2006:028

M A S T E R ' S T H E S I S

MergerHow companies prepare for it

Case Studies of Cloetta Fazer and CashGuard Group

Elisabeth Johansson Claudine Pettersson

Luleå University of Technology

Master's thesis Marketing

Department of Business Administration and Social SciencesDivision of Industrial marketing and e-commerce

2006:028 - ISSN: 1402-1552 - ISRN: LTU-DUPP--06/028--SE

ACKNOWLEDGEMENTS

ACKNOWLEDGEMENTS During the fall of 2005 we have written our thesis as our Master’s thesis within the Program of International Business at the Division of Industrial Marketing at Luleå University of Technology. The past ten weeks has provided us with a deeper understanding of how companies handle the issues of procedures and criteria regarding the choice of merger partner, as well as the organizational cultural in the pre merger phase. Even though we have had some difficulties along the way, this period has still been very interesting and instructive and it has also given us a deeper knowledge within this vast and fascinating area. A great support and motivation was given from our supervisor Manucher Farhang, Associate Professor at the Division of Industrial Marketing and e-Commerce at Luleå University of Technology and we would like to thank him. Furthermore, we would like to thank our participants from the selected companies; Kenneth Söderholm at Cloetta Fazer and Anders Eklund at CashGuard Group, for taking the time to answer all of our questions. Finally, we would like to thank our friends and family for putting up with us and always showing their support whenever needed. We hope that this thesis will be interesting and useful reading material for other students, researchers and people interested in getting a better insight in the area of research. Luleå University of Technology, January 4, 2006

Elisabeth Johansson Claudine Pettersson

ABSTRACT

ABSTRACT Mergers are an increasing phenomenon mainly due to increasing globalization and market competition. Previous research - reporting a high failure rate among mergers - have concentrated on the factors that cause failure or insure success during integration and post merger phases. The purpose of this thesis is to gain a better understanding of the conditions companies should fulfill in the pre-merger phase with the aim of ensuring merger success. Procedures and criteria, as well as role of organizational culture in partner selection were studied through two case studies dealing with mergers of Cloetta Fazer and CashGuard Group. Findings showed that the companies in their pre-merger phase satisfied the conditions leading to a successful merger, even if their ways to success looked different. Regarding the procedure and criteria for selecting a merger partner, our findings generally supported theory, even though Cloetta Fazer and CashGuard Group operate in different industries. When regard to the role of organizational culture and its impact on the pre-merger phase, we found that Cloetta and Fazer had different organizational cultures, while CashGuard and Security Qube System AB (SQS) did not. However, neither of the two companies did a cultural due diligence, as both Cloetta Fazer and CashGuard Group had production collaboration with their merger partners prior to the actual merger.

SAMMANFATTNING

SAMMANFATTNING Sammanslagningar är ett ökat fenomen huvudsakligen beroende på den ökande globaliseringen och marknadskonkurrensen. Tidigare studier- visar/rapporterar en högt misslyckande bland sammanslagningar- koncentrerat på faktorer som har påverkat misslyckande eller försäkra framgång under före och efter faserna av sammanslagningen. Syftet med denna studie är att få en bättre förståelse av de vilkoren företagen ska uppfylla i fasen före en sammanslagning med strävan att försäkra en framgångsrik sammanslagning. Författningssättet och kriterierna, likväl organisations kulturen i valet av partner blev även studerad genom två fall som behandlar sammanslagning av Cloetta Fazer och CashGuard Group. Slutsatserna visade att företagen i sin fas före sammanslagningen tillfredställde vilkoren som leder till en framgångsrik sammanslagning, även om deras tillvägagångssätt har sett olika ut. Beträffande författningssättet och kriterierna för valet av sammanslagnings partner, stöds våra slutsatser generellt av teorin, även om Cloetta Fazer och CashGuard Group verkar i olika industrier. När det gäller organisationskulturens roll och dess inverkan på fasen före sammanslagningen, fann vi att Cloetta och Fazer hade olika organisations kulturer medan CashGuard och Security Qube System AB (SQS) inte hade det. Hursomhelst, inget av de två företagen gjorde en kulturell företagsgranskning, eftersom både Cloetta Fazer och CashGuard Group hade produktionssamarbete med deras sammanslagningspartner före den faktiska sammanslagningen.

TABLE OF CONTENTS

CHAPTER 1 INTRODUCTION .........................................................................................1 1.1 Background ..................................................................................................................1 1.1.1 Merger: definition......................................................................................................1 1.1.2 Distinguishing mergers from acquisitions...................................................................1 1.1.3 Merger motives..........................................................................................................2 1.1.4 International mergers .................................................................................................3 1.2 Problem Discussion ......................................................................................................4 1.2.1 Merger phases............................................................................................................5 1.3 Purpose and Research Questions...................................................................................6 1.4 Delimitations ................................................................................................................6 1.5 Outline of the Study......................................................................................................6

CHAPTER 2 LITERATURE REVIEW..............................................................................7 2.1 Procedure and Criteria for Selecting Merger Partner .....................................................7 2.1.1 Determinants of success .............................................................................................8 Partner................................................................................................................................8 Purpose...............................................................................................................................8 Parameters..........................................................................................................................9 Prepare people psychologically...........................................................................................9 Epstein’s six determinants of merger success....................................................................10 2.1.2 Choosing merger partner..........................................................................................10 Recommendations how to choose merger partner .............................................................10 The Case of Renault- Nissan Merger ................................................................................11 2.1.3 Pre-deal planning .....................................................................................................12 GE Capital’s merchant banking business in NYC .............................................................12 Ameritech’s internal audit services (IAS) .........................................................................14 2.2 Role of Organizational Culture ...................................................................................15 2.2.1 Integrated mechanisms of organizational culture......................................................16 2.2.2 Organizational culture change..................................................................................16 2.2.3 Conducting due diligence.........................................................................................17 Procedure and Criteria for Selecting Merger Partner .........................................................20 Role of Organizational Culture in Partner Selection..........................................................22

CHAPTER 3 METHODOLOGY ......................................................................................24 3.1 Research Purpose........................................................................................................24 3.2 Research Approach.....................................................................................................24 3.3 Research Strategy .......................................................................................................25 3.4 Data Collection...........................................................................................................26 3.5 Sample Selection ........................................................................................................27 3.6 Data Analysis .............................................................................................................27

CHAPTER 4 EMPIRICAL DATA ....................................................................................30 4.1 Case One: Cloetta Fazer..............................................................................................30 4.1.1 Procedure and Criteria for Selecting Merger Partner ................................................31 4.1.2 Role of Organizational Culture.................................................................................33 4.2 Case Two: CashGuard Group......................................................................................34 4.2.1 Procedure and Criteria for Selecting Merger Partner ................................................35 4.2.2 Role of organizational culture ..................................................................................36

CHAPTER 5 ANALYSIS...................................................................................................38 5.1 Within-Case Analysis: Cloetta Fazer...........................................................................38 5.1.1 Procedure and Criteria for Selecting Merger Partner ................................................38 5.1.2 Role of organizational culture ..................................................................................41

TABLE OF CONTENTS

5.2 Within-Case Analysis: CashGuard Group ...................................................................43 5.2.1 Procedure and Criteria for Selecting Merger Partner ................................................43 5.2.2 Role of organizational culture ..................................................................................45 5.3 Cross-Case Analysis: Cloetta Fazer and CashGuard Group.........................................46 5.3.1 Procedure and Criteria for Selecting Merger Partner ................................................46 5.3.2 Role of organizational culture ..................................................................................50

CHAPTER 6 FINDINGS AND CONCLUSIONS .............................................................53 6.1 Research Question One: Procedure and Criteria for Selecting Merger Partner.............53 6.2 Research Question Two: Role of Organizational Culture ............................................54 6.3 Implications................................................................................................................56 6.3.1 Implications for management ...................................................................................56 6.3.2 Implications for theory.............................................................................................56 6.3.3 Implications for future research................................................................................56

REFERENCES ...................................................................................................................57 APPENDICES 1-2 Appendix 1 Interview Guides (English version) Appendix 2 Interview Guides (Swedish version)

LIST OF FIGURES AND TABLES

LIST OF TABLES AND FIGURES List of Figures Figure 3.1 Conceptual frame of reference for this study........................................................23 List of Table Table 5.1: Determinants of success.......................................................................................48 Table 5.2: Choosing a merger partner ...................................................................................49 Table 5.3: Pre-deal planning period ......................................................................................50 Table 5.4: Four integrated mechanisms of organizational culture..........................................50 Table 5.5: Four types of cultures...........................................................................................51 Table 5.6: Organizational model...........................................................................................52

INTRODUCTION

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CHAPTER 1 INTRODUCTION In this chapter we will present our research topic. First, a background followed by problem discussion, which then will lead to our purpose and our research question, and finally delimitations of the study.

