In the last decade, to accomplish changes in clients’ demands, IBM’s strategy was to strengthen its position through strategic investments and acquisitions in higher-value segments. In fact it acquired more than 100 companies to complement and scale its portfolio of products, moving towards higher-value and more profitable segments of the industry.
The aim of this project is to analyse the cultural integration issues consequent to the adopted strategy and to develop a general analytical framework that allows for the examination of those issues in post-acquisition integrations using the IBM ISS case. The selected case represents an IBM acquisition strategy and the related issues: the ISS acquisition was announced, at a worldwide level, during the summer of 2006 and completed in October 2006.
The work will focus on the post-acquisition integration phase of ISS in IBM in Italy. The research will focus on the Italian local reality for two main reasons:
The importance of local issues arising at a country level after a cross-border Merger and Acquisition (M&A);
The accessibility of data.
The project main objectives are to:
Identify appropriate theoretical support to understand and manage future post-acquisition cultural integrations;
Develop an analytical framework applicable to future acquisition cases;
Develop recommendations and the analytical framework to assist managers to develop a more structured approach in future integrations.
Background to the Project
IBM Main Strategy
IBM’s stated strategy is to divest in commoditizing businesses like personal computers and hard disk drives, and strengthen its position through strategic investments and acquisitions in higher-value segments like business intelligence and analytics, security, next-generation data centres, cloud computing and green solutions.
Up to 2009, IBM acquired 108 strategic companies to integrate and broaden its portfolio of products and offerings, consequently changing IBM’s business mix toward higher-value, more profitable segments of the industry. Moreover, the IBM 2010 budget allocated to strategic acquisitions is twice the 2009 budget and since the beginning of 2010, IBM has already completed some of them (the last one Blade Network Technologies in September 2010) .
This strategy is confirmed for the next 5 years. In fact, IBM, in its 2015 roadmap, plans to invest $20B in acquisitions as a contribution to its 5% revenue growth target, further adjusting its business and segment profit mix (Fig.1).
Fig.1 2000-2015 IBM business remix
source: IBM Business Perspective 2010
The consequence of this strategy is IBM’s continuous engagement in integration activities among companies: from financial, to processes and cultural and human resource aspects. Focusing on cultural integration, there are difficulties in managing motivations, behaviours and communication with the acquired companies’ employees (Buono and Bowditch, 1989; Haspeslagh and Jemison, 1991). These issues can affect the acquisition’s value and command attention and a continuous strive for improvement.
Internet Security Systems (ISS) was a publicly held company based in Atlanta. ISS provided security solutions to thousands of the world’s leading companies and governments, helping to proactively protect against internet threats across networks, desktops and servers. ISS software, appliances and services were specialized in monitoring and managing network vulnerabilities, in exploiting and rapidly responding in advance of potential threats.
ISS, with its X-Force security intelligence service, was able to proactively protect networks with detailed analyses of global online vulnerabilities and threat conditions. ISS had also a global network of Security Operations Centers (SOCs), which include sites in Tokyo, Brussels, Brisbane, Detroit and Atlanta.
Before the acquisition ISS had more than 11,000 customers worldwide (i.e. 17 of the world’s largest banks, 15 of the largest governments, 11 of the top public insurance companies and 13 of the world’s top IT organizations) and a consolidated network of business partners (BP) skilled in selling the ISS product line.
ISS, acquired at a worldwide level in October 2006, was later integrated into the Security unit of the IBM Global Technology Services (GTS) division, enhanced IBM strategy to use IT services, software and consulting expertise to automate labour-based processes into standardized, software-based services that can help clients optimize and transform their businesses.
Relevance of the Project
The success or failure of M&As depends upon many different aspects from financial, economic, process, to cultural, behavioural and human resource factors (Cartwright, 1990). Among the above mentioned aspects, the cultural perspective, focusing upon the human costs in post-acquisition integration, plays an important role.
The present project will focus on ISS acquisition and integration in Italy with an in-depth analysis of the different cultural issues faced in the post-acquisition integration phase and the impacts these had on the unit.
