new model had to be designed. In the new model, the dataset will be split in two, the mean score on uncertainty avoidance being the divider. Then on each group regressions will be ran, using the predicted values of the integration capabilities as the focus variables. After these regressions, the betas of the integration capabilities of both groups are compared. Those from the high uncertainty avoidance group are expected to be significant, while those of the lower group are expected to be insignificant. In case the betas of both groups are significant, the betas of the group with the high uncertainty avoidance scores is expected to be higher.

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Of this new model, the predicted values for the integration capabilities and the Hofstede dimension uncertainty avoidance also suffered from multi-collinearity. We therefore replaced the predicted values with the original values. Uncertainty avoidance was dropped from both regressions. This does not harm the result, since the effect of uncertainty avoidance is already captured by the division in the low and high group. It should be noted that we are aware of the limitations of this model, which means that the hypothesis cannot be tested reliably and thus the regression analysis only provides us with an indicative answer. One of the limitations is that you cannot compare the results of two equations, which this model does. Another limitation is that we are dealing with a model that is based on a system of equations, with focus variables that should be, but are not, exogenous. However, we feel that despite these limitations, it is still a good indicator as to how the relationship between the integration capabilities of the firm and the post-(international) acquisition performance is influenced by the acquirers home country score on uncertainty avoidance.

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Chapter 4 Results
4.1 Introduction
In this chapter the results of the tests will be presented. Since the test model for hypothesis two is different from the model testing the first set of hypotheses, we will have two different sets of results. The results of the tests regarding the first set of hypotheses are presented in section 4.2, while the results for the tests involving hypothesis two can be found in section 4.3. The first subsection of each section will cover the descriptive statistics, followed by a subsection that deals with the correlations. The third and final subsection of each section will present the results of the regression analysis involved. When a number in a correlation or regression table is printed in bold, it is significant. The degree of significance is indicated by either one or two * or a #. * Means that the significance is at the 0,05 level (2tailed), while ** means that the significance is at the 0,01 level (2-tailed), significance at the level 0,10 is indicated by a #.

4.2 Hypotheses one


4.2.1 Descriptive statistics For all variables that will be part of the model to test this set of hypotheses, the descriptive statistics, will be presented in table 4.1 with the exception of the dummy variables, for which the frequencies will be presented in table 4.2. Table 4.1: Descriptive statistics Variables Understandability Communication Key Employee Retention Acquirer Power Distance Acquirer Individualism Acquirer Masculinity Acquirer Uncertainty Avoidance Acquirer Long Term Orientation National Cultural Distance Target Net Sales ($mil) Target Country GDP development Acquirer Country GDP development N 167 167 167 167 167 167 167 167 167 167 167 167 Mean 0,425 1,808 0,371 39,25 80,65 54,04 51,35 44,88 0,966 1189,32 1,048 1,040 SD 0,385 1,064 0,875 9,664 11,498 18,819 15,923 18,995 0,886 3,04E3 0,839 0,757 S2 0,148 1,132 0,765 93,391 132,21 354,14 252,55 360,83 0,786 9231140,66 0,007 0,006 Min. 0 1 0 11 35 5 23 21 0,244 0,965 0,867 0,873 Max. 1 6 6 68 91 79 112 83 4,770 31910,0 1,52 1,228

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Table 4.2: Frequencies of dummy variables Variables Industry: Low/Mid Tech High Tech Services Total: Year: 1998/1999 2000 Total: N 57 65 45 167 % 34,13 38,92 26,95 100

100 67 167

59,9 40,1 100

Using the means of both the group with the below and the group with the above average score on the focus variable, we investigate whether the descriptive statistics can give us an indication about the relationship predicted in each hypothesis. The results of these tests can be found in table 4.3. The left set of descriptive statistics, belong to the observations that fall in the group which have a value for the focus variable that is below the mean, while the right group covers the descriptive statistics of the observations that score above average. Table 4.3: Descriptive statistics tests Dependent Variable Understandability Communication Communication Key Employee Retention Independent variable < mean N Mean SD 86 0,409 0,366 86 2,151 1,173 83 2,193 1,204 86 0,593 1,089 Independent variable > mean N Mean SD 81 0,442 0,406 81 1,444 0,791 84 1,422 0,735 81 0,136 0,468 T-test t -0,555 4,536 4,980 3,488 Sig. 0,579 0,000 0,001 0,001