1.1 Background During the last decade, mergers and acquisitions have been one of the dominant modes of firms’ internationalization (Weber, Shenkar, Raveh, 1996). It has become a chosen strategy for companies to maintain a competitive advantage (Schraeder & Self, 2003). According to Granell (2000) globalization has become a world-wide pressure for companies to change and it is also seen as one of the most frequent external and significant trends for companies. All around the world the trend for companies is to attract foreign investment and still increase exports and develop international alliances. According to Balmer and Dinnie (1999) mergers is one of the phenomena that is growing and over the past years it has become a characteristic of the current business environment and it seems to appear to have affected every country and industry. The authors further state that infrequent sectors are immune to the influence of consolidation that is spreading in the global economy and is affecting both public and private sector.

1.1.1 Merger: definition Mergers are usually described as a marriage. It can be complex to realize since it involves two partners more or less equal in strength which have decide to combine their managerial and operational functions (Olie, 1990). According to Ghobodian, A.J.P., Liu, J. & Viney, H. (1999), a merger is when two companies integrate to form a new company with shared resources and corporate objectives. Gertsen et al., (1998) further claim that mergers are cooperative agreements between equal partners, but in practice power is not automatically equally shared by the two partners. Zaheer, et al., (2003) define merger of equals as “one where there is 50-50 stock swap between the two merging firms and the broad of the merged entity has members from both organizations”.

1.1.2 Distinguishing mergers from acquisitions Buckley and Ghauri (2002) describe the difference between mergers and acquisitions where in a merger, two formerly separate companies unite their assets to establish a new organization, in an acquisition the power of assets in general shifts from one company to another. Schraeder and Self (2003), state that mergers are regularly characterized as the consolidation of two companies into one organization. In contrast, acquisition is often characterized as the purchase of a single company from another where the acquirer or buyer maintains control (ibid).

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According to Gertsen et al., (1998), four different types of mergers and acquisition can occur:

• Horizontal: Between competitive firms in the same branch and that are in the same production stage.

• Vertical: Between firms in the same branch but in different production stage. • Concentric: Between firms in different but related branches. • Conglomerate: Between firms that are unrelated businesses.

Consequentially, various types of mergers and acquisition have taken place in waves of particularly intense activity. Conglomerate mergers and acquisition were the mighty significant involving non-related companies seeking to diversify during the 1960s and 1970s. Even though companies combined together they still continued apart in a rather independent way. During the 1980s and 1990s, the trend in merger and acquisition were changed and affected to a vast extent in both vertically and horizontally related companies. Synergy and seeking the advantages of large-scale operations rather than diversification, was above all strategic goal. (Gertsen et al., 1998)

1.1.3 Merger motives According to Cartwright and Cooper (1996), motives for mergers are rational financial and strategic alliances made in the best interests of the organization and its shareholders. Mergers are believed to be set off by financial or value-maximizing motives when the most important objective is to increase shareholder wealth and financial synergy through economies of scale, knowledge transfer and increased control. Managerial or non-value-maximizing motives relate to mergers which occur above all to raise market share, management status, decreased uncertainty and restore market confidence or perhaps even as a takeover defense or a way of protecting profits from taxation.(ibid) Buckley and Ghauri (2002) also present the different motives for mergers. In line with Cartwright and Cooper (1996), the authors make distinction between four motives: strategic, market, economic, and personal. However, these authors further claim that there may be unstated psychological motives behind the merger decision, and there are times when the decision to merge is initiated only to please the needs of an individual or small group of individuals, rather than any interest from the organization. Some senior executives are motivated to initiate a merger out of fear of nature. In their view, the managers who stay alive, or go on to greener territories, are very much visible men and women of action; people who are known as always looking for new opportunities- forever moving the organization onwards and upwards. As a result, out of good judgment of insecurity and fear for their continual survival, mergers provide a useful way by which they can improve or renew credibility, and restore their own self-confidence and that of the board. Others may be motivated by greedy and selfish needs to implement power and warm up their muscles by engaging in some empire building. On the other hand, for some, mergers are no more than an amusement, where the “big boys” see it as a stimulating and exciting game to be less bored, and to keep their managers on their toes. (ibid)

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According to Mark (1997), many things about mergers and acquisition have changed and the current trend in merger can be summarized in five different items:

• Deals are more strategically driven: The decision to add organizations supports intelligent and distinct corporate strategy.

• Technological advance is driving deals: To keep up with the fast changing technology.

• Globalization is driving more deals: When firms believe that the home market is too

small and want to seek out new territories.

• Deals are involving large organizations: Large companies are transferring the corporate landscape, “mega-mergers”.

• Entire industries are put into play: Consolidation activity throughout whole industries

is encouraged by deregulation, social policies and changing customers’ demands.

1.1.4 International mergers According to Gertsen et al., (1998), an international merger is not only making a deal between two companies which themselves have different organizational cultures, but two companies whose organizational culture are embedded in different national cultures. Rock et al., (1994) state that the 1980’s was a period of remarkable growth in international mergers and acquisitions. According to Buckley & Ghauri (2002), the Asian financial crisis of the late 1990’s is the cause for increased merger activity in the once successfully developing East Asia (Thailand, Malaysia, Indonesia, Philippines and Republic of Korea). Further, Rock et al., (1994) state that cross-border businesses were by no means restricted to the United States, Japan, and West Germany, as it usually was. In fact, the United Kingdom and Canada have been the major recipients of foreign bids, with the United States, Japan, and Germany far behind in conditions of the relations of foreign to domestic. Merger activity in fast developing markets such as Hong Kong, Taiwan, Indonesia, Mexico, and Argentina also has accelerated. In spite of the reduction in the merger market as a whole, cross-border businesses are expected to grow both as a percentage of total transactions and in absolute terms. With the European Community rising as the single largest consumer market, merger activity has been progressively increasing to meet the challenge of fusion. A study during the 1990’s of potential consolidation activity in Europe illustrated that there were more than five times the number of competitors in Europe as in the United States in the battery, turbine, locomotive, and tractor manufacturing industries. Most noticeably, the study also demonstrated that there are more than 300 major appliance manufacturers in the European Community to just four in the United States. (ibid)

