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Cultural & Social, and Cross

Borders issue, and Targets
Selection Alternatives

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Cultural Issues

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Organizational Cultures
Management culture is developing system of beliefs (as

well as values and assumptions) that is shared by the managers

regarding the desired way of management for the organization so
that it can deal with the adjustment to its environment

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Historically, top management has failed to identify organizational

culture as main factor in determination:
The value of M&A transaction
The planning of integration of the 2 organizations
The retention of the human capital of the acquired company
Hence, often managers and key people of acquired company
leave after the M&A
BCG (2010) suggests that acquirer should conduct cultural
diagnosis of the merged companies

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The failure of identification organizational culture happened in the

process of:
Screening & finding target
Determining value and price
Planning integration
PMI
This issue should be evaluated in the pre-merger period,
negotiation stage, and integration process.
HR and PMI expert should be involved in the planning stage
before the deal is signed.

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The Influence of Organizational Culture 7 Dimensions

1. Approach to Innovation & Activity: Rapid response to change & to competition
2. Approach to Risk Taking: Investment, R&D, financial management
3. Lateral Interdependence: Horizontal relationship: Belief about the importance of cooperation
and attachment between units for achievement
4. Top Management Contact: Vertical Hyrarchical Contact: Belief attitude toward
subordinates, i.e support, warmth, understanding, encouragement
5. Autonomy and Decision Making: Delegation of important decisions
6. Approach to Performance: Focus on evaluating performance

7. Approach to Rewards: Reward fairly & competitively, compensation and benefits link to
performance

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Evaluation or Measurement
1. Direct Contact: first source, the target
2. Indirect Contact: second source, outside the target: usually in the
planning process, using various source depend on public or private

company
Further collection of information can be done by team during negotiation
through questions and observations and request documents.

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Social Issues

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Social = Economic
Define the management and governance of NEWCO
Relate to only narrow group of people :
Senior management
BOD
Influential middle manager

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Survey of Social Issues Frequently Addressed in Merger

Negotiations
1. Management Team: Who stays and who leaves

2. Retention of Payments: existing or new scheme, adjust to acquirer standard, adjust to

market price
3. Severance Payments: those who leaves attached of NDA and or NCA , possible golden
parachute
4. Leadership Succession: Acquirer or Target? This might impact share price

5. Organization Design: degree of autonomy, line reporting and accountability

6. Board Composition: number of seat acquirer vs target
7. Structure of Transaction: equal of un equal
8. Corporate Name: Acquirer, target, blended, new
9. Headquarters Location: relocation cost and inconvenience factors, impact NPV

Impact of Social Issues on

Attractiveness of The Deal

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Avenues of Economic Impact

1. Direct Costs: new scheme to executives, change of WACC
2. Incentive Effects:additional incentives

3. Price Impact:MOE for example trade off social term and price
4. Competitive Effect: support of target might reduce the price
5. Signaling Effect : location link to local support, etc

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Who Pays for Social Terms?

The matter of Trade-Offs
Form of payments determines ownership
Owner of Newco pays for social terms :
in cash-for stock or cash-for-assets deals, buyer owns newco.
buyer pays for social terms
mergers, stock-for-stock or stock-for-assets deals, shareholders of both
buyer and target own newco
buyer and target jointly pay for social terms
Price also determines who pays; it could be used as a bargaining
chip to trade off a lower price for higher social terms

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Summary and Conclusions

Primacy: Social terms are usually negotiated first and thus represent the great way

to structuring the other terms of transaction

Variety of terms: Many ways to address social issues and need not to disclose to public.
Valuation: Econompic implications of social terms are estimated with difficulties,
owing to their complexity, lack of transparency, and potential interactions among the
terms. Some impact may be impossible to estimate.
Materiality: Effects of social terms are economically significant for shareholders of the
buyer and target firm as it can be huge.

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Cross Border Issue

Robert F Bruner, Applied Mergers & Acquisitions,, John Wiley & Sons

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Reason for Cross Border M&A

Exploit Market Imperfections
Unmet consumers demand, source of materials and labor, country integration
to regional/global, saving R&D cost
Extend the Reach of Buyer or Targets Intangible Assets
Preempt imitation, broaden the scale of the use intangible assets.
Acquire local intangible assets and bring back home
Reduce Tax Expense
Shift operations to lower tax jurisdiction thus reduces tax expense (not transfer
pricing), this particularly inline with tax treaties
Cont.

Reason for Cross Border M&A

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Reduce Risk through Diversification

If economic activity across countries is less than perfectly correlated,
geographical diversification can reduce the risk. International diversification
pays when capital markets are not fully integrated. Return on MNCs fluctuate
less than domestic firms

Exploit Differences in Capital Market and Currencies

Conditions
Weaken currency and high growth rate encourage acquisition
Improve Governance
Greater investor protections of buyers country acquires poorer governance
Other Drivers
Regulatory avoidance, financing, maintaining good relationship with customers

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Implication of
Cross Border M&A
Anti trust
Risk of translation
Taxation
Transfer pricing
Political risk
Cultures
Market unfamiliarity
Expensive learning curve
Proprietary Right

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Target Selection Alternatives

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Mission & Vision

Objective

Closing
gaps

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The Process of Search and Identification
1. Determining the criteria for the search (Strategy & operational, see table 7.1 &
7.2) and screening process (table 7.3 next slide )
2. Determining the search strategy: confidential or not, through third party
3. Approach to the candidates: friendly, Opportunity, hostile approach

The responsibility is under business development unit or M&A team, however it is

important for top management to be fully involved and coordinate the entire
process, reasons:
1. Integrate variety of views (from external consultants if use)
2. Strategic fit analysis and qualitative concerns to organization fit

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