The outcomes of these tests have to be regarded as indicative since it only compares two variables, thereby not taking the possible effects of other variables from the model in to consideration. Hypothesis 1a: The mean for the low power distance group is 0,4089, (sd=0,3658) while the mean for the higher group is 0,4421 (sd=,4064). The difference between both means is not significant (t=-0,555, df=165, p>0,05). The means indicate that no relationship is present between power distance and understandability, which is not in line with the hypothesis. Hypotheses 1b: The mean for the low power distance group is 2,1512 (sd=1,1734), while the mean for the higher group is 1,4444 (sd=0,7906). The difference between both means is significant (t=4,536, df=165, p<0,05). The means indicates that a negative relationship is present between power distance and communication, which is in line with the hypothesis.

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Hypotheses 1c: The mean for the low individualism group is 2,1512 (sd=0,8763), while the mean for the higher group is 1,9691 (sd=1,1588). The difference between both means is significant (t=-2,328, df=165, p<0,05). The means indicates that a negative relationship is present between power distance and communication, which is in line with the hypothesis. Hypotheses 1d: The mean for the low power distance group is 0,5930 (sd=1,0887), while the mean for the higher group is 0,1358 (sd=0,1358). The difference between both means is significant (t=3,488, df=165, p<0,05). The means indicate that a negative relationship is present between power distance and communication, which is in line with the hypothesis. 4.2.2: Correlation Tables 4.4a and 4.4b present the correlations between the variables in the model. We will also present the results of the VIF scores on multi-collinearity. Table 4.4a: Correlation table part 1 Variables 1. 2. 3. 4. 5. 6. 1. Understandability 2. Communication -0,021 3. Key Employee Ret -0,051 0,174* 4. A.Power Distance -0,073 0,015 -0,106 5. A. Individualism 0,038 -0,306** -0,131 -0,056 6. A. Masculinity -0,004 -0,279** -0,143 0,048 0,316** 7. A. Uncertainty Av. -0,069 0,100 -0,083 0,705** -0,617** 0,010 8. A. L-T. Orientation -0,086 0,444* 0,027 0,130 -0,572** -0,111 9. Nat. Cul.Distance -0,143 0, 295** 0,079 0,213** -0,303** -0,248** 10. Target Net Sales 0,022 0,115 0,223** -0,002 -0,005 0,008 11. Year 2000 -0,105 0,090 -0,068 0,007 -0,136 -0,192* 12. T. Country GPD 0,038 0,085 -0,162** 0,006 -0,034 -0,016 13. A. Country GDP 0,016 -0,196* -0,201* 0,010 0,267** 0,018 14. Services Ind. 0,127 0,033 -0,011 0,036 -0,057 -0,046 15. High Tech Ind. -0,108 -0,111 -0,171* -0,025 0,062 0,096 VIF 4,23 4,37 1,50 Table 4.4b: Correlation table part 2 (for variable names please check table 4.4a) 8. 9. 10. 11. 12. 13. 14. 15. VIF Mean VIF: 8. 0,326** 0,137 0,128 0,133 -0,406** 0,059 0,067 2,42 2,462 9. -0,016 -0,018 0,032 -0,253** -0,023 0,039 1,311 10. 11. 12. 13. 14. 7.

0,474** 0,344** -0,033 0,064 0,011 -0,166* 0,017 -0,027 7,75 15.