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1.2 Problem Discussion Gertsen et al., (1998) report that at least 50 percent of all mergers and acquisitions (M&A) activity is unsuccessful, no matter how the success is measured. Questionably the failure rate for international M&A’s is even higher. It is rather surprising to note then, that more M&A’s are taking place around the world today than ever before, both in absolute numbers and in value terms. Besides, it seems like the M&A vehicle continues to be the preferred means of internationalization for companies. In comparison with domestic mergers, cross-border M&A face problems of both cultural and an environmental nature. (ibid) There are a lot of mergers and acquisitions that have not lived up to the expectations (Weber, et al., 1996). Marks & Mirvis (2001) claim that the reason for failing with mergers can be buying the wrong company, paying the wrong price and making the deal at the wrong time. The authors further state that the core of failed combinations is the process through which the deal is conceived and executed. Another contributing factor for failing is the cultural differences that often occur as the foundation for problems in the integration of the mergers. The home country and the industry often go hand in hand with the organizational culture and have a profound effect upon organizations and organizational behavior (Olie, 1990). The hierarchical structure of the company as well as the formalization by influence the national culture, also their decision-making style and its strategy are influence (ibid). Moreover, Olie (1990) claims that the internal merger is a special case and that the national culture also has a profound effect upon the organizational culture. When it comes to foreign takeovers, potential cultural clashes will be worked out through the bargaining power of the dominant part while that is not possible in mergers in which both partners are about of the same size or importance (ibid). According to Tetenbaum (1999), the weight on the financial and strategic issues in combination with ignoring the integration issues has been recognized as a major factor to the failure of mergers. Integration is significant to all parts of an organization (technologies, policies, systems and culture), and failures in mergers are due to the lack of an integration plan paying attention on people and human resource (HR) issues. Even though HR issues are important features of some mergers, these concerns are not dealt with effectively in a lot of the merger dealings that occur. (ibid) Gertsen et al., (1998), claim that high failure and disappointment rates in mergers are often recognized to negative employee reactions by organizational researchers and practitioners. The problems involving the human side of mergers are observed typically in terms of cultural conflicts and acculturation between the companies being united (ibid). Buckley and Ghauri (2002), state that integrating the merging companies is a procedure burdened with complexity and the need for this has become intense as mergers have moved away from unconnected conglomerate mergers to related and horizontal ones. Certainly, cross-border mergers are more complex than simply domestic ones due to the differences of national culture between firms. One study proposes that cultural fit has a major effect on post-merger performance and that companies that permit multi-culturalism and prevent too much control perform better than less permissive firms. Schweiger et al., (1993), claim that there are three major factors critical to success in any merger or acquisition. First, a deal must be assumed for strategic reasons such as to improve or develop competitiveness, to expand products, customers’ served or geographic presence. When mergers are driven only by opportunism or the desire to “do a deal”, rather than reliable

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strategic reasons, they are less probable to succeed. Second, the final purchase price of a merger classically shows both the inherent value of a target business and its value to the merging firm (i.e. combination value). However, when purchase price goes over either the inherent or combination value, mergers are also less likely to succeed. Finally, the value of mergers will in the end be decided by the degree to which they can be successfully implemented. In spite of a reasonable purchase price and sound strategic reasons, mergers are less expected to succeed if the merging organizations are not well combined with strategic benefits realized in practice. Based on these three factors mentioned above, it is obvious that top managers face many challenges in effectively transacting and implementing mergers. First and foremost, is the challenge of knowing what is being bought and both its inherent and combination values. Second, facing the challenge of implementing mergers to capture value. (ibid)

1.2.1 Merger phases The integration process of two merging firms consists of three phases; the pre-merger phase where the merger is planned, the merger phase when the definite deal is made and finally, the post-merger phase in which the integration of the two companies is initiated. (Buckley & Ghauri, 2002) According to Marks & Mirvis (2001), significant differences between classic and well-doing cases can be recognized by separating the different phases organizations experience in the shift from independent to incorporated units. The three phases are; the pre-combination phase, in which the deal is pictured and negotiated by managers and then with authorization, consented by shareholders and regulators, the combination phase, as integration planning develops and implementation decisions are made, and finally the post combination phase, as the combined entity and its people reorganize from first implementation and the new organization is established. (ibid) Doing a merger has become a more and more popular strategic alternative for firms’ internationalization in the modern business scene (Appelbaum and Gandell, 2003). Yet, few of these partnerships result with success (Marks, 1997). The international trend of mergers seems to continue and it affects industries in many areas, which makes it an interesting topic to investigate. Something that draws our attention is the fact that companies despite knowing the risks involved and documented high failure rates still want to merge. Navigating a combination on the way to the successful path starts in the pre-merger phase, as planning and preparation are fundamental to success when companies unite (Marks & Mirvis, 2001). According to Habeck et al., (2000), the failure risk is 30 percent in the pre-merger phase, 17 percent in the negotiation and deal phase and 53 percent in the post-merger phase. Most previous studies have covered the post-merger phase and have neglected the importance of the pre-merger phase, which is a motive for us to take up the issue for our research. We would like to devote more attention on how companies select their possible merging partner, as the failure risk in the pre-merger phase is rather high. Taking into consideration what has been mentioned earlier, we believe that it would be interesting to conduct an investigation concerning the factors companies take into consideration before entering a merger.

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1.3 Purpose and Research Questions Based on the problem discussion above, the purpose of this thesis is: To gain a better understanding of the conditions companies should fulfill in the pre-merger phase in order to ensure merger success. In order to reach our purpose we shall address the following research questions: RQ 1: How can the procedures and criteria used by companies for selecting a possible merger partner be described? RQ 2: How can the role of organizational culture in selecting a possible merger partner be described?

1.4 Delimitations Since we have a limited time frame as well as shortage of prior research in the area, we will put the focus on mergers between Swedish multinational corporations in Scandinavia. Also, though the pre-merger phase may involve many issues we limit our research to two of the more significant aspects (and as reflect in our research questions), namely that of what procedures and criteria are used and what role companies’ organizational culture play.

1.5 Outline of the Study The thesis consists of seven chapters and we will provide a brief text explanation of each chapter. Chapter one has presented the background followed by the problem discussion, and the research questions. Chapter two presents the literature and theory connected to the stated research questions and the conceptual framework ends this chapter. Chapter three provides a description of the methodology used. Chapter four presents the empirical data of the thesis in the form of two case studies, which will be analyzed in chapter five. Finally, chapter six will present with findings and conclusions as well as implications for further research.

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CHAPTER 2 LITERATURE REVIEW In this chapter, a selection of previous research related to our research questions is presented. Firstly, studies connected to the procedures and criteria used in selecting a merger will be presented. Secondly and lastly, the role of organizational culture in selecting a merger will be described. The literature on mergers is very vast, and there are various interesting aspects to explore, but our research problem only deals with one of them and therefore we have selected the literature we thought was most appropriate, namely related to pre-merger phase.

2.1 Procedure and Criteria for Selecting Merger Partner According to Appelbaum et al., (2000) once the decision to merge has been made, the pre-merger stage begins, but the public announcement and parts of the legal issues have not yet taken place. The important aspect of this stage is that it is solely preparatory. According to Marks & Mirvis (2001) the pre-combination phase is when the deal is visualized and negotiated by executives and then legally approved by shareholders and regulators. The combination phase is when the integration planning occurs and the implementation decisions are made. The post-combination phase is when its combining entity and its people regroup from initial implementation and the new organization settles in. Further, Marks & Mirvis (2001), state that these phases are not clear-cut phases and integration planning increasingly happened in the pre-combination phases before the deal receives legal approval. According to Appelbaum & Gandell (2003) in this period of pre-merger process, it is equally significant for successful merger is the establishment of a clear reporting relationship, which needs to remain unchanged during this period. According to Mark and Mirvis (2001) the pre-mergers phases begin with steering a combined entity toward the successful path. Combination preparing covers psychological and strategic concerns. The challenges concern key analyses that explain and bring into focus the sources of synergy in a combination (ibid). The psychological challenges cover the actions necessary to understand the mindsets that people bring with them and develop over the course of a combination. This method raises people’s awareness of and capacities to respond to the normal and to-be-expected stresses and strains of living through a combination (ibid). Appelbaum et al., (2000) states that people who are affected by a change of ownership or merger become cynical and detached about the intention of the new owner or management to make the new organization a successful one. There are four different aspects that have to be taking into consideration, according to Marks and Mirvis (2001), by executives, staff specialists and advisors, which involve partner, purpose, parameters and people. This can additional be divided into sub- issues (ibid). According to Donnelly et al., (2005) current research on merger goes beyond the bounds of company performance and showing that failure or success can often be bound up with strategic fit pre-and post- merger inter-firm relations. In the courtship period or the pre-merger the attention of critical aspects must to be devoted to such an evaluation of the trade-off balance between the price paid, respective strengths and weaknesses, the product and operational mix, geographical coverage, the quality of the acquired management team, future investment requirements and potential development. In the case of cross-border merger there are a few things that have to be taken into consideration; technical problems such differences in market conditions, taxation and accounting systems, stakeholder and shareholder expectations, as well as cultural difference. This can be extremely complex; all of these, with

