Article Detail

Cultural Fit and Post-Merger Integration in Banking M&As

Journal 33: Technical Finance

Alessandro Carretta, Vincenzo Farina, Paola Schwizer

The intense concentration process taking place in the financial systems has attracted substantial attention from stakeholders and academics. The impact of M&A on the value creation and efficiency/effectiveness improvements of banks involved appears, on the whole, disappointing and it is still hard to create benefits for customers. Management literature points to the difficulties of governing a post-merger integration process and recognizes the importance of corporate culture for explaining success. In fact, cultural clashes could, on one hand, generate conflicts and have negative effects on the timing and effectiveness of the post-merger integration process and, on the other hand, could influence the motivation and turnover of individuals.

Set in the Italian banking industry, this paper proposes a framework, applied to a representative sample of cases (about 78.2 percent of market share, based on total assets), for assessing cultural similarities of actors involved in M&A transactions. Corporate culture is measured using an ethnographic approach focused on language as its special artefact. The assessment is based on the definition of some key concepts that are relevant for the banking industry (i.e., competencies, competition, customer, disclosure, human resources, innovation, and risk) and on a text-analysis model applied to a corpus of reference texts produced by the surveyed banks three years before the transaction. The elaboration of data uses Wordsmith 4, a text analysis software developed by Oxford University.

The underlying assumption of this work is that the failure of M&A transactions does not depend only on errors made before the deal, concerning strategic and organizational analysis, but rather on the procedures for the implementation of the various phases that follow the conclusion of the operation, as well as the capacity of management in dealing with the complexity of the operation and with the problems of integration [Shojai (2009)]. An especially important problem is the presence of areas of conflict between the cultures of the different firms, which can constitute one of the main causes of failure. This work aims to create a model for assessment of the cultural compatibility of the banks involved in M&A transactions, with subsequent application of the model to real case studies.

The role of corporate culture in the success of M&A operations
When it comes to successful M&A transactions, the literature [Jemison and Sitkin (1986a, b); Datta (1991); Chatterje et al. (1992); Zollo and Singh (2004)] highlights the need for the presence of strategic and organizational coherence (strategic fit and organizational fit) in order to reduce resistance to change. In particular, organizational, human, and procedural coherence between firms may affect the needed change initiatives during the post-merger phase.

The extent to which the two companies are “related” has a profound effect on the possibility for a successful integration and, therefore, should be considered as a key factor, during the planning phase, when it comes to selecting the firm to be purchased or with which to merge. Seen in this light, the more the greater the degrees of similarities between the companies involved in the transaction the greater the probability that the operation will be a success. The degree of “relatedness” relates to the market/product matrices within the individual companies or to the extent to which their procedural, organizational, managerial, and cultural characteristics prove complementary. However, empirical evidence concerning banking organizations points to the need for caution in making generalizations. For example, while positive results are observed when certain aspects of the processes of concentration of the banks involved in the transactions are relatively similar, such as production functions and collection policies, there are also cases, and especially those involving cross-border M&As, where differences in policies of investment and management of credit risk result in better performances [Altumbas and Marques Ibanez (2004)].

In general, the potential success of integration process depends less on the degree of similarity of the outputs produced than on the compatibility of the structures. It can be measured using the degree of ease with which the corporate culture and skills are transferred from the bidder to the target, or the capacity of the new economic entity to pick up new skills or a new corporate culture.

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