-0,048 -0,013 -0,070 -0,037 -0,233** 1,14

0,013 0,372** -0,084 0,098 1,42

0,104 0,031 -0,032 1,08

0,059 -0,014 1,70

-0,485** 1,40

1,48

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Just as with the tests in the previous paragraph in which the means where compared, we have to remember that this test just gives us an indication as to whether their might or might not be a relationship between two variables. Hypothesis 1a: There is no significant correlation between the focus and dependent variables of hypothesis 1a, the acquirers home country score on the Hofstede dimension power distance and the acquirers integration capability understandability, meaning that this does not indicate that we have a (negative) relationship between both variables, as the hypothesis suggests. Hypothesis 1b: No significant correlation was found between the acquirers home country score on the Hofstede dimension power distance (focus variable) and the integration capability communication (dependent variable), meaning that this does not indicate that we have a (negative) relationship between both variables, as suggested by the hypothesis and indicated by the comparison of the means in section 4.2.1. Hypothesis 1c: A significant negative correlation (r =-,306; p<0,05; n =167) between the acquirers national cultural score on the Hofstede dimension individualism and the acquirers integration capability communication was found, which is in line with the hypothesis and the indication given by the comparison between the means in section 4.2.1. Hypothesis 1d: No significant correlation between the focus (power distance) and dependent variable (key employee retention) of this hypothesis was found, meaning that this does not indicate that we have a (negative) relationship between both variables, as suggested by the hypothesis and the mean comparison in section 4.2.1. The difference in results between the mean comparison and the correlations is caused by the fact that a pair wise correlation test is different than a comparison of the means. Next to the correlations between the focus and dependent variables of our framework, we will take a look at some other significant correlations that this overview gives us, that are of importance to the relationship between national culture and the integration capabilities of the firm. Two other significant correlations can be found between the integration capabilities and the acquirers home country score on a Hofstede dimension. Both involve the integration capability communication, which significantly correlates with the dimensions masculinity (r= -,279; p<0,05; n =167) and long term orientation (r = .444; p<0,05; n =167). The other correlations that we found to be significant, are beyond the scope of this research and will not be discussed. 4.2.3 Regression analysis In this paragraph we will investigate our hypotheses using a regression analysis. Since each hypothesis investigates a different link between the acquirers home country Hofstede scores and the three integration capabilities, we ran three regressions, one for each dependent variable. Tables 4.5, 4.6, and 4.7 present the regression results of the integration capability in question, regressed on the acquirers home country score on the respective Hofstede dimension, and the control variables. Since the regressions belonging to the hypotheses 1b and 1c both have the same dependent variable, communication, and therefore have equal models, these hypotheses share a table, and the 28

accompanying results. Model 1 gives the betas, R2, and F-value for the regression without the focus variable(s), while model 2 gives them for the model including the focus variable(s). The coefficients are standardized. The standard errors of these regressions can be found in Appendix II, tables A.II.1 to A.II.3. Table 4.5: Regression results hypothesis 1a (dependent variable: Understandability) Acquirer Individualism Acquirer Masculinity Acquirer Uncertainty Avoidance Acquirer Long Term Orientation National Cultural Distance Target Net Sales ($mil) Year 2000 Target Country GPD Development Acquirer Country GDP Development Services Industry High Tech Industry Acquirer Power Distance R2 R2 F Model 1 -0,033 -0,047 -0,008 -0,064 -0,144 0,013 -0,097 0,048 -0,012 0,099 -0,030 Model 2 0,059 -0,072 0,148 -0,073 -0,145 0,020 -0,096 0,051 -0,013 0, 108 -0,026 -0,134 ,058 ,005 0,784

,053 0,795

The regression analysis yielded no significant beta for the focus variable power distance with regard to the dependent variable understandability (Model 2: B= -0,134, p> 0,10). The R2 slightly improved with the addition of the focus variable to the model, from 0,053 to 0,058, but remained low. Table 4.6: Regression results hypothesis 1b and 1c (dependent variable: Communication) Acquirer Masculinity Acquirer Uncertainty Avoidance Acquirer Long Term Orientation National Cultural Distance Target Net Sales ($mil) Year 2000 Target Country GPD Development Acquirer Country GDP Development Services Industry High Tech Industry Acquirer Power Distance Acquirer Individualism R2 R2 F Model 1 -0,165* -0,183* 0,466** 0,171* 0,015 0,024 0,014 0,001 -0,078 -0,174* 0,307 6,899 Model 2 -0,076 -0,616** 0,462** 0,178* 0,000 0,017 0,006 0,014 -0,099 -0,178* 0,335* -0,321* 0,337 0,03 6,509

As can be seen in table 4.6, there is significantly positive relationship, (Model 2: B=0,335, p< 0,05), between the variable power distance and the dependent variable communication. The relationship 29

between the variable individualism and the dependent variable communication is also significant (Model 2: B=0,-0,321, p< 0,05), but negative. Adding the focus variables to the model did improve the R2 with 0,030,from 0,307 to 0,337. Table 4.7: Regression results hypothesis 1d (dependent variable: Key Employee Retention) Acquirer Individualism Acquirer Masculinity Acquirer Uncertainty Avoidance Acquirer Long Term Orientation National Cultural Distance Target Net Sales ($mil) Year 2000 Target Country GPD Development Acquirer Country GDP Development Services Industry High Tech Industry Acquirer Power Distance R2 R2 F Model 1 -0,253* -0,041 -0,247* -0,081 0,076 0,179* -0,006 -0,145# -0,154 -0,090 -,0165# 0,187 3,250 Model 2 -0,405** 0,001 -0,505* -0,066 0,078 0,167* -0,008 -0,150* -0,152 -0,104 -0,171# 0,221 0,197 0,012 3,187