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the human aspects being perhaps the more subtle and difficult to manage. Still, “courtship period” may be to short and mergers fail because of this. Companies fail to get to know each other well enough under this period prior to affecting the merger. (ibid) In a combination the strategic synergies should lead to a set of decisions in the pre-combination decision and where based on turf protection and empirical buildings rather than strategy. If the true motives that underlie a combination have less to do with strategy and more to do with non-rational forces, for example the desire to run the largest company in a industry or the fear of being eaten up by competitors. In these cases it is unlikely for a successful combination, since there are no true benefits to gain by joining forces. However, combinations based on such motives are not infrequent. To apply this companionship, corporate leaders declare the strategic criteria and make sure the acquisition team search for candidates that fit them. (Mark and Mirvis, 2001)

2.1.1 Determinants of success

Partner Successful mergers know what to look for and conduct a thorough search to ensure that the companies get what it wants. Companies’ selection of candidates covers the obvious financial and strategic criteria, and expanded also to include assessment of the human and cultural elements that can undermine an otherwise sound deal. A careful pre-merger screening comes only from speaking directly with a good cross-section of the management team from the potential partner. Face-to-face meetings are valuable to have, since they give a picture of the other companies’ dress code for example. It also requires listening and speaking to people from both the formal business issues as well as the less formal “how does it really work” issues. The team of due diligence should be broadened and just not including financial people, but as well including staff professionals from areas like information technology and human resources, and operating managers who are willing to work with the new partners if the combination is carried out. Operational managers have a particularly important role when it comes to due-diligence team, they can find a number of reasons why a deal that looked good on paper would fail in the early stage. Reverse viewpoints and preferences for how to conduct business are not the only reason to negate a deal, but incongruent values, genuine distrust and outright animosity should be noted as red flags. (Marks & Mirvis, 2001) The author further claims, it is also the time for due diligence to size up the depth and width of managerial talent in the potential partner. A study of large combinations found that 65 percent of successful acquirers reported managerial talent to be the particular most important instrument for creating value in a deal. If a buyer is smart, they would not only evaluate current executives, but also look closely at managers that are not yet in leadership positions. (ibid)

Purpose A company needs to first know what they are looking for in a merger partner and have an open and full review of these criteria, which permits for debate and companionship building between staff and line executives. If conflict and confusion appears concerning these criteria and are not fully addressed up front, it will continue down the road. (ibid) Applying these criteria thoroughly increases the likelihood of selecting a partner that will bring true productive value to the merger, rather that one that will just be an acquisition for the sake of doing a deal. Understanding precisely what synergies are wanted sets that stage for subsequently drawing out opportunities through the combination planning and

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implementation phases. The more unified both sides are with and between themselves about what is being sought, the more focused they can be in realizing their objectives. Two sets of criteria helps here and one is a generic set of criteria that guide a firm’s overall combination program and strategy. These are characteristics of organization that must be present in any combination partner. The second set of criteria guides the assessment and selection of a specific partner. (ibid) The setting of strategy starts by inspecting the competitive market and market status of the own organization, which includes strengths and weaknesses and top management’s objectives. The results define a direction for expansion in growth, profitability, or market penetration in existing businesses and for diversification into new areas or simply for cash investment. To evaluate a candidate most companies have standard metrics, which include its earnings discounted cash flow, and annual return on investment. Companies have beside these objectives about the impact of a combination on profitability, the earning per share of the combined organization’s, and future funding requirements. These financial criteria are respected and adhered to, in successful cases, balanced by careful consideration of each of the synergies sought in a combination and what it will take to realize and most combinations involve expense-reductions. For the executives, if they seek to create value, they have to be able to demonstrate for the employees of both sides that there is more to the deal then just cutting the costs. That involves a hard statement of how synergies will be gathered and what that means for the people involved. (ibid)

Parameters According to Marks and Mirvis (2001), partners in a successful combinations share commonality of purpose, they also recognize and accepting the terms of their relationship. The employees are able to focus their energy on a common goal and not on any wishful thinking that might contract the realities of the combination. Still, in several cases of corporate marriage contracts tend to be implicit, instead of explicit, and are open to interpretation and misunderstanding. Awareness defining the end state of a deal can finish the rumors of the pre-merger, since failing to do so can lead to an even more distasteful divorce. Further, the authors state that the initial step is the responsibility of senior executives involved in doing the deal, while the work of achieving the desired end state will involve a lot of people. Away from checking misperceptions, a well as articulated the desire end state guides combination planning and implementation. (ibid)

Prepare people psychologically According to Marks & Mirvis (2001) seller and buyer in an acquisition have very different psychological perspectives on the deal. Psychological factors can influence the relationships in cases where the role of leads and targets are not so well delineated. Members of one side might be seen by themselves or by the other side as technically sophisticated, worldlier, financially strong or savvy in the market place. Still, the assumption for the merger, that the partner will gain access to or pressure each other’s technology, customers, patents, or some other competence that they do not already possess, calls for a true meeting of the minds. Furthermore, the authors state that mindsets of psychology influence previous deals. It could dominate the critical months of transition planning and implementing and they often carry over this into the combined organization. If companies are aware of these mindsets, both one’s partners and one’s own, it helps both sides to prepare for a successful combination. Mark & Mirvis (2001) further explain, to nurse the dialogue about their respective mindsets

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can include sensitization seminars, this to have a psychological preparation. Individuals express their hopes and concerns of going forward, they hear about combination mindsets and by coping with their mindsets they learn tactics and that of their correlate. By readings, presentations or discussion of the human realities of a combination people can also be educated. (ibid)

Epstein’s six determinants of merger success According to Epstein (2004) to achieve merger success, it requires accomplishment in six factors and if companies are failing in anyone of the six factors they can impede the achievement of the goals of merger. Some of the six factors can be controlled simply through careful implementation and design, while other is more challenging because of numerous external forces. These six determinants are strategic vision and fit, deal structure, due diligence, pre-merger planning, post merger integration, and external factors. (ibid) Pre merger planning According to Epstein, (2004) the preparation during the period leading up to the merger announcement, is vital for success because it is critical to present the merger to key constituencies with confidence. Under this period the integration process if formulated and key decisions are made in the areas of structure, leadership and timeline for the process. It is significant to create clarity in roles and responsibilities for those involved in the integration process versus those in the operating businesses. Companies have to coordinate the communication efforts, widespread it and have it quickly developed, and both speed in planning and decisions and over communication to all stakeholders it is critical. It is essential to select a new leadership and guidelines for the lower levels of personnel decisions must be established. In merger of equals it can be particularly difficult to select a new CEO and board it can create hostilities and become extremely time- consuming. One solution can be to share the responsibilities, but power-sharing creates its own challenges and includes a lack of clarity at the top of the organization. The source of final authority, direction, and responsibility must be clear. Before the announcement the new company’s structure also the structure of the integration management team must be planned. In merger of equals creating a whole new organization is preferable to being constrained by either of the structures that was previous. Dates from earlier should as well be set for making key decisions and establish metrics and targets. If the planning process of pre-merger is not completed effectively, merger integration and success are typically unachievable. (ibid)

