Effect of Organizational Cultures on Mergers and Acquisitions: The Case of DaimlerChrysler

International Journal of Management, Jun 2007 by Badrtalei, Jeff, Bates, Donald L

Inquiry into past partnership waves provides guides about their causes and failures. These guides are applied to distinct organizational culture issues that were a major barrier to each stage of the DaimlerChrysler merger and will likely continue to plague the union for years to come. Some of the lessons to be gleaned from the DamilerChrysler experience are a reaffirmation of lessons reported in the literature while others are unique to this merger. The objective is to provide guides about how to avoid similar pitfalls in dealing with organizational culture in cross national partnerships and improve their success as the economy goes global.

Partnerships, of any form, be they mergers, acquisitions or joint ventures, are a viable strategic option to achieve the objectives of growth, diversification, economics of scale, synergy or a global presence.

Partnership strategies recently have run in waves. The previous partnership wave of the 1960-1970's was of the conglomerate type, partnering with an organization in an unrelated field (Cartwright & Cooper, 1995). To get a feel for the scope of this wave, it was estimated to have affected 25 percent of the U. S. workforce (Fulmer, 1986). The failure rate of this wave is also legendary with estimates ranging from a pessimistic 77 percent to an optimistic 25 percent (McManus & Heggart, 1988; Marks, 1988). The typical reason for failure was the partnership was based only on financial and economic information or what is more commonly called "hard " data and rarely involved data to support the meshing of the organizational cultures or the "soft" and "mushy" issues (Cartwright & Cooper, 1995). Conglomerate types of partnership agreements are likely to focus on the financial and planning systems at the corporate level. The operating division will remain independent, and therefore, are unlikely to have their organizational culture directly affected. Therefore, the inadequate meshing of the two organizational cultures as the cause of the partnership failure is, from a theoretical viewpoint, unusual (Hunt, 1988).

The 1980-90's wave of partnerships contrasts significantly from the 1960-70's wave in that they were of the horizontal or related business type - partnerships between organizations in the same field of business activity or industry (Cartwright & Cooper, 1992). Again, to get a feel for the scope of this wave, there were 49 partnership forming activities valued at $6.88 billion announced for the first quarter in 2000, up from 1999's 36 deals in the first quarter valued at $ 1 .88 billion (Lipin et. al., 2000). Research indicates that between 55 to 75 percent do not to meet the anticipated purpose and expectations for the partnership and are therefore considered failures (Carleton, 1997). Recent examples include Time Warner and AOL (Colvin, 2003) and Lowe Worldwide and Ammirati Puris Lentas (O'Leary & Mc Manins, 2001).

It appears that management has not learned anything about partnership formations from the failures of the 1960-70's wave because over one-half the time a partnership does not succeed, the fundamental cause is cultural-clash (Gibbon, 2002). Cultural-clash brings about lower commitment and cooperation from employees (Bruno et. al., 1984; Sales & Mirvis, 1984), greater turnover (Hambrick & Cannella, 1993; Luba��n et al., 1999), deterioration in operating performance (Very et al., 1997; Weber, 1996) and a decline in shareholder value (Chatterjee et al., 1992).

While it is generally agreed, that cultural compatibility is the greatest barrier to successful partnership integration, investigation of cultural factors is least likely to be conducted during the critical due diligence stage (Horwitz et. al., 2002). The first conclusion derived from a six month study of 156 companies in North America, Europe, and AsiaPacific, conducted by Right Management Consultants, was pay attention to differences in organizational culture and be prepared to address them. The study continued that the most damaging obstacles to a successful partnership are not created by geographic differences or language barriers but by differences in organizational culture. Regrettably, most companies fail to anticipate the toll that differences in organizational culture can take on their projects (Johnson, 2004).

Once a potential partner is identified, the "due diligence" is completed which involves a detailed analysis of the target firm's financial data, market presence, physical assets, business model, and legal issues (Krallinger, 1997). Even though history, research, and experience has strongly recommended the importance of addressing cultural fit, and there are no "soft" issues in developing new partnerships, the all important people issues continue to be neglected. (Johnson, 2004; Gibion, 2002). One researcher confessed to "no knowledge of firms developing a comprehensive cultural fit audit as a component of due diligence." (Carleton, 1997).

What is this powerful force called "organizational culture" that can dictate success or failure in partnerships, and is so easily overlooked? It has been defined in various theoretical and practical ways. To work with the culture of an organization is to work with all facets of a company that have any bearing on why people behave the way they do on the job from day to day (Gibbon, 2002). It is the traditions, shared beliefs, and expectations about how individuals behave and accomplish tasks in organizations (Cartwright & Cooper, 1993). One author states that organizational culture has a minimum of two levels: objective and subjective. Objective aspects include artifacts, office location, physical setting, office d�cor, etc. The subjective level includes shared values and beliefs (Schein, 1985). Another author breaks culture down into three components: structure, politics and emotions (demente & Greenspan, 1999).