Academic journal article Multinational Business Review

An Assessment of Cap Gemini's Cross-Border Merger with Ernst & Young Consulting

Academic journal article Multinational Business Review

An Assessment of Cap Gemini's Cross-Border Merger with Ernst & Young Consulting

Article excerpt

ABSTRACT:

Cross-border mergers are rising in number and scope even though, on average, firms do not profit from them. In this article, we use interviews and secondary data to assess a historic merger between two global consulting giants - Cap Gemini and Ernst & Young Consulting. The two firms had well-articulated strategic reasons for merging. Nevertheless, their integration strategy failed to address key differences in business models, core competencies, and organizational practices. As a result, the combined firm suffered five years of diminished financial and competitive performance. Our study highlights the organizational complexities affecting mergers between human capital-intensive firms.

INTRODUCTION

In this article, we critically examine a historic cross-border merger between two leading international services firms - Cap Gemini, headquartered in France, and Ernst & Young Consulting, headquartered in the U.S. We highlight the strategic reasons for the merger and analyze the integration and external issues that have dogged the combined firm since 2000. In researching the merger, we utilized published sources and several indepth interviews with leading executives from Cap Gemini and Ernst & Young.

The main questions we address are as follows: (a) what were the reasons for the cross-border merger between Cap Gemini and Ernst & Young Consulting? (b) What was the integration experience? (c) What happened to the merged firm's competitive position? We find that the parent firms had important strategic reasons for merging. Nevertheless, organizational integration issues and a deteriorating external environment created significant competitive disadvantages for the new firm. We conclude that cross-border services mergers are complex from a human resource perspective. In particular, differences in organizational competences and cultures could be more problematic than national culture differences for post merger integration. Further, firms involved in cross-border integration may lose competitive focus and suffer marked performance declines when market shifts occur.

RESEARCH ON CROSS BORDER MERGERS & ACQUISITIONS

There is significant statistical and anecdotal evidence that crossborder mergers and acquisitions are fraught with difficulty. Nevertheless, this form of merger and acquisition (M&A) activity has exploded in popularity (London, 2005.) To compare and contrast the merged Cap Gemini-Ernst & Young with other firms, we review current research on the outcomes and processes of crossborder M&A, focusing on acquiring firms. To provide additional background, we first outline research on two related topics: (a) corporate internationalization; and (b) domestic M&A. The existing studies have contradictory findings but a few themes emerge, as indicated below.

Intel-nationalization and Firm Performance

Statistical evidence on how internationalization affects firm performance is mixed, depending on the nature of the firm's activities and the external contingencies it faces. Across different studies, management and international business researchers find that increased international activity either has negative, insignificant, positive or non-linear effects on firm performance (see Hennart 2005 for a critical review.) A few studies show that increased cross-border activity improves firm performance

but, beyond a certain threshold, performance is reduced because multinational activities become too complex to manage (Hennart, 2005). Further, finance scholars have found that global diversification decreases a firm's market valuation (Denis, Denis, and Yost, 2002).

Domestic M&A and Firm Performance

Evidence about the effects of domestic mergers and acquisitions on firm performance is similarly mixed (see King, Dalton, Daily, and Covin, 2004.) A number of studies show that target firm shareholders benefit from M&A but acquiring firms experience insignificant or negative performance effects (Fuller, Netter, and Stegemoller, 2004; King et. …

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