High divergence in Corporate Social Responsibility (CSR) culture between firms in M&A deals negatively impacts announcement returns and chances of successfully generating synergy values in the combined business during the post-deal stage, according to new research co-authored by Bayes Business School (formerly Cass).
‘Corporate Social Responsibility culture and international M&A’, by Dr Zhenyi Huang, Research Fellow at Bayes, along with academics from University of Reading and University College Dublin, investigated the relationship between CSR cultural divergence, as measured by a full range of Environmental, Social, and Governance (ESG) metrics, and M&A outcomes in an international setting.
The study, a first of its kind on international M&A to employ all-encompassing measures of CSR cultural divergence between organisations, suggests that the risk of cultural clashes significantly reduces the chance for synergy value creation in the post-acquisition integration phase.
Key findings of the study are:
- CSR cultural divergence between acquirer and target firms is inversely related to acquiring firm announcement and long-run returns, and synergistic M&A gains. This is consistent with ‘cultural clash’ hypothesis on M&A integration that states cultural misalignment impedes the integration process.
- Misalignment of business cultures exacerbates the complexity of integration, which hinders the potential of value creation in the combined firm.
- More pronounced cultural mismatches increase the length of time a deal takes to complete, as well as the likelihood that a deal will ultimately fail to be completed.
- Greater cultural divergence reduces the likelihood of stock-swap financing.
The study used the EIRIS database to analyse the success of 220 announced M&A deals across 22 countries, examining data for nine years between January 2004 and December 2012. Research explored seven key areas of deal performance and transaction characteristics: acquirer announcement based on cumulative announcement return (CAR), synergy gains, acquirer bargaining power, deal completion likelihood and time, deal financing, acquirer long-run stock performance and operating performance.
Dr Huang said the study had important lessons for both acquiring and target firms, and respective financial advisors.
“There has been an increasing emphasis on corporate social responsibility and ESG behaviour in corporate culture, as firms’ CSR policies become more and more driven by stakeholder preferences,” Dr Huang said
“Differences in CSR policies can in turn reflect differences in stakeholder demands. Firms with higher cultural divergence with respect to CSR standards are therefore likely to have a greater integration cost when merging different stakeholders in the post-deal stage.
“Findings from our research show the value of due diligence, not just in terms of potential profitability of an M&A deal but also culture compatibility.
“Acquiring firms both domestically and from different countries carries risk of culture clash that pose a significant barrier in the post-deal stage for integration success and value creation.
“High cultural divergence risks creating serious friction between two firms involved in a deal during the negotiation stage, such that it reduces the likelihood of deals being successfully completed, and lengthens the average completion time even if they do.
“Divergence in corporate culture introduces a higher degree of information asymmetry and uncertainty in future value between the two merging firms, and target firms are therefore less willing to accept acquirer’s stock as the method of payment.
“This research provides significant implications for firms and deal advisors on the key ingredients of M&A deal success and highlights the importance of evaluating corporate culture from the very beginning of the process – even as early as the target selection and deal planning phases – to achieve expected synergistic gains.”
‘Corporate Social Responsibility culture and international M&A’, by Dr Zhenyi Huang, Professor George Alexandridis, Professor Andreas Hoepner, and Dr Ioannis Oikonomou, is published in The British Accounting Review.