The results of this regression (table 4.7) on the dependent variable key employee retention shows that there is no significant relation between the focus variable and the dependent variable (Model 2: B=0,221, p> 0,10). The R2 for model 1 was 0,187, while it increased to being 0,199 at model 2 after the addition of the independent variable. The implications of these results on the hypotheses, can be found in table 4.8, while other interesting results with regard to the explorative part of this research about the relationship between the Hofstede dimensions scores and the integration capabilities can be found in table 4.9. These results have to be taken viewed with some care since the way the dependent variables communication and key employee retention were measured is not a perfect fit with a linear regression. Table 4.8: Reject or not? 1a Hypothesis The relationship between the acquirers home country score on the Hofstede dimension power distance and the integration capability understandability is negative. The relationship between the acquirers home country score on the Hofstede dimension power distance and the integration capability communication is negative. The relationship between the acquirers home country score on the Hofstede dimension individualism and the integration capability communication is negative. The relationship between the acquirers home country score on the Hofstede dimension power distance and the integration capability key employee retention is negative. Confirmed No

1b 1c 1d

No Yes No

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Table 4.9: Other significant relations Dependent Communication Communication Key Employee Retention Key Employee Retention Independent Uncertainty Avoidance Long-Term Orientation Individualism Uncertainty Avoidance Direction Negative Positive Negative Negative

4.3 Hypothesis two


4.3.1 Descriptive statistics In this paragraph we present the basic descriptive statistics of the variable that is part of this hypothesis model, but was not part of the model for the previous hypotheses, post-(international) acquisition performance. In addition to that, we will compare the dependent variables mean of the group that scores below average on uncertainty avoidance with the mean of the group that score above average. Although this is not comparable to the model with which we test the hypothesis, since it lacks the integration capabilities and since it is just a comparison between two variables, leaving the influences of other variables out of the picture, we think that it is an interesting addition to the descriptive statistics part, since it gives an indication as to if and how uncertainty avoidance and performance in this sample are related. The descriptive statistics of the variable performance can be found in table 4.10. To see the descriptive statistics of the other variables, please go to table 4.1. Table 4.10: Descriptive statistics for variables hypothesis 2a Variables Post-(international) acquisition performance N 167 Mean 0,937 SD 0,795 S2 0,632 Min. 0,0160 Max. 6,543

The next step is to divide the database in two, based on the acquirers home country score on the Hofstede dimension uncertainty avoidance, and to check whether the means of the variable performance of both groups are different, using a t-test. The results of this test can be found in table 4.11. Table 4.11: Relationship uncertainty avoidance and performance Hypothesis Uncertainty avoidance < mean N Mean SD 94 0,992 0,793 Uncertainty avoidance > mean N Mean SD 73 0,866 0,798 T-test t 1,017 Sig. 0,455

Hypothesis 2

The mean for the low uncertainty avoidance group is 0,99231, (sd=0,793279) while the mean for the higher group is 0,86617 (sd=0,79753). The difference between both means is not significant (t=1,017, df=165, p>0,05).

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Since this is not the same model as the hypothesis and since it is just a comparison of two means, we cannot draw any conclusions or indications from this result other than that there seems to be no relation between uncertainty avoidance and performance. 4.3.2 Correlation In this paragraph, we present the correlations between the variable performance and the other variables. We have already checked whether multi-collinearity is a problem for this model. As can be read in chapter 3, it was a problem. That is why we decided to create a new model. The added variables correlation with other variables, can be found in table 4.12, while all other correlations can be found in tables 4.4a and 4.4b. Table 4.12: Correlation table Variables Correlation 1. Understandability 0,218** 2. Communication 0,166* 3. Key Employee Ret. 0,016 5. Acq.Power Distance -0,084 6. Acq. Individualism 0,052 7. Acq. Masculinity 0,046 8. A. Uncertainty Avoid. -0,090 9. A. Long Term Orient. -0,074 10. Nat. Cult. Distance -0,029 11. Target Net Sales 0,009 12. Year 2000 -0,293** 13. T.Country GPD Dev. -0,056 14. A.Country GDP Dev. -0,211** 15. Services Industry -0,049 16. High Tech Industry 0,060 Mean VIF: 2,141, excluding Acquirer Uncertainty Avoidance (8). VIF 1,095 1,958 1,460 4,358 4,916 3,068 >10 2,859 1,440 1,206 1,208 1,124 2,297 1,388 1,59