2.1.2 Choosing merger partner

Recommendations how to choose merger partner According to Palmer, Parry and Webber (2005) a key issue for small companies is how much actual choice they have. Large acquiring companies may use caution instead of where the smaller companies are in financial difficulties. If companies have weak finances it might have difficulties in finding a merger partner and to attract others can be more complicated since they are considered as “uninteresting” to potential suitors. Not only those parties who want to expand their territory but also to chase wider objectives, such as to start internal reforms or to highlight the major companies ideological position. This competitive market for transfers’ lead to a consideration of the criteria that small companies might apply to select an appropriate partner. One possibility is that companies engage in calculative approach and this by requesting bids from competing companies. This would enable small companies to address merger barriers, example concerns over the coming effectiveness. (ibid)

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The authors claim that when choosing merger partner, it is not simply based on a calculative rationale and that relationship with potential partner can be important. The relationship involving a merger can be with a company from the same or a different industry, consequently gaining from shared expertise and reinforced dedicated power. Smaller companies might instead pursue relationships on deeper political grounds and mergers with larger companies that have like-minded ideologies. Neither political nor occupational relationships, however, can be regarded as qualification for successful mergers. According to the authors, not all mergers act like this when choosing a partner. In addition, employees’ closeness can act repulsive rather than to stimulate to merger and in some situations mergers are hindered by a tradition of hostility between the two potential partners. In the selecting processes of an appropriate partner and negotiation of acceptable transfers terms, give small companies potential opportunities to address to the concerns relating motivations and barriers to merge. (ibid) According to Nguyen and Kleiner (2003) to be successful in merger, it all correlates directly on how well the level and quality of planning are. Companies often spend a little time analyzing and anticipating current /future market trends, but also on integration issues. It is ordinary for companies to refrain an objective analysis of their strengths, weaknesses, opportunities and threats, thus risking the success of the deals from the start. Too often the resources are insufficient and allocated to establishing strategic objectives. Numerous of deals also suffer or fail significant setbacks as a result of the poor due diligence preformed on the target company. (ibid) For companies it seems to be necessary to have an implementation strategy that is clear, before the merger procedure. A well planned merger is based on corporate needs, the definition of strategic and financial objectives. This often leads to a more effective post-merger implementation. The formalization of the internal process of acquiring company may be the key, a variable that can be used as a proxy measuring the extent to which the acquiring a company is internally well organized. If all this is the case, a successful implementation of a merger can be expected. (Papadakis, 2005)

The Case of Renault- Nissan Merger In Renault, sales were highly concentrated with 84.5 percent being in Western Europe alone. Being so concentrated on its domestic European market meant that compared with other major producers, especially its European rival, Volkswagen, Renault was very narrow-minded in capacity and possibly weak as the industry was globalizing quickly. (Donnely et al., 2005) In Nissan, the problems were internal; a conservative firm trapped in traditional Japanese business culture, in which there was little emphasis on profit, together with poor internal communications. In short, Nissan experienced a lack of urgency and had no shared vision of its strategic future. (ibid) Despite the poor shape of Nissan, Renault still wanted to ally itself with Nissan. First of all, as the industry was increasing, Renault needed to expand beyond the boundaries of its Northern European base in order to secure the long-term survival of the business. Secondly, in order to create credibility in a global context, Renault needed to be present in North American and Asia Pacific markets. Thirdly, such expansion would mean a prohibitively expense and could not therefore be an option without a partner. An American partner was out of the question as Ford, General Motors and Daimler-Chrysler were still trying to manage their own recent unions with other European companies. Attention was then drawn to Japan where Nissan

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alone seemed to be on the market. Subaru and Isuzu were under the influence of General Motors and Mazda was under Ford’s sponsorship. (ibid) Merger underlying principle often involves the potentialities of developing future market share and access to a range of technologies, which was obvious in the case of Renault-Nissan. Firstly, Nissan had benefit from a strong market presence in the United States and Asia, whereas Renault was present in Europe and the Mercosur markets. Secondly, their united strengths in technology would without a doubt be of shared benefit. Renault provided significant expertise in research and development, concept design and in marketing, whereas Nissan’s main strengths were its engineering technology. The pre-merger phase took eight months. (ibid)

2.1.3 Pre-deal planning According to Lynch & Lynd (2002), mergers and acquisitions are synonymous. Success depends on two key issues. First, companies or their consultants have to do a far better job in selecting acquisition candidates. Avoiding “falling in love” with a targeted company is one of the recommendations the authors would make. Second, once selected a target, business leaders must form their post-acquisition main concerns and behavior more carefully. (ibid) In the pre-deal planning period, mistakes often occur in three areas:

• Inadequate due diligence on the part of the buyer and/or seller: Too few deals make a complete risk assessment and management profiles, much less sufficiently measure these risks. (ibid)

• Lack of a compelling strategy: Unfortunately, more than one merger has been

motivated by the call for increasing shareholder value more than by sound strategic thinking. Attached to this are some very human issues: Pressures in the environment move executives not to be last in line to make an acquisition. Simple drive, imitative behavior, executive ego or organization stagnation are also among the other understandable, but questionable motives that drive M&A activity. (ibid)

• Overly optimistic expectations of synergies: Mergers are often motivated by the desire

to acquire one particular business of the target; the short of synergies and negative impact of integrating other parts of the business may be unseen as a result. (ibid)

GE Capital’s merchant banking business in NYC Robert Stefanowski, who is Certified Public Accountant (CPA) and managing director at GE Capital merchant banking business, provides suggestions for merging companies how to achieve long-term success in an article form the Journal of Accountancy. Tips to make a merger work:

• Involve top management early in the due diligence process: Whether the target’s company will fit well with existing operations, senior executives must play an essential part in the decision-making. When it comes to acquisitions within the same industry, senior management has the ability to use its experience and objectivity to

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estimate the strength and ability of the target’s management to perform after the merger. (ibid)

• Make sure due diligence is thorough: Prior to proposition, the due diligence team

should have access to all the target’s relevant accounting records and organize meetings with key management staff. If the target is located at many international sites, the team ought to visit all key operating places and get together with local management. The team should obtain board-meeting minutes, calculations of accrued liabilities, fixed asset analysis, inventory and receivable aging and independent audit work papers. It is of highly importance that the acquirer has an in-depth understanding of the target’s operations and risks involved before determining whether its bid for the company is fairly accurate. (ibid)

• Critically evaluate information from due diligence process: Management has to assess

the due diligence findings and review the earnings projections the seller’s investment bankers set as they have a tendency to make too positive forecasts to steer up the target’s price. The buyer has to think finishing the deal makes sense against all probabilities. (ibid)

• Be aware of “troubled companies”: Sometimes, companies are not always what they

appear. Acquirers regularly will get around unidentified risks by placing a portion of the purchase price into escrow for a period after the acquisition. If the organizations solve these problems after closing, the seller can draw on the escrow for the unpaid balance of the purchase price. On the other hand, if the risks result in damages, such as an unfavorable settlement of a pending lawsuit, the buyer keeps the escrowed funds to cover any losses. (ibid)

• Involve the integration team early: It is a requirement of the acquirer to have a sound

business integration plan in plan before closing. By having members of the integration team from the legal, finance and risk areas, they each can use their perspectives to help recognize and address potential problem areas. (ibid)

• Negotiate tight purchase agreements: Lacking extensive due diligence, buyers have

only the seller’s images to protect themselves from hidden liabilities at closing. Purchasers need appropriate representations and insurance from the seller with respect to environmental, tax, employment and other legal responsibilities that may be present but unidentified- the contract ought to state that all liabilities at closing should stay with the seller. (ibid)

