Fits and starts

The curse of the cor­po­rate cul­ture clash

Sunday Times - - Careers - By RANA FOROOHAR

● Tar­iffs, trade wars and ris­ing na­tion­al­ism may com­mand head­lines, but they have done noth­ing to dent global deal­mak­ing. More than $2.5-tril­lion (about R33.8-tril­lion) in merg­ers and ac­qui­si­tions have al­ready been an­nounced this year and if the pace con­tin­ues, 2018 is likely to sur­pass 2015’s $5tril­lion in M&A deals.

Partly, this re­flects the end of a long cy­cle of easy money in which com­pa­nies are look­ing to get that last bit of juice out of their stock prices. Some of the largest deals, such as AT&T-Time Warner, Dis­ney-Fox or CVSAetna, are about tra­di­tional com­pa­nies try­ing to com­pete with the big in­ter­net groups by build­ing scale. Ei­ther way, it is worth re­mem­ber­ing that more than half of all merg­ers de­stroy share­holder value.

What sets suc­cess­ful merg­ers apart from the fail­ures? In large part, it is hav­ing a good cul­tural fit. Cor­po­rate cul­ture is, of course, pred­i­cated on many things: a com­pany’s na­tion of ori­gin, the type of tal­ent it calls for, the in­dus­try it is part of, and so on. But all these can be cat­e­gorised in a bi­nary way: is the cul­ture “tight” or “loose”?

While all cul­tures have their norms, tight ones — whether they ex­ist in coun­tries or com­pa­nies — tend to en­force their norms quite strictly, whereas loose ones are more tol­er­ant.

Michele Gelfand, a psy­chol­ogy pro­fes­sor at the Univer­sity of Mary­land, whose re­search on cul­tural norms has been used by the US Depart­ment of De­fence, sug­gests that coun­tries as di­verse as Ja­pan, Nor­way, Singa- pore and In­dia have tight cul­tures. She classes those of Is­rael, the Nether­lands, Greece and the US as more or less loose.

The re­sults of her study of 33 na­tions, first pub­lished in the jour­nal Sci­ence in 2011, show that lev­els of tight­ness were high­est in South and East Asian na­tions, then the Mid­dle East, and Nordic or Ger­manic coun­tries.

The Latin, English-speak­ing and for­mer com­mu­nist na­tions are the loos­est. The lat­ter may be at least in part a re­sponse to a pe­riod of strict Soviet rule. Ex­treme cul­tures can trig­ger a counter-re­ac­tion, which is per­haps one rea­son the rise of a lib­eral coastal elite in the US has been coun­tered by right-wing pop­ulism in the coun­try’s heart­land.

Glob­ally, cross-border deals have nearly dou­bled rel­a­tive to the first half of last year, mean­ing that cul­tural con­flict could play a more im­por­tant role in M&A than usual. In her up­com­ing book, Rule Mak­ers, Rule Break­ers: How Tight and Loose Cul­tures Wire Our World, Gelfand out­lines re­search on 6 000 sig­nif­i­cant merg­ers in more than 30 coun­tries be­tween 1980 and 2013.

She finds that a large tight/loose gap be­tween the cor­po­rate cul­tures of the par­ties in­volved re­sulted in a lower-than-av­er­age stock price and lower re­turns for the investor. The largest gaps an­a­lysed re­sulted in a loss of $30-mil­lion within five days of the

What sets suc­cess­ful merg­ers apart from the fail­ures? In large part, it is hav­ing a good cul­tural fit

an­nounce­ment, which seems to in­di­cate that mar­kets un­der­stand cul­tural gaps even when buy­ers them­selves do not.

All this sug­gests that in­vestors should per­haps be happy that Broad­com, the Sin­ga­porean chip­maker, was blocked from buy­ing US tech com­pany Qual­comm by the Trump ad­min­is­tra­tion in March. The two com­pa­nies come from coun­tries that are, ac­cord­ing to Gelfand’s re­search, un­likely to mesh well.

But even com­pa­nies within a sin­gle coun­try can have wildly dif­fer­ent cul­tures. Con­sider the re­cent Ama­zon-Whole Foods deal, which may give rea­son for con­cern. While many in­ter­net com­pa­nies have loose cul­tures (think Uber or Face­book), Ama­zon founder Jeff Be­zos runs his com­pany with a tight top-down struc­ture.

Per­for­mance is con­stantly surveilled, eval­u­ated and re­viewed. That is quite a con­trast to Whole Foods, which has a looser cul­ture that can be traced to its hip­pie roots.

No won­der there are now sto­ries of gro­cery clerks cry­ing on the job and store shelves go­ing empty at Whole Foods.

This kind of cul­ture clash does not bode well for in­vestors.

Fos­ter­ing di­ver­sity is not easy, but the best com­pa­nies do it. Chi­nese in­ter­net groups such as Alibaba or Baidu are in­flu­enced by the stric­tures of the state, and yet they find ways to re­main cre­ative and nim­ble.

The key is not to be blind­sided. Suc­cess­ful cor­po­rate mar­riages re­sult when each part­ner knows what they bring to the ta­ble.

Pic­ture: Getty Im­ages

Will Jeff Be­zos’s Ama­zon be a fit with the Whole Foods cul­ture?

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