The post-(international) acquisition performance of the firm is significantly positively correlated with the integration capabilities understandability (r =,218; p<0,05; n =167) and communication (r =,166; p<0,05; n =167), but not with key employee retention. None of the Hofstede dimension scores is significantly correlated with the post-acquisition performance. Other correlations are beyond the scope of this research and will therefore not be discussed. We also investigated whether the correlations between the integration capabilities and the performance are different between those correlations belonging to a set of observations which have an above average score on uncertainty avoidance and those observations that have a below average score. The results for the group with the lower score can be found in table 4.13, while those of the group with the higher score can be found in table 4.14.

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Table 4.13: Correlations for low uncertainty avoidance group Variables 1. Understandability 2. Communication 3. Key Employee Retention 4. Performance 1. 0,022 0,049 0,236* 2. 0,381** 0,129 3. 4.

0,037

Table 4.14: Correlations for high uncertainty avoidance group Variables 1. Understandability 2. Communication 3. Key Employee Retention 4. Performance 1. -0,013 0,056 0,180 2. -0,053 -0,276* 3. 4.

-0,009

The variables understandability and performance are only significantly correlated within the low group (r =0,236; p<0,05; n=167), while performance and communication are significantly correlated in the high group (r =-0,276; p<0,05; n=167). This means that the hypothesis, stating that the relationship between the integration capabilities and performance increases when uncertainty avoidance increases, is only supported by this test with correlations with regard to communication. The other significant correlations found in these tables is the one between key employee retention and communication. It is important to remind that this is not a test of the hypothesis, but an indication. 4.3.3 Regression analysis The dataset is divided in two, based on the score on the Hofstede dimension uncertainty avoidance. In order to assess the influence of the uncertainty avoidance score on the relationship between the integration capabilities and post-acquisition performance, we compare the betas of the integration capabilities for both groups. Table 4.15 presents the regression results. The coefficients are standardized. The standard errors for this regression can be found in Appendix II, table A.II.4.

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Table 4.15: Regression results hypothesis 2 low uncertainty avoidance 0,225* 0,239# -0,008 0,108 -0,080 -0,046 -0,121 -0,008 0,071 -0,343** -0,038 0,057 0,006 0,212# 0,217 1,560 high uncertainty avoidance 0,225* 0,360** -0,199 -0,076 -0,047 -0,074 -0,187 -0,233 0,005 0,085 -0,079 -0,593** -0,002 0,061 0,391 2,663

Understandability Communication Key Employee Retention Acquirer Power Distance Acquirer Individualism Acquirer Masculinity Acquirer Long Term Orientation National Cultural Distance Target Net Sales ($mil) Year 2000 Target Country GPD Development Acquirer Country GDP Development Services Industry High Tech Industry R2 F

For both regressions the integration capabilities understandability (Low: B=0,225; p<0,05; High B=0,225; p<0,05) and communication (Low: B=0,239; p<0,10; High B=0,360; p<0,01;) are significant. The R2 for the model with the high level of uncertainty avoidance (0,391) is higher than the one for the low group (0,217). No difference exists between the betas of the low and high group for the integration capability understandability. For communication, both betas are significant, although the higher groups betas significance is better and the beta is slightly higher. Since this is not an actual test of the hypothesis, due to the fact that the independent variables are not exogenous to the model and since you cannot compare two different regressions, we cannot say whether the hypothesis should be confirmed or rejected. Upon reviewing the results, we can say that there does not seem to be any support for the hypothesis. However, the fact that the relation is not clearly indicated, can be caused by the fact that it does not exist, or by the fact that using an incorrect measurement distorts the result.

34

Chapter 5 Discussion, conclusions and recommendations


5.1 Introduction
In the final chapter of this thesis, we begin with a section (5.2) that discusses the implications of the results as presented in chapter 4 for our hypotheses, and the result of the explorative part of this research. We will draw a conclusion about the addition of the variable national culture to the framework of Reus and Lamont (2009) in section 5.3, and give recommendations as to how to interpret and apply the findings of this research in practice. The final section (5.4) of this chapter will discuss the limitations of this research and suggest topics and methods for future research.

