Though the current equity market collapse and economic slowdown has, expectedly, taken a toll on outbound M&As by Indian firms, the going is still fairly strong. According to Reuters, outbound M&A announcements by Indian firms till early May this year were at $6.8 billion, about 39% less than the corresponding figure last year. However, this is still almost close to the total completed outbound M&A deals for the entire 2006 at $7.3 billion. Over the previous two years, Indian companies have spent almost $40 billion in overseas acquisitions, close to four times the figure spent on domestic deals.
The global shopping spree has spanned a wide range of sectors and much of the globe. The list includes, for instance, a Sudanese oil field, a South Korean truck maker, a British tea company, a Singapore paint company with plants in 12 countries, and the Anglo-Dutch steel giant, Corus.
Most acquisitions around the world?domestic or cross-border?end up being value-reducing. One of the major challenges, practitioners point out, is integration. Corporate cultures differ widely and this can disable major market and cost synergies. Cross-border acquisitions are particularly at risk, since national cultural differences make the terrain hostile.
Defining and measuring national cultural differences is a challenging task. Nevertheless, scholars of international business have devised several measures to measure cultural difference, ranging from simple differences in language and religion to those involving complex statistical analysis of survey data. The most popular measure is that developed by the Dutch scholar Geert Hofstede in early 1980s using a survey of IBM employees around the world. It defines national cultures initially in terms of four dimensions?masculinity, power distance, individuality and uncertainty avoidance (with one more, long-term orientation, added later for a few countries) and assigns scores to each country on each of these dimensions. Several other competing measures have been developed since then, but the Hofstede measure remains the most popular.
How does India fare on these dimensions? Let?s take power distance that measures the extent to which unequal power distribution is accepted by the less powerful in society. Here India scores a high of 77 as opposed to the world average of 56.5. India?s Long Term Orientation score is 61, considerably higher than the world average of 48, reflecting perseverance and parsimony. India?s Masculinity score of 56, slightly exceeding the world average of 51, indicates a greater than average gap between values of men and women, and chances of a more competitive and assertive female population. India?s Individuality score, measuring the degree to which one is on his/her own and cares only for immediate family, is perhaps surprisingly high at 48 compared to the world average of 43.6. At 40, India?s score in Uncertainty Avoidance is considerably short of the world average of 65, making India more open to unstructured ideas and situations.
Given these features, which countries are closest to India in terms of ?cultural distance?? Using the straight line distance in the original four-dimensional space, India?s closest countries or regions are Philippines, Hong Kong and China, Iran, Morocco, East Africa and the Arab world. The farthest countries are Central American countries, Israel, and European countries like Denmark, Austria and Greece.
Therefore, where should Indian firms seek targets to avoid integration blues? The first set naturally, right? Wrong. A recent study, involving this author, shows that in terms of long-term stock returns, other things remaining the same, acquirers do best when their targets come from countries that are culturally more different from, not similar to, their home countries. The somewhat surprising finding is based on an analysis of over 800 cross-border acquisitions between 1991 and 2004, and survives considerable econometric torture.
What could be the reason behind this unexpected result? Well, there could be at least two possible explanations. Firstly, companies are far more cautious in their due diligence when it comes to acquisitions in culturally disparate countries. A far larger number of such deals fall through at the due diligence stage. Those that survive therefore are more likely to have considerable synergies to gain from. Another explanation is that in acquisitions between companies from culturally distant countries, the acquirer is much more likely to grant greater autonomy to the target firm, admitting the target?s superiority of knowledge of business practices in the latter?s country. This can certainly reduce integration troubles.
While clearly cultural difference is but one of several determinants of success in the complex exercise of global M&As, it may serve as a useful device to identify cross-border targets and take precautionary steps to avoid disasters after the deal.
Rajesh Chakrabarti teaches finance at Indian School of Business