The importance of local language and culture in cross-border M&A
At first sight, it might look like a paradox: in order to close an international transaction deal successfully, you need to be firmly rooted locally. “To think cross-border M&A is all about financials is a huge mistake”, says Kenneth Ma, director Moore Transaction Services Ltd in Hong Kong and expert in valuation and due diligence. “Cultural gaps definitely have a negative impact on success in transnational M&A. So it is paramount to have a deep understanding of the country and the people who are managing the company, their language and how they are operating.”
“In some sense, culture always comes first”, says Kenneth Ma. “There’s no way you can understand why a country has a specific legal system or tax system, if you have no clue of its people, politics, language, culture. Take China, for example – a country with its own set of rules and regulations. Local companies and businesses are being protected from foreign investors by the government. ‘The way things work’ only makes sense (read: you can only act wisely) if you know of China’s unrelenting concern about national security, whereby they don’t want to depend on foreign investment in strategic industries such as natural resources, banking, energy, insurance… So even before you can reflect on the valuation of a target company, before you engage in financial, legal and tax due diligence, you have to take a deep dive into a cultural due diligence. You need to know more than numbers.”
Even when negotiating with close neighbors this is a hot issue. “When I want to invest in China, I have to touch base in China and connect with a team that knows the culture and that I can trust”, Kenneth Ma says. “Although my team and I are based in Hong Kong, we still need to work closely with the local teams of our Chinese Moore partners since China has many – and very different – cities and provinces where different local practices exist or even different dialects are spoken. Being as close as you can to your target company, facilitates the negotiations and the due diligence process. It is almost impossible for an outsider or a foreign investor to interpret things right without the help of a local team specialized in due diligence.”
You don’t know what you don’t know
Cross-border M&A between firms with a similar native language have an advantage over negotiations between parties with different mother tongues. If you don’t speak the same language literally, chances are you neither speak the same language proverbially. Cultural gaps impact the negotiation skills and the information asymmetry.
But there’s more to culture than language. Kenneth Ma: “International due diligence requires a company to go beyond traditional M&A work and consider variables that are unfamiliar to most companies and to most businesspeople who lack cross-border experience. Because you don't know what you don't know, unintentional mistakes are made and rarely corrected in time.”
Speeding up post-merger integration
The ability to speak each other’s language and know each other’s culture is not only important during the M&A process, but also a huge help to speed up the post-merger integration. “Post-merger success depends on lots of factors, but even here I want to point out that when business fails after an acquisition, much is to blame on a flawed cultural evaluation of the target company. Will the employees, the customers, the partners, the suppliers remain motivated and loyal? Do you really understand the market and the business environment? Sure, we have a vast number of solutions. One of which is the compensation program. You have to understand how remuneration works in each legacy company and present steps to integrate them in a way that employees see as beneficial to their interests. You need the right incentives for the existing executive management to stay with the company and make them loyal to the new owners. People are the most important asset in business and whoever invests in a foreign company is looking for a target with a growth potential. So, in order to grow you need a team of reliable, good people. And you need to compensate them. There’s more to it than ‘a few dollars more’. In a cross-border context, you have to keep in mind that they may have complete different expectations to the new owners.”
Kenneth Ma points out some other solutions to deal with the impact of culture on the post-acquisition success for cross-border M&A. “There are quite some cultural levers to help you create the right dynamics in the ‘new’ company – if you know how to handle those levers wisely, that is. To get everyone aligned, it helps to bring to life a new internal brand that appeals to managers and employees of both companies. It helps to create a common focus, unburdened by any company history. This asks for change management whereby culture integration should have the highest priority and where decisions are not biased by cultural differences. On a completely different level, it is key to decide which language prevails and to translate important operation manuals. Etcetera.”
Measurement of success
An important measure of success, is the completion of acquisition trails. As is the post-merger achievement of the desired operational and financial synergies on the longer term. Play a leading role in the process of cross-border mergers and acquisition: information symmetry, recognized financial models and metrics, strong communication skills and cultural diversity. Cultural diversity has lasting effects and is reflected in different approaches to contracts, interpretation of regulations, communication approaches, the information provided, intention to integrate with a new owner, etcetera. Kenneth Ma: “If you manage to bridge cultural diversity, you will experience a positive impact on the success of mergers and acquisitions.”