5.2 Discussion
5.2.1 Hypothesis 1a We have not found any proof or indication that a (negative) relationship between the acquirers national culture score on the Hofstede dimension power distance and the acquirers integration capability understandability exists. Therefore the hypothesis predicting such a relationship is rejected. 5.2.2 Hypothesis 1b The regression analysis did yield a significant (p<0,05) relationship between the national culture of the acquirers score on power distance and the dependent variable, the integration capability communication. However, this influence was positive, rather than the negative influence predicted by the hypothesis. Thus the influence of the Hofstede dimension power distance on the acquirers integration capability communication does not seem to be negative and therefore we have to reject the hypothesis. 5.2.3 Hypothesis 1c A significantly (p<0,05) negative influence of the dimension individualism on the integration capability communication was detected. Therefore we can conclude that, on the basis of our test, the negative relationship between the acquirers home country score on individualism and the acquirers integration capability communication, as predicted by the hypothesis, is confirmed. 5.2.4 Hypothesis 1d Due to fact that no significant influence of the Hofstede dimension power distance on the integration capability key employee retention was discovered, we cannot say that the hypothesis, predicting a significantly negative relationship, is proven. Therefore this hypothesis is rejected. 5.2.5 Hypothesis 2 The prediction of hypothesis 2 was that the relationship between the three integration capabilities and post-acquisition performance, would become stronger as the acquirers national culture scored higher on the dimension uncertainty avoidance. To get an indication as to whether this is true, we specifically do not call it a test since this is not the correct way to test this hypothesis, we ran two regressions. One with the observations that have a below average score on uncertainty avoidance, and one with a group that scores above that average. If the relationship where to be stronger with increasing uncertainty 35

avoidance, and thus stronger for the higher group versus the lower group, the betas of the integration capabilities for the higher group, would be significant and/or higher versus insignificant or lower for the group with a lower score. According to our regression analysis two, (communication and understandability) out of the three integration capabilities, have a significant influence on the postacquisition performance of the acquiring firm. However, they where significant for both groups. Between the betas and the significance of understandability for both groups, no difference was found. The beta for the higher group regarding communication was slightly higher and more significant (p<0,05 versus p<0,10). Thus the regression seems to indicate that a stronger relationship between the integration capabilities and post-acquisition performance might only, slightly, be the case for the capability communication, and not for the other two. Since this was not a test results, but a mere indicator as to whether there is any evidence pointing in the direction of the hypothesis, we cannot say that we reject or confirm, either completely or with regard to one or two integration capabilities, this hypothesis. 5.2.6 Explorative research In addition to testing our hypotheses, this thesis also had it as a goal to explore the existence of other ties between national culture and the integration capabilities. As can be read in chapter 4, we did find such links and they were significant. The connections found involve the integration capability communication in combination with the dimensions uncertainty avoidance and long-term orientation, and the integration capability key employee retention in combination with the Hofstede dimensions uncertainty avoidance and individualism. All relationships are significantly negative, with the exception of the relationship between long-term orientation and communication, which is significantly positive.

5.3 Conclusions and recommendations


5.3.1 Conclusions The main goal of this thesis was to investigate the addition of the variable national culture to the framework of Reus and Lamont (2009). After a literature review, we came up with five hypotheses. Four of which investigated the link between the home country of the acquirers score on a certain Hofstede dimension with the integration capabilities of the acquiring firm. The fifth involved the influence of the score on the Hofstede dimension uncertainty avoidance on the relationship between the integration capabilities and the post-(international) acquisition performance. We also wanted to explore whether there were any other links between national culture (again in the form of the Hofstede dimensions) and the integration capabilities, other than those already investigated with the hypotheses. With regard to the link between national culture and the integration capabilities we can say that links are indicated by our analyses. Although of the actual links at which the hypotheses were aimed only one turned out be significant, four other links, not predicted by the hypotheses, were found. These connections did not involve the integration capability understandability. Therefore we conclude on the basis of this research, that understandability is not influenced by the acquirers national culture. The integration capabilities communication and key employee retention however, are influenced by the Hofstede dimensions. Figure 5.1 depicts our conclusion in a schematic way. The links between dimensions and integration capabilities that, according to this research, are significant, are depicted with arrows and signs, indicating the direction of the influence. 36

Figure 5.1: Relationships between dimensions and integration capabilities National culture of the acquirer (Hofstede dimension scores) Power Distance Uncertainty Avoidance Long-term Orientation