• Include material-adverse-change clauses: The negotiation of M&A contracts can take

months and a material-adverse-change (MAC) clause gives the buyers a shelter between signing and closing the agreement. Should a material adverse change occur, then the purchaser has the right to lower the offer or sometimes cut off the deal. Even though MAC clauses are standard in the M&A world, sellers usually want one defined as narrowly as possible; buyers want a broader view so they can modify the price if the results of the original business change significantly before closing- caused by a natural disaster, for example. (ibid)

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Ameritech’s internal audit services (IAS) Ameritech is a company that was acquired by SBC Communications Inc. in 1999, and the article is written by John Burke, former senior internal auditor at Ameritech and is associate director-finance for SBC Datacommunications Inc. The reason for presenting it here is to provide a better view of the importance of making a due diligence. Three factors are at the core of every analysis: customer needs, strategic fit, and shareholder value. The research and follow-through set that internal audit departments can play a major part both before and after a merger. By doing due diligence, IAS took advantage of their internal auditors’ in-depth knowledge of company operations and strategy. They used the due diligence model to study controls in the next processes: (Burke, 2000)

1. Cash receipt, application, and management 2. Processing of accounts receivable 3. Processing of accounts payable 4. Processing of employee expense reimbursements 5. Inventory ordering, controls, and management 6. Customer billing systems 7. Employee payroll 8. Vendor and customer contract review and approval 9. Revenue recognition policies For each process, they:

• Documented and process-mapped the newly acquired company’s methods and procedures.

• Assessed the effectiveness of controls in place. • Compared the processes and practices with Ameritech’s and benchmarked key

factors such as reserve balance, inventory turns, and other items. • Provided recommendations on improving operations and taking advantage of

synergies. With the use of the due diligence model, IAS evaluated risk by investigating the key components of the targeted company’s business. The critical processes were examined to decide integration issues and those areas of immediate concern. (Burke, 2000)

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2.2 Role of Organizational Culture Culture can be defined in many different ways, according to Nahavandi & Malekzadeh, (1998) culture is the beliefs and assumption shared by members of an organization. The authors further state that the term culture is often used as if companies just have one culture, instead most companies have more than one set of beliefs that influence the employees’ behavior within their organization. It can be different subcultures within an organization and it can be divided into functional, occupational, product or geographical lines. Hence, to understand the culture of any firm involves decoding and identifying the different subcultures. This is to intake insight how the subculture interplay to influence organizational decisions making and behavior (ibid). Culture can be a make or brake factor when companies’ merger and culture is to an organization what personality is to an individual. Poor culture can be a contribute factor for merger and acquisition to fail (Schraeder & Self, 2003). Organizational culture is soft, holistic, hard to change, has a historical basis and is socially constructed. It can be necessary to change the environment within an organization if the culture should be changed (Schraeder & Self, 2003). Organizational culture can be an influence on how people set personal and professional goals, carry out tasks and control assets to accomplish them. The culture of an organization have an effect on the way in which people consciously and subconsciously think, make choices and finally the way in which they recognize, feel and act (Look & Crawford, 2004). The pre-merger stage can be described as only introductory. Cultural audits and creation as well as plans of action all include the pre-stage. These steps help in ensuring the smooth completion of the remaining process, as well as the success of the M&A. (Appelbaum & Gandell, 2003) According to Cartwright & Cooper (1996), the decision whether to merge or not is perhaps one of the most significant and expensive decisions an organization ever makes. The most effective way of avoiding the culture conflict is by not going into an inappropriate and potentially catastrophic organizational marriage in the first place. It seems like there is a need for an almost formal pre-nuptial agreement or establishment paper between joining companies which lay out the foundation and terms of the agreement and the expectations each company has of the other. The authors have outlined ways in which selection decisions, planning and management can be improved: Preplanning

• Know you own culture fully. (ibid) • Research the target company. (ibid) • Consult the personnel functions. (ibid) • Arrive with an agenda of people issues and areas for discussion, which will test out

your implicit or pre-formed theories about its culture. (ibid) Aims

• To make an initial assessment of the culture of the potential merger partner. (ibid) • To outline the terms of the proposed marriage contract. (ibid) • To establish the likelihood of its acceptance and so ascertain a realistic time-scale for

integration. (ibid)

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2.2.1 Integrated mechanisms of organizational culture A number of studies have identified key factors for success in M&A’s. There is a connection between M&A planning, management practices, and coherence of organizational culture and performance. Four integrated mechanisms of organizational culture can be an influence on its performance: organizational direction and shared purpose, early employee involvement, the impact of a strong culture on firm performance, and integration of an extensively held system of norms and expectations. Different cultures may hinder integration around new norms, work practices, individual and organizational identity. A strong organizational culture can be a means to create competitive advantage, increase motivation, and organizational effectiveness if expressed integration processes are settled and put into practice. (Horwitz et al., 2002) Success of an M&A depends on the ability of decision-makers to spot a potential merger partner or acquisition target with a good strategic and cultural match. Since financial and strategic considerations may be more important than selection criteria based on cultural similarities, mixtures between organizations of diverse culture type take place. It is appropriate to ask whether a particular combination of cultures has more chance of success than another combination. For instance, the combination of a “role culture” with a “task culture” has more possibility to succeed than a “power culture” with a “person/support culture”. A suggestion of a typology of merger integration refers to traditional, open and collaborative marriages, which depend on the reason for the merger and power relations in an M&A. Since the objectives of “traditional marriages” and “collaborative marriages” are different, acquirers require different characteristics in their partners. Success for a traditional marriage is dependent on the ability of an acquirer to modify the culture of the acquired, while integration in a collaborative marriage depends on readiness to compromise. The degree of difference between two culture types can decide the degree of adjustment needed to reach a new “best of both worlds” culture. (ibid)

2.2.2 Organizational culture change If the individual sees the culture of the other company is likely to intrude on his/her own, the more extensive and critical the evaluation. The concern of cultural fit is hardly ever given any serious consideration in the decision-making stage. At best, cultural compatibility is regarded as likely to improve the success of that marriage, but lack of it is an insufficient cause to take out the original proposal. The culture fit model proposes that if the acquiring organization or dominant merger partner aims to change the culture of the acquired organization then cultural similarity is not essentially a precondition. The change of culture is a long and complicated process, probably three to five years or even longer. However, certain types of culture are more open to change than others, in that cultures which require a high degree of individual constraint, such as power or role cultures, are less resistant to change than those which promote autonomy, such as task or person/support cultures. If the method of acculturation is cultural integration to make a new “best of both worlds” culture, then the more similar cultures, the smoother and easier the transition, given that the marriage is not between two power cultures. Organizational cultures can generally be seen as four main types: power, role, task/achievement and person/support; which then have been extended and elaborated. If two organizations come together and their cultures are mismatched to the point that many employees no longer fit into the environment and its dominant culture, or find the culture indefinite, split or conflictual, the resulting effects are likely to have a substantial and large-scale impact. The effects of uniting different cultural types, as it has an influence on managerial style, employee perceptions and behaviors both before and during the integration

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period, and the degree to which a single sound culture emerges, will probably generate important consequences for both individual and organizational merger outcomes. Especially, the role of organizational culture has more and more appeared as a prominent factor in influencing the integration process and thereby merger outcomes. (Cartwright & Cooper, 1995) According to Appelbaum et al., (2000), it is important that CEOs and human resource departments work together to plan the actions that need to be taken into consideration that culture can be a factor that could help or destroy the company, if the company were to merge. If this is overlooked and if the differences are too big, it can almost alone damage the deal. To change the corporate culture involves that employees must see concrete reasons that changes work and are valuable; otherwise, it could end in that they devote themselves to the new culture. The decision of which model of organizational culture that will be implied is the most important step at the pre-merger phase and it includes (Appelbaum et al., 2000):

• Using one or the other culture. (ibid) • Forming a culture that integrates the strongest characteristics of each culture. (ibid) • Building an entirely new culture that is not based on how each culture was before.