Given IBM’s strategy to invest and acquire higher-value segments, this analysis will be useful to define an analytical framework that allows senior managers and Human Resources (HR) Department for examining cultural integration issues in the ISS post-acquisition integration and possibly apply the framework to future acquisitions.
The methodology applied in the project is based on a literature research followed by a mix of the deductive and inductive approaches. Firstly, the most important literature relevant to the topic was identified and secondly defined a set of issues to be addressed with semi-structured interviews to selected people with different roles in the company. The interviews were designed to understand the cultural issues encountered in the ISS case.
The research questions addressed are:
What were the main cultural issues faced during the ISS post-acquisition integration?
What impact have the indentified cultural issues had on the unit?
How did IBM manage the issues raised during ISS post-acquisition integration and how could management of future integrations be improved?
The project is organized in a way that firstly reviews, in a specific chapter, the most important theories to the topic of interest and secondly it presents the methodology chapter showing the rationale underlying the choice of research design, sample and the development of an interview structure. After the results are presented and discussed, a closing chapter concludes and makes recommendations.
Literature Review Search Strategy
The aim of the literature review was to look for material on all the different topics related to the project area: M&A, corporate culture and cultural integration.
The research was based on keywords related to the topics of interest and the sources are reported below.
The main sources used to find articles and books were:
Business Source Premier
Web of Knowledge
Book24x7 (http://www.books24x7.com by SkillSoft: http://www.skillsoft.com )
Library of Università Cattolica del Sacro Cuore di Milano
The literature review was based on the following keywords:
Merger and Acquisition – M&A
Human Resources Management (HRM)
Except for the first, all the other keywords were searched also in conjunction with the ‘Mergers and Acquisition – M&A’ keyword to find material more appropriate and relevant to the project.
Introduction to M&A
During the past two decades, due to fierce competition, the emergence of new financing opportunities and decreased entry barriers throughout the globe, M&As have become increasingly popular among companies as a means for strengthening and maintaining their position in the market place achieving various objectives such as growth, higher returns, a competitive advantage and a dominant market position in the global market (Nahavandi and Malekzedah, 1988 and Napier, 1989).
In many cases, M&As are seen as a relatively fast and efficient way to expand into new markets and incorporate new technologies and capabilities (Seo and Hill, 2005), even if it is a really complex strategic choice due to its multifaceted characteristics.
According to Cartwright and Cooper (1990), the main factors facilitating this growing trend are the following:
Market Conditions bringing the need to consolidate or capture new markets;
Increasing Availability of Capital within organizations and financial institutions;
More Family Companies for Sale either because they have grown so large that the entrepreneurs can no longer continue as family business, or there is no natural successor within the family;
The Easing of Regulations although an anti-merger movement is developing within some countries (i.e. USA)
The Need to Share Risk particularly in capital intensive industries;
The Existence of Complex Problems contributing to the increase of joint ventures (JV), strategic alliances are often a prelude to a M&A;
Unrecognized Psychological Motives such as fear of obsolesce (Levinson, 1970) or a CEO’s desire to find a new game to play (McManus and Hergert, 1988).
M&As are commonly classified according to four types (Walter, 1985; Hovers, 1973; Kitching, 1967).
Vertical includes organizations with a client-supplier relationship within the same industry.
Horizontal is the combination of two companies competing in the same industry.
Conglomerate takes place between companies operating in an unrelated business.
Concentric comprehends companies unfamiliar but operating in a related field, into which the acquiring company wishes to expand.
The following literature review firstly gives an overview of the M&A phenomenon, trying to understand the motives that lead companies to merge or acquire another company, the different approaches to this phenomenon, the process (phases) to follow and the relation between M&As and company performance. Secondly, it will move to the core of the work: the definition of culture and the crucial role it plays in M&As and the cultural issues that may arise in the post-acquisition integration process that can have important impacts on the success or failure of M&As.
Given M&As have become a global phenomenon and a strategic choice for companies’ growth and expansion (Lodorfos, 2006), and according to the literature, the failure rate of M&As ranges from 55 to 70 percent (Carleton, 1997), academics have been attracted to study the motives behind M&As and the causes of their success or failures.