Masculinity

Individualism

Understandability

Key Employee Retention

Communication

Integration Capabilities Since the design of the test for hypothesis two was not rigorous enough to give a final answer to the question whether hypothesis two should be rejected or confirmed, we cannot conclude whether or not an increased uncertainty avoidance strengthens the relationship between the integration capabilities and performance. The only integration capability for which the beta and significance slightly increased, was communication, indicating that the hypothesis might be true for this integration capability. We should keep in mind though, that there are other, much stronger influences than the integration capabilities, that influence the performance of the newly combined firm. In addition to that, the method used has its constraints, which makes it impossible for us to know for sure that the effect is or is not there, or whether it is caused by the fact that the method is flawed. 5.3.2 Recommendations Now that we have the drawn the conclusions based on the results, it is time to look at the practical applications of this research. When a company originates from a culture that has Hofstede scores which are unfavorable to the integration capabilities of that company, changing the national culture it originates from is not a solution. As with many problems, acknowledgment is the first step towards solving it. Knowing that you are not able to reach the same level on one or two integration capabilities, compared to acquirers from other national cultures, is the first step towards finding a solution. Solutions will differ from company to company, some will work at one, but will not at another. A solution that might help is to let an already existing foreign unit of your firm, from a culture that scores better than yours, handle the integration. Another remedy is, that if a firm knows they are weaker on a certain integration capability due to their cultural heritage, it should work to improve the level of factors endogenous to the firm. This way, they 37

can compensate for the lack of the right routines and repertoires it suffers from, helping them to handle their deficit caused by their national culture, which is a factor exogenous to firm. Banks and/or other financial institutions investing in the newly combined firm, for example by lending money, could add the score on a certain Hofstede dimension as a factor to their analysis. However, they should be cautious, since the link between those dimensions and the actual performance was not proven in this research. For companies being targeted by a foreign firm, the score on a certain Hofstede dimension can also be added to the consideration if they are in the process of negotiating with multiple possible acquirers from different cultures. A certain score might indicate if the company will be a able to communicate well with the acquired unit or if it will be able to retain the key employees once the acquisition is a done deal. It should be noted though that not all target firms are able to choose their acquirer. Governments could also use it as a factor, when deciding on the approval of the sale of a corporation to a foreign company, when they want to know more upfront about the fate of the acquired employees.

5.4 Limitations and suggestions


5.4.1 Limitations of this research The first limitation of this study is that the data for the integration capacities and other variables is secondary data instead of primary data. This has led to a smaller sample, since not all information needed was available for all transactions. This also led to observations from certain countries or regions being deleted more often due to a lack of information, possibly creating a bias in the data and the results. The measurements of the integration capabilities are proxies rather than actual values build upon inside company information, limiting their reliability. Another limitation regarding our data was that we only used transactions involving two publically traded firms. We did so, because secondary data is much more available for public firms, compared to private firms. Using secondary data also meant that we had to drop some observations since for some companies the data was not available anymore because they had since gone under. This has possibly led to a bias since extremely negative performers that went bankrupt are not part of the sample. The fact that we only did quantative research is another weakness, since doing qualitative research, can give you better and extra insights in certain situations. Since the integration capabilities communication and key employee retention are based on counted observations, a linear regression was not the most fitting type of regression. This might have caused some distortions in the results. The fact that hypothesis two was tested with a model that had independent focus variables which were not exogenous has weakened the model for that hypothesis, just as the design in which the betas of both regressions where compared was not a prudent test of the hypothesis. These factors have constrained our ability to test this hypothesis. The final limitations are the fact that we used a VIF score of >10 as a cutoff point for multi-collinearity, while cutoffs at >5 or even >4 are not unusual, and the low R2 values, meaning that only a limited amount of the dependent variables variance is explained by our models. 5.4.2 Suggestions for further research We recommend a research using primary data gathered through interviews and questionnaires, backed up by secondary date. This type of research is already done by Reus and Lamont (2009) and Morosini et al. (1998), but it was beyond the scope of this thesis to apply it in this study. This type of research will 38

take a away a large portion of the weaknesses and limitations of this study. In addition to that, it might be worthwhile to use other measures of culture, such as the GLOBE project (House et al., 2004). Also, corporate culture could be considered as well, for example as a control variable. Next to testing the predicted relationships, we also explored and proved the existence of other significant relationships between the Hofstede dimensions and the integration capabilities, which might be of interest for future research. These relations where between key employee retention and the dimensions uncertainty avoidance and individualism, and between communication and the dimensions uncertainty avoidance and long-term orientation. Since no literature providing us with a basis for a hypothesis with regard to one of these relationships could be found, a gap in the literature exists which is an opportunity for future research.

