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Article Excerpt
Introduction
A majority of corporate mergers fall. Failure occurs, on average, in every sense: acquiring firm stock prices tend to slightly fall when mergers are announced; many acquired companies are later sold off; and profitability of the acquired firm is lower after the merger (relative to comparable nonmerged firms). (1) Participants report a lot of conflict during the merger, resulting in high turnover (Buono et al. 1985, Walsh 1988). (2) Participants express disappointment in the mergers' results, and surprise at how disappointed they are. Curiously, widespread merger failure is at odds with the public and media perceptions that mergers are grand things that are almost sure to create enormous business synergies that are good for employees, stockholders, and consumers.
Two examples may help illustrate our ideas about cultural conflict in mergers. In the period leading up to the Daimler-Chrysler merger, both firms were performing quite well (Chrysler was the most profitable American automaker), and there was widespread expectation that the merger would be successful (Cook 1998). People in both organizations expected that their "merger of equals" would allow each unit to benefit from the other's strengths and capabilities. Stockholders in both companies overwhelmingly approved the merger and the stock prices and analyst predictions reflected this optimism. Performance after the merger, however, was entirely different, particularly at the Chrysler division. In the months following the merger, the stock price fell by roughly one half since the immediate postmerger high. The Chrysler division, which had been profitable prior to the merger, began losing money shortly afterwards and was expected to continue to do so for several years (CNNMoney, February 26, 2001). In addition, the re were significant layoffs at Chrysler following the merger (that had not been anticipated prior to the merger) (CNNMoney, February 29, 2001).
Differences in culture between the two organizations were largely responsible for this failure (Vlasic and Stertz 2000). Operations and management were not successfully integrated as "equals" because of the entirely different ways in which the Germans and Americans operated: while Daimler-Benz's culture stressed a more formal and structured management style, Chrysler favored a more relaxed, freewheeling style (to which it owed a large part of its premerger financial success). In addition, the two units traditionally held entirely different views on important things like pay scales and travel expenses. As a result of these differences and the German unit's increasing dominance, performance and employee satisfaction at Chrysler took a steep downturn. There were large numbers of departures among key Chrysler executives and engineers, while the German unit became increasingly dissatisfied with the performance of the Chrysler division. Chrysler employees, meanwhile, became extremely dissatisfied with what they per ceived as the source of their division's problems: Daimler's attempts to take over the entire organization and impose their culture on the whole firm. (3)
While cultural conflict often plays a large role in producing merger failure, it is often neglected when the benefits of a potential merger are examined. For instance, following the announcement of the AOL-TimeWarner deal, a front-page Wall Street Journal article (Murray et al. 2000) discussed possible determinants of success or failure for the merger (such as synergies, costs, competitor reaction, and so forth). The only clear discussion of possible cultural conflict is a single paragraph (out of a 60-column-inch article) revealing how the "different personalities" of AOL's Steve Case and TimeWarner's Gerald Levin reflect cultural differences between the two firms. A similar article (Jubak 2000) included a single paragraph entitled "What could go wrong with the synergy strategy" Moreover, in these sorts of short, cursory, obligatory discussions of possible cultural conflict, there is rarely discussion of what steps might be taken if there is dramatic conflict.
While culture may seem like a "small thing" when evaluating mergers, compared to product-market and resource synergies, we think the opposite is true because culture is pervasive. It affects how the everyday business of the firm gets done--whether there is shared understanding during meetings and in promotion policy, how priorities are set and whether they are uniformly recognized, whether promises that get made are carried out, whether the merger partners agree on how time should be spent, and so forth.
This paper introduces a simple experimental paradigm to explore cultural conflict as a possible cause of merger failure. The guiding hypothesis is that an important component of failure is conflict between the merging firms' cultural conventions for taking action, and an underestimation by merger partners of how severe, important, and persistent conflicts are. Cultural conventions emerge to make individual firms more efficient by creating a shared understanding that aids communication and action. However, when two joined firms differ in their conventions, this can create a source of conflict and misunderstanding that prevents the merged firm from realizing economic efficiency. We hypothesize that the extent of these conflicts are unexpected because observers focus on tangible aspects of firms' practices (such as technology, capital, and labor costs) and ignore aspects that are more difficult to measure such as culture. This leads to overestimation of the value of a merged firm at the time of the merger.
Our emphasis on cultural conflict is not meant to suggest, of course, that other potential causes of merger failure are not important. Certainly, agency problems, optimism, and hubris may lead top managers to undertake mergers that are bad for shareholders. Also, holding cultural incompatibility aside, conflicts of interest between employees in two merged firms may also harm the merger. For instance, employees in each of the two firms may have reasons to prefer maintaining the "old way of doing things"--possibly because of learning costs, inertia, and so on--and may, therefore, intentionally resist adopting the other firms' practices. While we recognize these other potential sources of merger failure, our focus is on one specific cause: differences in culture may simply make it difficult for members of the merged organization to see things in the same way.
Our paradigm also allows us to explore the development of a specific form of tacit knowledge in groups, which we use as a metaphor for culture. The experiments we report in this paper specifically explore what happens when two groups that have independently developed this tacit shared knowledge--which allows them to operate efficiently--need to combine their knowledge and anticipate how difficult it will be to do so.
Organizational Culture
Organizational culture has received considerable attention from organizational researchers, and substantially less attention from economists. While agreement on a precise definition of the concept has proven difficult, there are a few important elements shared by most definitions. Culture is usually thought of as a general shared social understanding, resulting in commonly held assumptions and views of the world among organizational members (Wilkins and Ouchi 1983, Schall 1983, Rousseau 1990, Schein 1983). Culture is developed in an organization through joint experience, usually over long periods of time. It is useful because it allows an organization's members to coordinate activity tacitly without having to reach agreement explicitly in every instance. Language--in the form of codes, symbols, anecdotes, and rules about appropriate statements--plays an important role in organizational culture, constituting a large part of the shared understanding held by organizational members (Schall 1983, Schein 1983, Crem er 1993).
However, despite agreement that culture is important, it is difficult to precisely measure and study (Schein 1996, Marcoulides and Heck 1993, Rousseau 1990). Researchers have relied on a few different approaches to study culture in organizations (Schein 1990, Rousseau 1990). Much of this research is ethnographic observation of interactions in small numbers of organizations (e.g., Schein 1983, 1990; Barley 1983). While informative and helpful for inspiring theory, the small samples involved in this type of analysis usually make it difficult to draw firm conclusions.
Another approach consists of questionnaires administered to large numbers of members of a few organizations (e.g., Schall 1983, Hofstede et al. 1990, O'Reilly et al. 1991, Chatterjee. et al. 1992). The questionnaires are usually designed to measure important elements of culture that can then be compared across firms to draw conclusions about how they differ in culture and how culture affects organizational performance. These studies are useful in that they provide concrete empirical measures of differences between firms on several dimensions related to culture. However, there is often little agreement from one investigation to the next concerning the key elements of culture. Moreover, these studies often have small numbers of independent observations (firms) and the usual concerns in survey research like response bias due to the sample of selected firms not being determined randomly or due to nonresponses being correlated with dependent variables, or the fact that respondents retrospectively recall and evalua te cultural variables.
Culture has received considerably less attention from economists. Kreps (1990) argues that culture presents organizations with a solution to problems resulting from multiple equilibria...
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