In M&As it generally happens that ‘single motives for deals are rare’ while ‘multiple motives are more the norm and these motives are not necessarily in alignment’ (Angwin, 2009, Lesson 2, p.20). In fact, for example, according to Napier (1989), it is possible to make a distinction between financial or value maximizing motives, when the main objective is to increase shareholders’ wealth (Salter & Weinhold, 1979) and financial synergy, and managerial or non value maximizing motives where mergers main drivers are other strategic reasons such as increasing market share (Halpern, 1983), management prestige (Rhoades, 1983), personal gains for managers or reducing uncertainty and restoring market confidence (Pffeffer, 1972).
All the M&As strategic motives are based upon the assumption that the deal will make the firm ‘better off’ (Porter, 1987) in a demonstrable way, using conventional performance indicators such as reported earnings, share price or market share. A synthetic and clear presentation of the motives behind M&As and the related relevant payoffs is shown in the following table.
Table 1 Motivation Types and Payoffs
Source: Angwin, 2009
The motives behind a merger may influence the extent to which the two firms, and their HR practices, are integrated after the merger (Shrivastava, 1986).
Approaches to M&As
As previously mentioned, M&As decisions are motivated, evaluated and justified by strategic and economic considerations and the primary concerns are related to the legal, financial and strategic aspects of the deal (Mirvis and Marks, 1992). Consequently, literature on M&As has initially focused on the following fields:
Strategic management: studying M&As as a method of diversification, focusing on both the motives for different types of combinations (Ansoff et al., 1971; Salter and Weinhold, 1981; Walter and Barney, 1990) and the performance effects of those types (Lubatkin, 1987);
Economics: emphasizing economies of scale and market power as the main motives for mergers and examining acquisition performance with primarily accounting-based measures (Goldberg 1983);
Finance: studying acquisition performance, relying on stock-market-based measures (Jarrell et al., 1988; Jensen and Ruback, 1983; Weston and Chung, 1983).
However, because of the high rate of failure, recent research (Seo and Hill, 2005; Haspeslagh and Jemison, 1991; Buono et al. 1985; Nahavandi and Malekzadeh, 1988; Mirvis, 1985) has shifted to the organizational and human side of M&As to try to understand the organizational, psychological and behavioural effects of M&As on companies and employees. M&As necessarily have organizational implications, and the degree of organizational change can vary substantially as the motives and types of M&As differ widely (Seo and Hill, 2005). While organizational research has focused mainly on the post-acquisition integration process (Haspeslagh and Jemison, 1991), highlighting the concepts of culture clash (Buono et al. 1985; Nahavandi and Malekzadeh, 1988) and conflict resolution (Mirvis, 1985), HRM literature, on the other hand, has emphasized psychological issues (Levinson, 1970; Marks, 1982), the importance of effective communication (Schweiger and DeNisi, 1991) and the impacts on careers (Hambrick and Cannella, 1993). Moreover, Fralicx and Bolster (1997, p.50) pointed out that ‘culture can be a make or break factor in the merger equation’. Cartwright and Cooper (1993) suggested that financial benefits anticipated from M&As are often unrealised because of incompatible cultures. Weber (1996) reinforced this by suggesting that the magnitude of cultural differences can effectively impede a successful integration during M&As, resulting in poor overall performance.
Although long recognized by psychology as a major and complex process of organizational change (Humpal, 1971), the human aspects of M&As have been little considered by decision makers, and have come to be labelled the ‘forgotten’ or ‘hidden factor’ in merger success (Cartwright and Cooper, 1990). Even if it is widely admitted that cultural compatibility alone cannot guarantee the M&As’ success, it is also true to say that cultural dissimilarity creates tensions and affects financial and managerial performance (Kanter and Corn, 1994; Jemison and Sitkin, 1986).
M&A Process (phases)
Even if it is not always easy to define the exact origin of a transaction or to understand when a specific step in a process begins and stops, overall, in M&As, managers generally operate within the planned sequence as represented in the following figure.
Fig.2 The M&A process
Source: Angwin, 2009
The degree, speed, manner and direction of the change that the M&A process produces varies from deal to deal. The post-acquisition integration phase, according to Shrivastava (1986), occurs at three levels: the physical, the procedural and the socio-cultural level. Integration at the physical and procedural levels can be achieved in a shorter time scale than at the socio-cultural level (Berry, 1980), which can take three to five years (Walters, 1985) or even longer (Levinson, 1970).
