Mergers and acquisitions across European borders : national perspectives on pre-acquisition due diligence and the use of professional advisers

Angwin, Duncan (2001) Mergers and acquisitions across European borders : national perspectives on pre-acquisition due diligence and the use of professional advisers. Journal of World Business, 36 (1). pp. 32-57. ISSN 1090-9516

Abstract

Recent years have seen a huge growth in European cross-border mergers and acquisitions (M&A) and considerable attention has been given to how such deals arise and are completed. However, most theoretical emphasis has been placed upon noncultural factors although it is increasingly recognized in other spheres of management theory that management styles and business performance cannot be separated out from national or regional cultural influence. As a consequence, this exploratory study focuses upon the influence of national differences in business culture upon preacquisition management. In this paper we report the findings of a large-scale exploratory survey into whether such cultural differences are reflected in different perceptions of the value of due diligence and the use of professional advisors in the preacquisition phase. The findings suggest that national cultural differences do play an important role in affecting acquirer’s perceptions of target companies and we suggest that this may have important consequences for the negotiation of deals and the subsequent management of the postacquisition phase. Arace for Global cross-border mergers and acquisitions (M&A) continues to drive transactions to new record-breaking highs in volumes and size of deal. In the first six months of 2000, the value of worldwide deals rose to $ 643 bn, an increase of 60% over the first six months of 1999, and the number of deals transacted rose 20% to 3,310 (KPMG, 2000).1 Taking a five year view, the first six months of 2000 represent over a five fold increase in value, which is largely the result of marked increases in the size of deals recorded.2 Indeed one of the main features of this recent sustained wave of activity is the rise of the ‘mega-merger’ with new behemoths being formed in many industry sectors, such as AOL/Time Warner ($399 bn) in infotainment, Exxon/Mobil ($86 bn) in oil, Travelers/Citigroup ($73 bn) in financial services. Also of note is that many mega-mergers are cross-border deals such as Vodaphone/Mannesman ($186 bn) in telecommunications, Daimler/Chrylser ($ 40 bn) in the automotive industry, Deutsche Bank/Bankers Trust ($10.1 bn) in financial services. The vast bulk of global cross-border activity is by Western Europeans who, in the first six months of 2000, accounted for 76% of total purchases amounting to $492 bn. This represents a 85% increase in value over the first six months of 1999, although the total number of deals has remained relatively constant. The influence of mega-deals is clear with Vodaphone/Mannesman on its own, accounting for nearly 38% of total European value. Hand-in-glove with the boom in M&A activity is a multibillion dollar business in due diligence. The increase in the total number of transactions together with the growing popularity of value-based bidding for the larger deals, has enabled due diligence fees to soar with the meteoric rise in M&A values. However, among the many due diligence successes are spectacular failures of missed critical liabilities. British and Commonwealth’s £408m acquisition of Atlantic Computers resulted in the acquirer going into administration as the acquisition was riddled with liabilities. In the U.S., the fiery descent of Cendant Corporation also resulted from inadequate attention to predeal issues. Created in 1997 through the merger of CUC and HFS, this $14 bn corporation’s stock market value plunged on revelation of accounting problems in CUC before the merger. This woeful tail is amply echoed in the recent merger between La Salle Partners and Jones Lang Wootton that created the world’s largest property firm. The shares in the combined group plunged 65% just eight months into the merger as the group was forced to issue a profits warning because of an earlier acquisition in the U.S. by La Salle Partners. Due diligence plays a critical role in M&A and yet is assumed to be objective and neutral in approach. However, where M&A is across borders, this assumption may not be well founded. Different national cultures may give rise to variations in the expectations that acquirers and merger partners have of the value and role of due diligence. However, if both sides assume that their due diligence is ‘objective and neutral’ there may be room for many mistaken assumptions. This paper seeks to examine national perspectives on due diligence and the use of professional advisers. With high volumes of cross-border M&A taking place in Western Europe, we focused upon the most active acquiring nations in this region and carried out a substantial survey of 142 top executives in leading European companies. This paper reports the findings of this exploratory work and compares and contrasts responses in the light of national cultural differences to see whether such cultural factors have an influence on the preacquisition process.