José M. Guardia

Internet, Media & Technology Analyst

Writer, Columnist, Commentator

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Culture clashes between southern Europeans and those with a northern mindset means the game is up for many mergers

By Bernhard Warner and Jose M. Guardia - April 17, 2001

Pizza is a serious matter to Italians. Though a simple dish, it should be savoured, not devoured as junk food at an office desk. And certainly it's a waste handing around pizzas as a way of ingratiating oneself with staff. But American and Northern European bosses may not see that – and this cultural incompatibility is mirrored in many cross-border mergers.

Sometimes the consequences can be fatal. Take the case of Tiscali and World Online. When Tiscali, the Italian Internet service provider, acquired its bigger Dutch rival World Online for $5.1 billion (5.6 billion euros) last December, it was a spectacular coup. Tiscali was running drastically low on cash and World Online was in the throes of shareholder lawsuits. Worse still, there was deep scepticism about the battered European ISP sector.

And yet the architects of the deal – Tiscali's Renato Soru and World Online's James Kinsella – won over shareholders and analysts alike to the logic of the move, convincing them that the two firms shared a vision. Soru and his American-born counterpart sold the deal by focusing on the big picture: together, the duo would build a pan- European IP network.

That dream is still alive. But there's already been a casualty. Kinsella lasted less than two months as Tiscali's CEO. He resigned abruptly in February. Kinsella and Soru may have shared a philosophy about what it will take to win Europe's ISP war, but they have differing ideas on how to handle the more mundane, day-to-day tasks.

"I felt like we were offering confusing information to the troops," Kinsella said at the time of his resignation.

One disagreement reared its head over the pepperoni. After a meeting in Milan earlier this year, Kinsella decided to treat staff to pizza as a gesture of thanks. But when Soru saw the bill, he confronted Kinsella angrily over the cost. Not a great deal of money was in fact at stake, but, in the eyes of Soru, reducing pizza to a free commodity for employees spoke of extravagance.

The incident appears to have unsettled Kinsella. At a conference last month he lashed out at the European business community, saying cultural stereotypes are preventing Europeans of different nationalities from working together. The divide is particularly apparent between northern and southern Europeans.

Pejorative difference

"The idea that there is a total Euroland is total bullshit," he said, adding that business cultures continue to impose "pejorative" differences upon one another.

The pizza incident was a case in point: a tiny niggle that represented a wider gulf. Soru, the single largest shareholder in Tiscali, likes to run a tight ship, conserving costs as if he were running a small business. He is said to hate the free-spending proclivities that made Net start-ups a byword for excess.

In the course of his acquisitions of World Online and later, the French ISP Liberty Surf, Soru inherited many spendthrift operations. Predictably, Tiscali is in the course of stripping out excess costs, a move that has resulted in the loss of over 100 jobs at World Online.

Today, Kinsella remains with Tiscali as a board member and continues to consult Soru on broader points of strategy. He and the Tiscali boss are no longer at loggerheads.

But if two top execs who have such a closely aligned vision for the business can't work together, do any cross- border mergers stand a chance?

Culture clash is nothing new to the world of mega-mergers. But the big egos of the Internet seem particularly unable – or unwilling – to share power. In the past two months, several big names have called it quits shortly after steering their company into the arms of a suitor. Bob Davis, CEO of Terra Lycos, parted company with his Spanish counterparts in February amid continued clashes with the board.

Pierre Besnainou, the CEO of Liberty Surf, jumped ship shortly after it was announced his firm was being sold, against his wishes, to Tiscali. And in mid-March, Frank Keeling, the COO of Freeserve left when it emerged that there would be no room for him in the Anglo-French union with Wanadoo.

One startling aspect is not that the "divorce rate" is so high, but how quickly the unions fall apart. Consider Terra Lycos. Last May, Davis heralded the merger as the creation of "a global Internet powerhouse". It was the largest-ever Spanish buyout of a US company and its power base was an impressive one. Davis and the team of Juan Villalonga (then chairman of Telefónica), Abel Linares (then CEO of Terra) and Ted Philip (then CFO of Lycos) were supposed to run the show. None are still with the company.

Just four days after the merger was consummated last October, Davis sold 3.4 million of his shares in the firm, reaping an estimated $71.4 million (79 million euros) windfall. The sell-off indicates Davis never had the stomach to run an Internet powerhouse from both sides of the Atlantic. He seldom made the trek to Spain following the completion of the acquisition.

Davis's appetite, it is believed, began to wane shortly after his confidant, Villalonga, was pushed out of Telefónica. A chain reaction of power shuffling ensued, bringing General Electric veteran Joaquim Agut to power as the top man at Terra. Davis eventually left amid repeated power clashes with the more conservative Agut.

Villalonga, a Spanish citizen and a government appointee, had a style reminiscent of Davis's – an American risk- taking style. Villalonga, like Davis, didn't feel it was necessary to consult the board on every decision. And Villalonga, who lived most of the year in Miami, shared Davis's ambition to build a global powerhouse with the impressive finances of Telefonica and the Web expertise of Terra Networks and Lycos. This was an irresistible proposition for Telef–nica's Spanish backers. By harnessing the promise of the Net, Terra, a Spanish corporation, could become a global force, breaking free of an inferiority complex that afflicts the Spanish business world. So far, it hasn't happened. Terra's share price has sunk from $56.38 on the day of the deal to just below $10 now.

As any investor knows, the acquiring firm in any deal often suffers a stock hit. But what every investor wants to know is how low and for how long? A decline in shareholder value is common in the world of mergers and acquisition. Accenture found in a recent study that half of all M&A deals, over time, saw shareholder value deteriorate.

A 50 per cent failure rate is not encouraging. In fact, it's worse than the UK's rate of failed marriages, itself the highest in Europe. Executives break corporate wedlock for numerous reasons. Most separations occur because of culture. That is, the difficulty in melding two different corporate visions, cultures and egos under the same roof.

"In my professional career, I don't remember seeing any M&As in which the company who takes control doesn't elbow out at least some of the executives of the controlled company," says Pedro Riera, a partner at Seeliger & Conde AMROP, a Madrid-based recruitment firm. The partings are made expeditiously, most often by giving top bosses a position of diminished power, thus forcing them to exit.

But Riera believes that corporate, not ethnic, culture clashes are the root of most departures. "In a globalised world, there are no substantial differences between European and US corporate cultures," he says. "Many of the business people have been educated with the same theories and even textbooks; many have working experience in the US or in European subsidiaries of American companies."

Unaffordable luxury

Cultural differences transcend geographic barriers, maintains Sunny Bates, chairwoman and CEO of her eponymous human resources company based in New York. "Even in the US, there are some cultural problems when East Coast firms merge with West Coast companies", she says.

Sorting out "the cultural aspects of mergers and acquisitions is often the last thing to do, since they are the most tricky ones. In fact, sometimes it takes years," she continues.

But in the Internet world, taking years to sort out internal differences is a luxury nobody can afford. The urgent nature of the business tends to aggravate existing tensions.

So, it's more a matter of too little time than too little understanding of your new boss's upbringing. As Kinsella says: "I think if you have been a successful executive in America, you have been forced to work with different cultures already.

"I'm a fairly culturally sympathetic guy. I can conduct business in a number of languages. In 2001, the international executive has to be sensitive not just to culture, but you also have to be sensitive to the bottom line."

In other words, when it comes down to it, what analysts want to hear is that a merger will produce greater profits. And it doesn't matter whether that's communicated with an English or Italian flavour.