(ibid)

2.2.3 Conducting due diligence Mark (1999) claims the cultural objective of due diligence is not to reduce cultural conflict in a combination since that would not be possible. The purpose of cultural due diligence is neither to find a perfect fit between organizations that is to be integrate. In reality a moderate degree of cultural distinctiveness is beneficial to productive combinations. The best combination take place when a fair amount of cultural clash prompts constructive argues about what is best for the combined organizations. The due diligence of cultures primary benefit is to prepare executives for demands of combining together with previously separate organizations. Furthermore, the author explains that due diligence cultural raises awareness of and sensitivity to the issues with cultural in merger. It makes the selection process more sophisticated and complements the financial and strategic criteria. Cultural due diligence helps anticipate the demands, to assist and integrate in order to determine the cultural “end state” of consolidation. (Mark, 1999) According to Mark (1999), approaching to conducting cultural due diligence go under four general categories:

• To integrate cultural criteria in the initial merger discussion.(ibid) • To organize and prepare due diligence teams with a gaze at cultural criteria.(ibid) • To add cultural criteria to due diligence data gathering. (ibid) • To use proper tools to review cultural fit. (ibid)

The level of “acculturation” is an important aspect of the merger that both firms go through during this period. Nahavandi and Malekzadeh (1988) integrate the model which spots four forms through which “acculturation” occurs to identify the optimized model of organizational culture in the pre-merger phase. According to (Appelbaum et al., 2000) these forms are dependent on the type, size, and cultural characteristics of both the buyer and the target and they are:

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• Integration: people in the acquired firm want to keep their independence and preserve their culture and identity: This as a rule leads to structural absorption of two cultures, but little cultural and behavioral assimilation. (ibid)

• Assimilation: is always a one-sided process where one group freely takes on the

identity and culture of the other. In general, the acquired firm will be engrossed into the acquirer, and will not have a cultural identity. (ibid)

• Separation: includes efforts to preserve one’s culture and practices by staying separate

and independent from the dominant group. Not much cultural exchanges will take place between the two groups, and each will function independently. (ibid)

• Deculturation: the acquired firm looses both cultural and psychological contact with

both itself and the other group, and it involves remaining an outcast of both. (ibid) The more diverse cultures, the greater probability there is for a large cultural shock, foremost if the M&A was not voluntarily chosen (Horwitz et al., 2002). According to Cartwright & Cooper (1995), when two organizations merge, the resulting contact or acculturation always creates some form of culture shock. The effects may be mildly distasteful, shocking and novel or extremely disturbing of for organizational members, depending on how individuals appraise the attractiveness of the other culture in comparison and degree to which they value their own culture. Different cultural types may make the individuals constrained as individuals judge the culture of the other partner by the value they connect to conserving their existing culture, or the extent they identify the culture of “the other” as attractive (Horwitz et al., 2002). Potential results for the organization consist of member assimilation, integration, separation, and deculturalization. Successful marriages are a result of the cultural dynamics and power relations in the combinations. The culture types of both organizations before integration make a crucial part in deciding whether an acquired culture will change or integrate. Cultural likeness is not a prerequisite for pleasing assimilation. Most mergers are traditional marriages and they are likely to be successful if the proposed direction of culture change is seen as giving an increased employee participation and autonomy. Significant integration through a collaborative marriage is more likely to take place where there is potential to create a “best of both worlds”. There are four broad approaches an acquiring firm may take, each with differing effects: aggression/hostility, conciliation, corrosion and indoctrination. Conciliation and collaboration are more likely to be associated with establishing cultural fit prior to an M&A than other approaches. (Horwitz et al., 2002) Merger and acquisition strategies try to find competitive advantages which organic growth cannot achieve. Power relationships among parties affect the way in which HR and cultural integration occur. In an acquisition there are winners and losers. There is more obvious employee resistance to change in hostile acquisitions than in voluntarily M&A’s. Here the HR policies and practices of the dominant party may be forced. Feelings of defeat may have an effect on merger results in setting the direction of future cultural change and HR integration. (ibid) Ashkenas et al’s., acquisition model has four stages, first a pre-acquisition stage with due diligence, negotiation and closing the deal. Second, an establishment building stage with a launch, and merger integration and strategy formulation. Third, fast integration by realizing

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and integration plan, and progress judgement. Fourth, a valuation and modification of the long-term plan to be as successful as possible. (ibid) Failed mergers often reflect careless “soft” due diligence, meaning that the due diligence was not thoroughly enough. Key critical success factors for such a cultural inspection include understanding management strengths and weaknesses, needs/opportunities for organization restructuring and redesign, review of existing HR practices and systems. Outstanding differences in corporate culture need to be dealt with. (ibid) The CEO of the acquiring company should have a plan to deal with cultural conflicts as the employees and executives of the two incorporated companies begin working together in two different environments in order to reach the common goals of the new unit. Language problems and a variety of cultural dimensions identified by Hofstede: individualism versus collectivism; large versus small power distance; strong versus weak uncertainty avoidance; masculinity versus femininity; and short-term versus long-term orientations. (Agami, 2001) The culture of ICL and Nokia-Data In ICL-Nokia-Data, culture can be defined as “the way we do things around here”. It is the mix of many parts and can be described at a point in time. The values and beliefs are the most significant of these and are propagated by the most senior people in the organization; to this they can add history, processes and procedures, mission and objectives, educational programs and so on. (Mayo and Hadaway, 1994) Three years before was when the merger of Ericsson Data Systems and Nokia Data took place and changed the cultural mix- with consensus-loving, participative style of the Swedes in disagreement with the direct often insensitive Finnish approach. The former was definitely the larger organization, and most countries outside of Finland were mainly or totally Ericsson. The cultural shift was dominated by the controlling Finnish style, even though the Swedes felt a strong dislike. Yet the better managers typically said: “in Ericsson, you had to push decisions upstairs all the time; in Nokia you sink or swim on your own judgement”. Therefore, one key manager in the PC Division advised not to make the same mistake with Ericsson and invest at once in inter-cultural understanding. (ibid) 2.3 Conceptual Framework The aim of this section is to develop a conceptual framework, based on the literature review covered in the previous sections, and will show how different theories relate to each research question. The conceptual framework will aid us in data collection and later in data analysis.. According to Miles & Huberman (1994) a conceptual framework describes, either graphically or in a narrative structure, the most important things to be studied, namely the key factors, constructs and key variables. Moreover, the authors say that it is easier to create a conceptual framework if the research questions already have been stated, which has been done for this study (ibid). In order to be able to answer our two research questions, an explanation will be provided in order to explain what we will collect our data on. Among the theories presented, we will choose the concepts that are most relevant for our study. Our conceptualization will be presented in accordance with the order and content of our research question stated below:

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RQ1: How can the procedures and criteria used by companies for selecting a possible merger partner be described? RQ2: How can the role of organizational culture in selecting a possible merger partner be described?

Procedure and Criteria for Selecting Merger Partner To answer research question number one, we have done a selection of literature concerning the different criteria and procedures that are used in selecting a possible merger partner. Determinants of success According to Marks and Mirvis (2001), in order to succeed in the pre-merger phase, four different aspects have to be taken into consideration by executives, staff specialists and advisors. The four aspects are:

• Partner • Purpose • Parameters • People

Lynch and Lind’s, (2002) “two key issues of success” will be utilized to find out if the selecting procedures for possible merger partner, if companies take this into consideration, if not what do companies take into consideration. Success depends on two key issues and is stated below:

• Companies or their consultants have to do a far better job in selecting merger candidates. Avoiding “falling in love” with a targeted company is one of the recommendations we would make.

• Once selected a target, business leaders must form their post-merger main concerns

and behavior more carefully. Robert Stefanowski, CPA (Certified Public Accountant), and managing director have some tips on how to make a merger work. We found this interesting and want to look further on this, in order to see if companies are taking these tips into consideration or if companies have other tips on how to be handling a merger in the best way. The seven tips of how to make a merger work are presented below.