Among a variety of problems characterizing the M&A process such as momentum (needed by the deal to be agreed), fragmentation (the complete picture divided in specific aspects) and reductionism (choices made to cope with complexity) (Jemison and Sitkin, 1987), another, one of even greater relevance, is the information asymmetry on the process and between the parties (Angwin, 2009; Bertoncelj and KovaÄ 2007). In fact, according to Hunt’s study (1988), the more successful acquisitions are the ones in which the acquirers are better informed about the organization to be acquired.
M&As and Performance
Even after years of analysis, researchers (Larsson and Finkelstein 1999) trying to understand the relation between M&As and company performance didn’t succeed in reaching a consensus on this topic. In fact while some researchers have shown that M&As are often unsuccessful (Goldberg, 1983; Lubatkin, 1983), Jensen (1984, p.120), for example, stated that ‘scientific evidence indicates that activities in the market for corporate control almost uniformly increase efficiency and shareholders’ wealth’. The controversy depends on the use of measures of performance in economics and in finance, often presenting significant errors (Bradley and Jarrel, 1988) and little attention is paid to other factors such as organizational integration and employee reactions to M&As (Schweiger and Walsh, 1990).
Given the problems associated with the measures based on economics and finance and the importance of strategic, organizational and HRM perspectives, Larsson and Finkelstein (1999) conceptualized M&As performance in terms of synergy realization as the actual net benefits (reduced cost per unit, increased income) created by the interaction of the two firms involved in a M&A. Larsson and Finkelstein’s (1999) view emphasises the benefits that are actually realized after the deal is completed. In addition, it focuses solely on the value creating activities of the merged firms (Jemison, 1988).
Culture has been defined by researchers in many different ways, but the majority of the definitions all emphasize the collectively shared, historically based, emotionally charged, symbolic and inherently fuzzy characteristics of culture (Trice and Beyer, 1993). Nahavandi and Malekzadeh (1988, p.80) defined culture ‘as the beliefs and assumptions shared by members of an organization. It is assumed that although a firm may have a dominant culture, many subcultures may coexist and interact. Understanding the culture of any company involves identifying and deciphering the various subcultures and gaining insight into how they interplay, to influence organizational behaviour and decision making’. In line with this definition, Davis (1984) considers culture ‘the pattern of shared beliefs and values that give members of an institution meaning, and provide them with the rules for behaviour in their organization’.
For Rugman (2009, p.131), ‘at the most general level, culture can refer simply to the lifestyle and behaviour of a given group of people, so corporate culture is a term used to characterize how the managers and employees of particular companies tend to behave’. In addition, other researchers (Mohan, 1993; Schein, 1985) suggest that cultural frameworks provide individuals within the group with generalized guidelines or prescriptions to interpret organizational events, to interact with other members of the group and to perform work-related tasks. However, organizational culture does not necessarily imply a uniformity of values: culture may be expressed as a ‘common frame of reference or shared recognition of relevant issues’ (Feldman, 1991) that members may disagree about or actively contest.
Despite the differences in the definitions, culture anyway represents a crucial and important determinant of the success or failure of organizational innovation, change implementation and restructuring – elements included in any M&As – and ultimately performance (Detert et al., 2000; Nahavandi & Malekzadeh, 1988): indeed ‘culture can be a make or break factor in the merger equation’ (Fralicx and Bolster, 1997).
Given that culture seems to be ‘characterized more by continuity than by change’ (Trice and Beyer, 1991) and by collective and common ground, not surprisingly post-acquisition cultural integration seems a very challenging and sometimes insurmountable task (Blight, 2006). In fact, acquirers should understand that in all the single phases of M&As, it is not difficult to assess and integrate the assets, technology or infrastructure but the people (Feldman and Murata, 1991). Lack of a complete assessment of cultural compatibility since the beginning and a future potential for compatibility compromises the likely success of the M&A. Hence, to improve the percentage of successful M&As it is necessary to make a cultural assessment of compatibility between the two companies (Appelbaum et al., 2009).
