Post-acquisition managerial learning in Central East Europe

Organization Studies, Spring, 1996 by Roland Villinger

For decades, a 'wall' separated eastern Europe from the rest of the continent. On one side there was controlled ideology and central planning, hierarchical structures, restrictions and rigidity and on the other pluralism, decentralization and markets, open systems and individual responsibility (at least to a certain extent . . .). In the course of 1989 this wall was dismantled by a chain of revolutions in eastern Europe. Since then, all countries in the region have begun to move in the direction of a market-oriented environment. Hungary, (the former) Czechoslovakia and Poland represent the 'fast movers' in this transition process. These central east European, 'fast-track' reforming countries can be described by their relative success with respect to progress both in structural reforms and in macro stabilization.

A major role in this tremendous transformation process has been (and still is and will be) performed by foreign companies investing financial and human capital in the region. East European governments, on the one hand, hope that the managerial and technological capabilities as well as the financial resources of western investors will contribute to a fast growth of their economies, eventually leading to the standards of living characteristic of developed, western, market-based societies. Thus, the privatization of their previously state-controlled economies has become a high priority on their political agendas. Western companies investing in the region, on the other hand, see attractive opportunities to enter and expand into 'new' markets promising high growth rates.

Hence, foreign direct investment especially into Hungary, Poland, the Czech Republic and Slovakia has grown rapidly, exceeding US$ 10 billion for these four countries in the period from 1990 to 1993.

With privatization schemes generating promising investment opportunities, western acquisitions of substantial equity stakes in east European companies have been accelerating, especially from 1991 onwards. According to Ackermann and Lindquist (1992), a total of 207 western equity participations in existing east European enterprises were completed between January 1989 and March 1992, of which 194 took place in the fast moving countries of central eastern Europe mentioned above. East-west joint ventures, and other looser contract-based networks representing various types of co-operation between two or more companies, have admittedly outnumbered western acquisitions in eastern Europe, i.e. takeovers of local companies. However, the picture can change dramatically when the disclosed investment values in conjunction with joint ventures, on the one hand, and acquisitions, on the other hand, are taken into consideration (East European Investment Magazine 1992). The values, in terms of equity participation plus committed investments of the largest western acquisitions, involve amounts of several hundred million US$, and the top transactions exceed one billion USS. Thus, western acquisitions are a means of foreign direct investment with substantial economic significance in the transformation of east European countries into market-oriented economies and, consequently societies.

Acquisitions also represent highly interesting phenomena with respect to the organizational and managerial issues involved. Acquisitions tend to lead to 'tighter' forms of co-operation between originally separate companies than joint ventures and other forms of alliances. Hence, the acquisition of a controlling equity stake potentially involves a very significant transfer of managerial paradigms and practices as well as an extreme type of clash between two organizations representing different structures and cultures.

In an east-west context, as discussed here, these differences are bound to be particularly pronounced, thus involving substantial organizational challenges. This is obviously due to a crossing of national boundaries and, at the same time, boundaries between (at least formerly) highly different political and economic systems: the socialist, centrally planned countries of eastern Europe versus the market-based societies in the west.

Acquisitions, as analyzed in the study underlying this paper, include all transactions in which a western company takes over an equity stake in an existing, central east European (Hungarian, Czech, Slovakian, Polish) enterprise, thus gaining essential control of the acquired organization's management. These transactions generally take place through privatization, i.e. a sell-off by the respective country's government to private and - in capital-intensive industries - predominantly foreign investors. Only companies engaged in manufacturing industries are included in the study. In many cases the acquired equity stake is a majority stake or, in a number of cases, a 100 percent share of the acquiree. However, even with an equity participation of (slightly) less than 50 percent, the western acquirer - representing a relative wealth of managerial, technological, and financial capabilities and resources - is generally expected to lead the process of adjusting and restructuring the east European business to meet the requirements of market-based competition.