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Mars–Venus marriages: Culture and cross-border M&A

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Abstract

Using a sample of over 800 cross-border acquisitions during 1991–2004, we find that, contrary to general perception, cross-border acquisitions perform better in the long run if the acquirer and the target come from countries that are culturally more disparate. We use mainly the Hofstede measure of cultural dimensions to measure cultural distance, but also examine alternative proxies. The positive relationship of performance to cultural distance persists after controlling for several deal-specific variables and country-level fixed effects, and is robust to alternative specifications of long-term performance. Cash and friendly acquisitions tend to perform better in the long run. There is also some evidence of synergies when acquirers are from stronger economies relative to the targets.

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Notes

  1. Pautler (2003), in a survey of recent studies by consultants on transnational M&A, cites managing cultural difference between organizations as central to the success of a deal.

  2. For instance Chrysler-Daimler, GE-Tungsram (of Hungary) and Upjohn and Pharmacia AB of Sweden.

  3. In a recent paper, practitioners Langford and Brown (2004) argue that the recipe of success through acquisitions is to buy small, buy often, and buy cross-border. Gratchev (2001) discusses the case of 3M, which he states has turned cultural differences between US and Russia into synergistic gains in the global marketplace. In a recent article in The New York Times William Holstein (2005) discusses the benefits of an American multinational being a “cultural chameleon” when it ventures abroad.

  4. Stulz and Williamson (2003) argue that the culture of a country, as reflected in its religion and language, has a greater role to play in determining creditor rights than the origin of a country's legal system. Guiso et al. (2004) show that the trust that people of a country have in a citizen of another country plays a significant role in economic exchange between the two nations. Other recent papers in the finance area that have used the Hofstede metric include Chui, Titman, and Wei (2008), who show that stock markets in individualistic countries have more active trading and momentum in stock returns, and Licht, Goldschmidt, and Schwartz (2003), who use Hofstede distances to show the heterogeneity within the broad groups used by La Porta et al. (1998) to characterize corporate governance systems.

  5. A fifth dimension, long-term orientation, was later added for a small subset of countries. The four original dimensions are traditionally used to calculate the cultural distance (see Kirkman et al., 2006).

  6. Covered in detail in the November 2006 issue of JIBS.

  7. In contrast, a large literature focuses on US domestic M&A activities (see Bruner (2002) for a survey). The findings of previous studies indicate that acquiring firms earn zero or negative abnormal returns in both the announcement period and the post-merger period when making domestic acquisitions, although results are sensitive to choice of techniques (Mitchell & Stafford, 2000).

  8. See Cakiki, Hessel, and Tandon (1996) and Eun, Kolodny, and Scheraga (1996), for instance.

  9. Table 5.8, pp 111–112.

  10. The correlations of Hofstede distance with our language, religion and legal origin dummies are −0.84, −0.31 and −0.62, respectively.

  11. In our robustness checks we also use the Fama–French factors to adjust for risk for the US acquirers.

  12. This evidence is very similar to the evidence for US acquirers acquiring domestic targets (e.g., Loughran & Vijh, 1997).

  13. The results are available on request.

  14. In order to control further for risk factors that might have escaped our analysis, we also looked at risk-adjusted CARs for US acquirers using the Fama–French factors. While this analysis is difficult to do for cross-border acquisitions in general, the factor values for US acquirers were obtained from Professor French's website. Two of the measures of cultural distance – Hofstede distance and language dummy – continued to be significant.

  15. Undistributed cash flow is calculated, using firm-level data from the Global Compustat database, as CASH_FLOW=INC−TAX−INTEXP−PFDDIV−COMDIV. Here, INC is the operating income before depreciation (item no. 13); TAX is calculated as Total income taxes (item no. 16)−Change in deferred taxes from previous year to present year (change in item no. 35); INTEXP is the gross interest expense on short- and long-term debt (item no. 15); PFDDIV is the total amount of preferred dividend requirement on cumulative preferred stock and dividends paid on non-cumulative preferred stock (item no. 19); and COMDIV is the total dollar amount of dividends declared on common stock (item no. 21).

  16. Of the 132 firms in our sample, 16 did not have the complete data dating back to 240 days preceding their acquisition announcement dates. In those cases, we use as many observations as we can get from CRSP over the estimation period to estimate the coefficients of the market-model regression, maintaining the restriction that there must at least be 36 observations. Because of this requirement, four sample firms are dropped from the calculation of the announcement abnormal returns.

  17. The methodology employed here is based on Dodd and Warner (1983). For more details of the computation, please refer to Dodd and Warner (1983).

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Acknowledgements

We thank Lee Radebaugh, the Departmental Editor, and two anonymous referees for insightful comments. We thank Hyung-Suk Choi and Abhishek Sinha for excellent research assistance, and Bhagwan Chaudhry, Jonathan Clarke, Charalambos Th Constantinou, Sankar De, Cheol Eun, Vidhan Goyal, Matthew Higgins, Rocco Huang, Ravi Jagannathan, Bradley Kirkman, Kalpana Narayanan, Jay Ritter, Richard Roll, Kuldeep Shastri, Laxmikant Shukla, Ajay Subramanian and participants at the FMA 2005 European Meetings in Siena, Italy, FMA 2004 Annual Meetings in New Orleans, Georgia Tech International Finance Conference and the Indian School of Business, Hyderabad Finance Workshop as well as seminar participants at Georgia Tech, Indian Institute of Management-Calcutta and Indian Statistical Institute-New Delhi for their helpful comments. We are responsible for all remaining errors. Gupta-Mukherjee acknowledges financial support from the Alan and Mildred Peterson Foundation for National Science Foundation (NSF) IGERT Graduate Associates. Jayaraman acknowledges research support from CIBER at Georgia Institute of Technology.

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Authors and Affiliations

  1. Indian School of Business, Hyderabad, India

    Rajesh Chakrabarti

  2. School of Business Administration, Loyola University Chicago, Chicago, USA

    Swasti Gupta-Mukherjee

  3. College of Management, Georgia Institute of Technology, Atlanta, USA

    Narayanan Jayaraman

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  1. Rajesh Chakrabarti
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  2. Swasti Gupta-Mukherjee
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  3. Narayanan Jayaraman
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Correspondence to Narayanan Jayaraman.

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Accepted by Lee Radebaugh, Area Editor, 26 November 2007. This paper has been with the authors for one revision.

APPENDIX

APPENDIX

See Table A1.

Table A1 Description of variables included in the study and their sources. (Variable names as in tables provided in parentheses for variables that have been reported in tables.)
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Chakrabarti, R., Gupta-Mukherjee, S. & Jayaraman, N. Mars–Venus marriages: Culture and cross-border M&A. J Int Bus Stud 40, 216–236 (2009). https://doi.org/10.1057/jibs.2008.58

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