The surprising thing about the continuing fashion for international mergers and acquisitions is that there's compelling evidence to show that they add little or no value to the acquiring business. The research in this area has so far failed to address the reasons why, but there are several possible explanations for the apparent underachievement of acquisitions. Is it poor corporate strategy? Are the benefits of mergers overstated? Or is it that companies are incapable of putting a management control system in place to extract the value that's there?
All of these possible explanations should be of concern to management accountants--especially the last one. What are the problems in management accounting when a company based in one country controls a business in a different country with different management accounting traditions?
In our recent study of cross-border acquisitions, we investigated the issues of strategy, evaluation, management control and management accounting. The research involved two acquisitions: one by a UK company of a German subsidiary and the other by a German company of a UK subsidiary. In both cases there was a history of underachievement since the acquisition. See figure 1, below, for the model we used for the analysis.
[FIGURE 1 OMITTED]
We found that there was a clearly defined acquisition strategy in both cases, with "added value" as the corporate objective. In the British acquisition of the German subsidiary, the strategy was one of making gains from vertical integration. This would seem to be a legitimate source of added value, but a look at the economics of this case raised doubts about any value creation. In the German acquisition of the UK subsidiary, there were two legitimate sources of added value that should have made the takeover successful: first, worldwide deregulation across the industry had given the acquiring company a chance to develop a global strategy of growth and profitability; second, it would be able to acquire and disseminate new technical expertise to improve its products and reduce material costs.
There were possible management control system solutions for the vertical integration case, but the lack of value creation may explain the company's inertia in developing one that was appropriate. Instead, management accounting differences and problems were cited by managers of the UK parent company to be a key difficulty. For example, the company:
* tried to implement its standard costing system in the subsidiary without considering whether this was appropriate;
* did not appreciate the role and status of the finance function in Germany;
* did not appreciate that it was traditional for a German management accounting function not to be so product-focused;
* ignored differences relating to the use of estimates and simpler accounting methods--eg, the Germans' focus on precision and their keenness to do things in a strictly correct way, regardless of complexity.
All of these could be interpreted as cultural issues, but they represent a simple failure to appreciate a different management accounting tradition. In contrast, the second case showed that different management accounting traditions were not seen as a barrier--it was simply the lack of a well-implemented control system focusing on strategic objectives.
In both cases, the subsidiaries were given considerable autonomy over how they did their accounting within the constraints of delivering standard reports. …