Cultural Fit and Acculturation
According to Berry (1980, p.215) acculturation, in its anthropological sense, is defined as ‘changes induced in (two autonomous cultural) systems as a result of the diffusion of cultural elements in both directions’ and it occurs both at the group and individual levels in the three stages of contact, conflict, and adaptation (Berry, 1983). Acculturation describes a process, a reaction to the imposition of one culture onto another. Although theoretically, acculturation can result in a balanced merging of two groups, anthropological studies would suggest that this balance rarely occurs. Instead, one group tends to dominate the other and influences the direction of cultural change much more strongly than the subordinate group (Berry, 1980). Nahavandi and Malekzadeh (1988) distinguish between anthropological acculturation and organizational acculturation. In particular, in organizations, members can decide not to accept the culture of the other choosing to leave the organization if acculturation becomes too stressful.
The concept of acculturation focuses on the desires of the members of the acquired company and on their ability to adapt to the dominant culture. It’s important to highlight that, according to Elsass and Veiga (1994), the motives for the merger, the type of merger, the characteristics of the acquirer and how the two groups adapt to each other have impacts on the acculturation mode, classified by Berry (1983, 1984) in the following way:
Integration happens when the acquired firm wants to preserve its own culture and identity and is willing to remain autonomous. Integration can take place only if the acquirer is willing to allow such independence. In the Nahavandi and Malekzedah (1988) paper, it is argued that although integration involves interaction and adaptation between the two cultures, it does not involve loss of cultural identity by either. Overall, integration leads to some degree of change in both groups’ cultures and practices; the flow of cultural elements is balanced because neither group tries to dominate the other. In fact, as a result, according to Elsass and Veiga (1994) members of the two firms may experience high levels of stress and tension.
In anthropological terms, if the subordinate group gives up its prior cultural identity, and assumes the imposed culture, it is said to be assimilated. Assimilation is always a unilateral process in which one group adopts the identity and culture of the other (Berry, 1983; 1984). This normally happens, for example, in the case of vertical M&As or economies of scale where the required interdependence between the two firms may force integration to minimize cultural differences between the two firms, and the acquired firm is assimilated into the larger one.
Separation involves attempting to preserve one’s culture and practices by remaining separate and independent from the dominant group (Berry, 1983). Hence, the acquired firm wants to preserve its culture and organizational systems refusing to be assimilated into the acquirer. The acquired firm wants to remain totally separate from the acquirer and it functions as a separate unit under the parent company: only minimal cultural exchanges between the two groups exist. Separation may occur, for instance, if the technologies and functions of the two firms are completely different and no interdependence exists. The forces of organizational integration would be weak, and each group would operate independently (Elsass and Veiga, 1994).
Deculturation happens when members of the acquired firm have no desire to maintain a separate identity as they do not value their own culture and do not want to be assimilated into the acquiring firm (Nahavandi and Malekzedah, 1988). Besides, the acquiring firm has no need to impose its culture on them. Members of the acquired firm no longer maintain their original cultural identity, but do not replace it with a new identity. As a result, the acquired firm is disintegrated as a cultural entity and this situation is characterized by collective and individual confusion and by feelings of alienation, loss of identity and stress (Berry, 1983).
Figure 3 shows the Berry’s (1983) representation of the four modes of acculturation with the superimposition of the levels of stress characterizing each mode (Elsass and Veiga, 1994). According to Berry (1980, p. 261) acculturative stress is defined as ‘….individual states and behaviours that are mildly pathological and disruptive….’ (p.261) and results from the contact with another group (Berry, 1983; Berry and Annis, 1974).
Fig.3 Adaptation of the Berry (1983) acquired firm’s modes of acculturation
Nahavandi and Malekzedah (1988) suggested an interesting approach for a successful implementation of an M&A based on the degree of agreement (congruence) between each organization’s preferences for the mode of acculturation: when two organizations agree on the acculturation mode, less acculturative stress and organizational resistance will result, making acculturation a smoother process. The definition of acculturation and congruence suggest that many issues associated with post-acquisition integration of two firms can be avoided if the two firms agree on the mode of acculturation.
