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When customs collide: the pitfalls of international acquisitions.

When customs collide: the pitfalls of international acquisitions

Kiel AG, a multinational conglomerate, is based in Switzerland and owns companies all over Europe. In 1988, Kiel's management decided that it was time to come to America, and the company developed a special interest in the construction boom in the southeastern United States.

Through an American business broker, Kiel learned about Georgia-based Edwards Engineering, Inc. (EEI) as a possible acquisition target. EEI, a middle-sized construction company, had 60 employees and $12 million in annual revenues. Joseph Edwards, founder, president, and sole shareholder of the company, wanted to retire. Since he had no children to inherit the company, he resolved to sell his interest, preferably to someone who could actively maintain the business.

Early contacts were promising. Kiel's tentative offer was not far from Edwards' asking price, and Edwards was assured that Kiel would keep the company intact. As the issues narrowed, Kiel was tempted to proceed with only an informal audit of EEI. But finally, and somewhat reluctantly, the European company hired an American Big Eight accounting firm to conduct an intensive preacquisition audit of its target. When the audit was concluded, a date was set for the final, face-to-face negotiations.

Herbert Kiel, Kiel's president, came to the U.S. to personally conduct negotiations. He brought the company's financial controller, the head of Kiel's international real estate development division (under whose jurisdiction EEI would fall after the merger), and the company's Swiss lawyer. He hired a business lawyer from a small Georgia firm to serve as local counsel. Edwards was represented by a large, regional corporate law firm.

Initially, both sides thought that they were close to agreement on all major issues. But after a day or two in negotiations, it became clear that they were growing further apart. Moreover, seemingly minor issues kept blossoming into major ones. After four frustrating days, talks broke off and the Kiel group went home. Both sides were left with a negative impression not only of each other but of the entire process of trans-Atlantic acquisitions.

Today, after almost a year in which to reflect, neither side is quite sure what went wrong. Each wanted to make the deal, took what it thought was a fair opening position, and was encouraged by the other's opening proposals. In addition, all participants were on their best negotiating behavior. So what happened?

Worlds apart

Experienced international negotiators will tell you that this scenario is as common as it is baffling. In conducting a post-morten, they suggest examining the behavior of each side form the cultural perspective of the other. In a deal like the one between EEI and Kiel, there are a number of potential trouble spots.

Negotiating styles--In his typical American way, Edwards was forthright and open. He was candid about the strengths and weaknesses of his company, and responded quickly to every request for information. Given this openness, he found the expensive and time-consuming preacquisition audit unnecessary and even a little insulting. The Swiss, accustomed to the gamesmanship and ritual characterizing European negotiations, did not know what to make of Edwards. They waivered between thinking him naive and worrying that his apparent openness was a ploy to hide some serious problem. In either case, their esteem for Edwards and his company diminished. His impatience with the audit magnified their concern. On the other hand, Edwards was put off by the Kiel team's lengthy, polite, but unresponsive answers to his questions. They impressed him as secretive, often hudling for whispered consultations in German. Their wary response to his requests to inspect documents further alienated him.

As negotiations proceeded, Edwards displayed characteristic American pragmatism, quickly modifying his proposals and demands to respond to Kiel's concerns, while Kiel proceeded in a more formal fashion, refusing to modify some positions "on principle," yet conceding other points completely. Edwards viewed Kiel as arbitrary and stubborn; Kiel viewed Edwards as "slippery" and unreliable.

The point, of course, is that by the standards of its own culture, neither side was doing anything out of the ordinary. All that the other side could see, however, was behavior that was unfamiliar and thus suspicious.

The use of lawyers--Each side sent strong but conflicting messages through the different ways they used the services of lawyers. Like most American businesspeople, Edwards perceived an acquisition as fraught with legal perils. Accordingly, he hired a large, specialized law firm, and relied heavily on the lawyers, who did their job in a thorough and sometimes aggressive way. As they would in a domestic acquisition, they insisted on detailed and--they hoped--airtight documentation in an effort to protect their client's interests. Because a large part of the purchase price was covered by a note, they demanded full representations and warranties from the other side. At the same time, Edwards' lawyers put limits on his representations and warranties, using boilerplate qualifications and exceptions that struck the Swiss as having little application to the transaction. Edwards saw all this simply as a necessary evil, an unavoidable part of making a major business deal, and assumed that the other side would see it in the same light.

