Any acquisition is inherently risky, explains Killian McCarthy, professor of Strategy at uu77’s Nijmegen School of Management. Yet on average, Japanese companies tend to be more successful at them than businesses in other countries. In their paper in the , McCarthy and his colleagues Rick Aalbers (uu77) and Hanae Suzuki and Shintaro Sengeki (Tokyo University of Science) explain that the ‘why’ and the ‘where’ are critical factors in having M&A succeed.
Exploitation or exploration?
The researchers set out two common reasons that companies engage in M&A: either for exploitation (taking over a similar company to increase market share), or exploration (taking over companies in different or only tangentially related industries, to grow your business in new areas). McCarthy: ‘Often times, Japanese business base their M&A choices towards exploitation. These are acquisitions that are inherently less risky, because the two companies have a similar background and expertise. In some cases, it boils down to adding a few extra production lines to an existing business.’
‘That’s a big contrast to most acquisitions in the United States, the Netherlands and other countries, who choose to grow through exploration. You see that now with companies such as Philips investing in AI. It’s not their core expertise, it’s risky, but if it succeeds it can greatly expand their revenue.’
Cultural and physical distance
Location was the second factor that McCarthy and his colleagues looked at. ‘Not just physical, but also cultural distance – think of factors like individualism and equality in the workspace - can really shape the success of M&A. What we found is that Japanese firms tend to prefer relatively close targets: acquirers are at an average distance of 1035 kilometres from each other, while in the US the average distance is 1750 kilometre. Again, we see that Japanese firms are more cautious in choosing their targets for acquisitions.’
Yet when it comes to cultural distance, Japanese firms often have a higher cultural distance than their American and Chinese counterparts when acquiring. McCarthy notes that expectations may play a role in this: ‘Mergers between German and Dutch companies are actually more likely to fail than mergers between Japanese and Dutch companies. In the first scenario, companies assume the cultural distance is small, but it can actually be quite big. When it comes to hierarchy, for example, Dutch organisations are a lot flatter than German ones. Those preconceived notions hinder integration. But when Japanese and Dutch firms attempt to integrate, there’s already an awareness that the cultural gap is larger, which provides more space for the process.’
The risk of putting all your eggs in one basket
Though Japanese firms tend to succeed more often in acquisitions, McCarthy and his colleagues warn we shouldn’t copy their approach wholesale. ‘Though companies in Japan reduce their acquisition risk, they expose themselves on a firm level. Reducing the risk also reduces the upside and potential for growth. You could have acquired all the fax companies in the world and become the biggest producer of faxes, but then when the fax was replaced your business would still be doomed. There’s room for a middle ground between the risky approach of Western companies and the cautious approach of Japanese companies.’