As previously mentioned, every organizational culture differs from others in style, rules, planning, function, rewards and structure. Making an assessment of these variables between the two merging companies is important for the success of their future integration. The cultural compatibility (cultural fit) assessment increases the odds of successful mergers. In Bijlsma and Frankema’s (2001) view, cultural fit reflects preferences for style of management, planning, reward and sanction modes, time perspective and orientation to growth.
Many studies have been carried out on the role of cultural fit in M&As, focusing on how two firms can be integrated with respect to day-to-day operations once an acquisition has been made (Jemison and Sitkin, 1986; Lodorfos and Boateng, 2006; Birkinshaw et al., 2000). While authors as Fralicx and Bolster (1997) and Cartwright and Cooper (1993) acknowledged that the lack of cultural fit is an important factor in M&As’ failure, relatively few studies have investigated the role of culture and its integration in the M&A process.
Bijlisma and Frankema (2001) argue that the closer the cultural fit between the two companies, the less adversity will be faced during the integration process. The two companies cultural fit can be either too close to realize synergetic improvements or too far apart to integrate without negatively impacting the integrated firms performance and the level of employee performance/satisfaction overall.
Even if the cultural fit seeks similarities in style, leadership, direction, communication, and organization policies, it doesn’t mean that two companies must have absolutely similar cultures; it means that the integration process is harder, requiring extra time, attention, and communication (Appelbaum et al., 2009).
Another variable to consider, according to Bijlisma and Frankema (2001) is the cultural potential as the framework in which companies operate, including the way in which the relations with other organizations and cultures are managed. It can reveal the level of a firm’s openness to change, mainly affecting the following traits:
Innovative Potential: openness to new values and ideas;
Trust Potential: openness to trust;
Mutual Dependence Potential: the mindset of two companies working together for the greater good;
Integrative Potential: the openness of a company to sorting through issues, understanding differences, and wanting to work through differences.
Organizational changes, especially significant changes, such as M&As, sometimes cause significant employee distress, uncertainty and tensions (Cartwright and Cooper, 1993). These psychological states may result in lowered morale, job dissatisfaction, unproductive behaviour, increased staff turnover and absenteeism rates (Sinetar, 1981; Schweiger and Ivancevich, 1985; Hall and Norburn, 1987; Bruckman and Peters, 1987). Their effects have negative impacts on both organizational performance and the longer-term physical, psychological and mental employees’ health.
An M&A represents an event where employees (especially those of the acquired company) do not have sense of control as changes in their work places may be imposed by the acquiring company (Fried et al., 1996) and they have no choice but to accept the changes or to leave. These situations lead the acquired companies’ employees to feel loss of control, or even helplessness (Ashoforth, 1989; Fried et al., 1996), and uncertainty about their future caused by changes in jobs and in the relationships with their co-workers (Fried et al., 1996; Ivancevich et al., 1987). To make matters even worse, it may happen that executives of the acquired companies adopt a crisis management orientation because of the uncertain situation (Marks and Mirvis, 1986; 1987a) centralizing and cutting off a large amount of communication to protect their own position and power. This aggravates the situation increasing subordinates’ feelings of uncertainty, insecurity and loss of control (Fried et al., 1996; Marks and Mirvis, 1997b).
Schreader (2003) argues that once employees acknowledge that their organization is being bought, their psychological reaction can be compared with the sense of loss experienced following the death of a close friend or relative.
According to Cartwright and Cooper (1990) employee reactions to M&As pass through the following stages:
Disbelief and Denial;
Anger through rage and resentment;
Emotional bargaining beginning in anger and ending in depression;
In sum, along all the phases of the M&A integration process, it is necessary to implement proper communication of the future changes and strong management leadership to prevent employees sense of loss, confusion and tensions (Appelbaum and Gandell, 2003).
According to Appelbaum et al. (2009), successful M&As communicate as early as possible and as often as possible to employees, customers, partners and media about all the anticipated effects of the change. Even if communication is one of the largest concerns in any acquisition, it is also the most neglected activity during the integration phases. Early communication and employee involvement in the M&A process drastically reduce stress and anx