For the Swiss, however, Edwards' heavy reliance on high-powered lawyers raised a red flag. Following their custom, they expected to conclude and document the deal on their own, and expected the documentation to be concise, with few details committed to paper and most things left to be worked out by mutual understanding. Their employment of a single local lawyer reflected their belief that this role would be limited.

Once again, each side drew the worst possible inferences from the behavior of the other. The Swiss saw the American lawyers and their barrage of documents as some sort of power play by Edwards, while Edwards immediately suspected that Kiel's relaxed approach to the legal aspects of the transaction was a trap.

Concerns for the future--As is common in transactions like this, the two sides came to the negotiating table with radically different assumptions about what the future would bring. Edwards assumed that the Swiss looked at his company and saw what he saw: a thriving, well-run business which, if left in the hands of its current capable management, would continue to yield a handsome return on investment. The EEI managers who would be staying, sharing this assumption, saw the acquisition as an infusion of capital with no strings attached.

From the Swiss perspective, however, EEI was an enterprise which, while profitable, had the potential to do even better if given the benefit of superior European management practices. Some of the Kiel people saw EEI as succeeding almost in spite of itself in the vast and lucrative American market. For them it went almost without saying that someone would be sent over from Switzerland to assume the presidency of EEI and that the American company would be kept on a short leash by the home office.

These dramatically different assumptions became clear only when negotiations were well underway, creating a major source of contention and distrust. For the first time, Edwards feared for the security of key employees who had served him well for years. To the Kiel people, Edwards' failure to share their assumptions was yet another example of his off-putting naivete.

A case of misunderstandings

A point bearing emphasis here is the prevalence of misconceptions among European businesspeople concerning employee relations in the United States. Like us, they have read unflattering comparisons between large Japanese corporations, which offer lifetime security for most workers, and their American counterparts, where the critical question to employees is, "What have you done for me lately?" They tend to assume that this is the climate at all American companies and that the owner of an American business will never let loyalty to colleagues and employees stand in the way of a profitable stock sale. But the success of smaller businesses is usually dependent on the abilities and efforts of key employees, something a majority shareholder is likely to appreciate, even when stepping aside.

The ultimate question is how to avoid these deal-breaking misunderstandings. One obvious and highly effective answer is simple awareness. A couple of hours of preparation, probably best spent in conversation with businesspeople or lawyers who have been through a similar negotiation, can bring a negotiating party to the valuable recognition that differences in style do exist. The preparation also can highlight some of the specific cultural tendencies that are most likely to be misunderstood.

But awareness of the problem is not a solution. No matter how often a business executive is told that a particularly irritating habit is just the way that Americans, Germans, Swiss, or any other group does things, he can still find it so aggravating that it colors his judgment of the other side's honesty and the merits of the deal.

Moreover, not everyone is honest. How can you tell when someone's behavior is in fact an unconscious and innocent cultural tendency and not a ploy used to deceive?

In these delicate matters, there is no substitute for experience. No matter how confident they are in their own face-to-face negotiating ability, businesspeople unfamiliar with the culture represented across the table should consider giving up some measure of control and relying heavily on intermediaries to bridge the culture gap. For Americans going abroad, it means finding out who commonly fulfills the intermediary role in the foreign culture--lawyers, accountants, or business agents, for example--and associating with such a person.

For the most part, an international merger or acquisition is indistinguishable from its domestic counterpart: people all over the world are in business to make money and can be counted upon to make decisions that will enhance their earnings. However, the specific items on the economic agenda and the way in which the agenda is pursued will vary substantially from culture to culture. The critical task in any international deal is to prevent cultural differences from masking or sabotaging the goal shared by both sides--business and economic success for each.

PHOTO : Covered soup bowl of hard-paste porcelain with leather carrying case, Germany, c. 1730 Made for mobility, leather traveling cases were sectioned for secure fitting of porcelain and silver

PHOTO : Hard-paste porcelain tureen and stand, Germany, c. 1735 An example of decorating with brilliant and durable honey gilding, a process by which gold leaf is ground up, suspended in honey, then painted onto the surface of the porcelain
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Author:Buck, Peter C.
Publication:Financial Executive
Date:May 1, 1989
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