39

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Appendix I: Methodology
Table A.I.1: Transactions per country Country Australia Austria Belgium Canada Denmark Finland France Germany Greece Ireland Israel Italy Luxembourg Netherlands New Zealand Norway Philippines Poland Portugal Singapore South Korea Spain Sweden Switzerland United Kingdom United States Total Acquirer 1 2 2 10 4 7 8 8 1 3 7 1 11 2 3 4 10 24 59 167 Percentage 0,60 % 1,20 % 1,20 % 5,99 % 2,40 % 4,19 % 4,79 % 4,79 % 0,60 % 1,80 % 4,19 % 0,60 % 6,59 % 1,20 % 1,80 % 2,40 % 5,99 % 14,37 % 35,33 % 100 % Target 3 26 5 1 2 2 5 6 1 7 1 1 2 2 2 1 6 36 58 167 Percentage 1,80 % 15,57 % 2,99 % 0,60 % 1,20 % 1,20 % 2,99 % 3,59 % 0,60 % 3,70 % 0,60 % 0,60 % 1,20 % 1,20 % 1,20 % 0,60 % 3,59 % 21,56 % 34,73 % 100 %

Table A.I.2: Distribution of transactions over the years Year 1998 1999 2000 Total N of transactions 47 53 67 167 Percentage 28,14 % 31,74 % 40,12% 100%

VII

Figure A.I.1: Outliers understandability

Figure A.I.2: Outliers communication

Figure A.I.3: Outliers key employee retention

Figure A.I.4: Outliers post-acquisition performance

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Appendix II: Results


Table A.II.1: Standard Errors Hypothesis 1a Acquirer Individualism Acquirer Masculinity Acquirer Uncertainty Avoidance Acquirer Long Term Orientation National Cultural Distance Target Net Sales ($mil) Year 2000 Target Country GPD Development Acquirer Country GDP Development Services Industry High Tech Industry Acquirer Power Distance Table A.II.2: Standard Errors Hypotheses 1b and 1c Acquirer Masculinity Acquirer Uncertainty Avoidance Acquirer Long Term Orientation National Cultural Distance Target Net Sales ($mil) Year 2000 Target Country GPD Development Acquirer Country GDP Development Services Industry High Tech Industry Acquirer Power Distance Acquirer Individualism Table A.II.3: Standard Errors Hypothesis 1d Acquirer Individualism Acquirer Masculinity Acquirer Uncertainty Avoidance Acquirer Long Term Orientation National Cultural Distance Target Net Sales ($mil) Year 2000 Target Country GPD Development Acquirer Country GDP Development Services Industry High Tech Industry Acquirer Power Distance Model 1 0,008 0,004 0,006 0,005 0,082 0,000 0,153 0,783 1,091 0,167 0,157 Model 2 0,011 0,004 0,011 0,005 0,082 0,000 0,153 0,781 1,086 0,168 0,157 0,013 Model 1 0,004 0,005 0,005 0,091 0,000 0,171 0,877 1,213 0,188 0,176 Model 2 0,004 0,012 0,005 0,090 0,000 0,169 0,864 1,203 0,186 0,174 0,015 0,013 Model 1 0,004 0,002 0,003 0,002 0,039 0,000 0,073 0,372 0,518 0,080 0,075 Model 2 0,005 0,002 0,005 0,002 0,039 0,000 0,073 0,373 0,519 0,080 0,075 0,006

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Table A.II.4: Standard Errors Hypothesis 2 low uncertainty avoidance 0,207 0,118 0,106 0,032 0,029 0,009 0,011 0,101 0,000 0,185 0,959 2,199 0,212 0,203 high uncertainty avoidance 0,240 0,081 0,140 0,007 0,010 0,005 0,007 0,162 0,000 0,227 1,177 1,349 0,232 0,218

Understandability Communication Key Employee Retention Acquirer Power Distance Acquirer Individualism Acquirer Masculinity Acquirer Long Term Orientation National Cultural Distance Target Net Sales ($mil) Year 2000 Target Country GPD Development Acquirer Country GDP Development Services Industry High Tech Industry