• Involve top management early in the due diligence process. • Make sure due diligence is thorough. • Critically evaluate information from due diligence process. • Be aware of “troubled companies”. • Involve the integration team early. • Negotiate tight purchase agreements. • Include material-adverse-change clauses.

Choosing a merger partner

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Further Marks & Mirvis, (2001) state that a careful pre-merger screening comes only from speaking directly with a good cross-section of the management team from the potential partner, which we will also want to look at, i.e., how companies approach potential partners. According to Palmer, Parry & Webber (2005) give some recommendations on how to choose a merger partner.

• If companies have weak finances they might have difficulties in finding a merger partner and to attract others can be more difficult since they are considered as “uninteresting” to potential partners.

• When choosing merger partner, it is not simply based on a calculative rationale, but

that relationship with potential partner can be important.

• Merger can be with a company from the same or a different industry, thus benefiting from shared expertise and strengthened committed power.

By using the theories mentioned above we want to examine if these criteria occur in reality, if this is what companies are taking into consideration when choosing a merger partner, or at least how they react toward these criteria. Pre-deal planning To examine the pre-deal planning period, we have chosen Lynch & Lind’s (2002) theory, to see what mistakes that often occur in the pre-planning phase and how companies are handling this planning period. Whether companies choose to handle the preplanning process or not, will also be investigated through the data that connects with determinants of success. The three mistakes that often occur in the pre-deal planning period are:

• Inadequate due diligence on the part of the buyer and/or seller. (ibid) • Lack of a compelling strategy. (ibid) • Overly optimistic expectations of synergies. (ibid)

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Role of Organizational Culture in Partner Selection To answer the second research question, relevant literature regarding the role of organizational culture in selecting possible merger is chosen. Integrated mechanisms of organizational culture Horwitz et al., (2002) have identified key factors for success in M&A. Four integrated mechanisms of organizational culture can be an influence on M&A’s performance, and will be used in order to observe to which extent the culture factor plays a role in a merger. Different cultures may hinder integration around new norms, work practices, individual and organizational identity. The four mechanisms are presented below.

• Organizational direction and shared purpose. (ibid) • Early employee involvement. (ibid) • Impact of a strong culture on firm performance. (ibid) • Integration of an extensively held system of norms and expectations. (ibid)

Organizational culture Cartwright & Cooper’s (1995) theory on “the role of organizational culture” will also be utilized. In order to more specifically investigate the different organizational cultures and how it plays a role in merger. The authors state the following aspects of cultures, that has more and more appeared as a prominent factor in influencing the integration process and thereby merger outcomes.

• Power • Role • Task/achievement • Person/support

Moreover, Appelbaum et al’s., (2000) theory about the “importance of culture in organizations” will also be used since organizations must be aware of the cultural impact of a merger and that merger can destroy a deal or help one. The decision of which model of organizational culture will take on is the most important step at the pre-merger phase and it includes:

• Using one or the other culture (of the merger companies culture). (ibid) • Forming a culture that integrates the strongest characteristics of each culture. (ibid) • Building an entirely new culture that is not based on how each culture was before.

(ibid) Conducting due diligence Similarly, we want to examine if the theory by Mark (1999), about the issues of conducting cultural due diligence is used by companies when choosing a possible merger partner. The four categories are:

• Integrating cultural criteria in the earliest merger discussions. (ibid) • Staffing and preparing due diligence teams with an eye toward cultural criteria. (ibid) • Adding cultural criteria to due diligence data collection. (ibid) • Using formal tools to assess cultural fit. (ibid)

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These different theories combined together, we believe it will assist us in collecting the data which eventually help us in providing an answer to our research questions: how can the procedures and criteria used by companies for selecting a possible merger partner be described and how can the role of organizational culture in selecting a possible merger be described. Based on the above, we can present the frame of reference in a pictorial form as shown in figure 3.1.

Figure 3.1 Conceptual frame of reference for this study. Source: Authors’ Construction.

Role of Organizational Culture in Partner Selection

• Integrated mechanisms of

organizational culture - Horwitz et al., (2002)

• Organizational culture change - Cartwright and Cooper, (1995) - Appelbaum et al., (2000)

• Conducting cultural due diligence

- Mark (1999)

Criteria and Procedure for Selecting Merger Partner • Determinants of success

- Marks and Mirvis (2001)

- Lynch and Lind (2002)

- Robert Stefanowski, GE Capital (2002)

• Choosing a merger partner

- Marks and Mirvis, (2001) - Palmer, Parry and Webber (2005)

• Pre-deal planning period - Lynch and Lind, (2002)

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CHAPTER 3 METHODOLOGY In this chapter the research methods that are used, to answer the research questions are presented. The chapter starts with the purpose of the research, followed by the research approach and strategy, then the data collection methods and sample selection. Further, the methodology problems which develop during the study will be reviewed and discussed.

3.1 Research Purpose According to Eriksson & Wiedersheim-Paul (2001), the purpose with a research is to state what is to be accomplished by conducting research and how the results of it can be used. Furthermore, Yin (2003) claims that research can be categorized as exploratory, descriptive or explanatory. Saunders, Lewis & Thornhill (2000) say that it is also possible to have more than one purpose. Saunders, Lewis & Thornhill (2000) state that exploratory studies are important means of finding out what is happening, to look for new insights, to ask questions and to evaluate phenomena in a new light. Further, the authors say that the exploratory research approach is especially useful if you expect to clarify the understanding of a problem. The exploratory research can be conducted in three ways; a search of the literature, interviewing to experts in the subject and finally, performing focus group interviews (ibid). According to Saunders, Lewis & Thornhill (2000) the aim of descriptive research is to correctly depict a profile or person, situations, or events. Descriptive research comprises the choice of perspective, aspects, levels, terms, and concepts (Eriksson & Wiedersheim-Paul, 2001). The authors also say that it is essential to observe, register, systematize, classify, and interpret. In addition, a high-quality description is often a necessary base when the researcher wants to explain, understand, predict, and/or decide (ibid). Explanatory studies are according to Saunders, Lewis & Thornhill (2000) termed as studies that establish casual relationships among variables. Further, Eriksson & Wiedersheim-Paul (2001) say that to explain signifies to analyze cause-effects relationships and that an explanation of what causes produces what effects. According to Reynolds (1971), explanatory research is focused on developing explicit theory that can be used to explain the empirical generalizations that evolved from the descriptive research, which gives a cycle of theory construction, theory testing and theory reformulation. The emphasis is on studying a situation or a problem with the aim of explaining the connection between different variables (Saunders, Lewis & Thornhill, 2000). Our study based on the research questions and purpose stated earlier is primarily descriptive as it aims to shed additional light on issues already investigated by other researchers.

3.2 Research Approach There are two categories that studies can be divided in, qualitative and quantitative research. Quantitative research involves numerical data or limited data that usefully can be quantified and can vary from simple counts, such as the frequency of occurrences, to more complex data such as test scores or prices. (Saunders, Lewis & Thornhill, 2000) Qualitative research is described as the opportunity to investigate a subject as real as possible (ibid). It is the conclusions of a qualitative research that are based on non-quantifiable data, such as attitudes, values, and perceptions (Lundahl & Skärvad, 1992). According to Saunders, Lewis & Thornhill (2000), the nature of qualitative data has implications for both its

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collection and its analysis. To be capable of capturing the fullness and richness related with qualitative data it cannot be collected in a standardized way, like quantitative data (ibid). Instead the purpose with qualitative research is to provide a better understanding of the studied area (Holme & Solvang, 1991). On the other hand, for a qualitative research, information is gathered to gain a deep and thorough understanding, and to make descriptions of situations as a whole, in which the research problem exists. It is involv