One Israeli economic indicator that has changed in the past three years is the direction of capital flow. Instead of foreign investors buying Israeli companies, Israeli investors have begun buying an increasing number of foreign companies. Israeli executives have concluded that the only way to grow in a shrinking domestic economy is to expand abroad, while making Israel the base for their international operations.
A prominent example of just such an Israeli company is generic drug maker Teva (Nasdaq: TEVA; TASE:TEVA), which can now be defined as an multinational corporation. This month Teva acquired US pharmaceutical company Sicor (AMEX: SCRI) for $3.4 billion - the largest acquisition ever by an Israeli company.
The Sicor deal is Teva's third acquisition in the US, joining a long list of Teva's acquisitions in 16 countries, including Italy, Germany, the UK, the Netherlands, Bulgaria, Hungary, the Czech Republic, Canada and Mexico, in recent years.
A merger of companies is a hard and complex process, even when the merged companies share a common language and culture. When these differ, the complications are compounded multi-fold. Varda Pearl is an organizational psychologist and consultant who specializes in intercultural communication. She says, "Research shows that 50-85% of mergers and acquisitions fail, and the main cause is cultural incompatibility."
Pearl says the most frequent phrase heard during an intercultural merger is: "These idiots don’t understand anything!"
The problem, she asserts, is the tendency to minimize cultural differences in a globalized world. "When two companies from different countries merge, many managers will today tell you, 'There's no problem. After all, it's a global marketplace now.' But is simply isn’t true. The worst damage comes from this denial."
Local pay, global costs
How can culture clash problems be handled to ensure a smooth acquisition?
Teva VP human resources Haim Benjamini is one of the most experienced people in Israel on this subject. He says, "It is necessary to deal with the cultural aspect of every merger and acquisition as if it were due diligence. You have to go out into the field, wander among the people and learn every pertinent detail, such as, 'What is the management culture? Is it centralized or decentralized?'"
Benjamini says Teva does not try to replace the management of the companies it acquires. "In most of our acquisitions, we kept the existing managers, which is very rare among the Americans. When they acquire a company, the first thing they do is replace the managers.
"Unlike many companies, we don’t send Israelis abroad to manage our overseas holdings. We've relocated only seven or eight Israelis abroad. This is part of our world view to respect the local culture."
Benjamini notes that there are cultural differences within the US itself. Although it is only five hours flying time between Pennsylvania and California, there are cultural differences between the two. "Just because both are part of the US, that doesn’t mean that they have the same culture, as we've learned over time."
Hungary provides a practical example of potential management problems arising from cultural differences. "We acquired a Hungarian company in 1996, at a time when the remnants of the Communist regime were still around. In Hungary, either you worked or you were a criminal. As a result, even though there was a lot of hidden unemployment in the factory, it was hard for us to convince management to make cuts."
Nevertheless, Teva's policy is to impose as few practices as possible on the companies its acquires. "We sometimes adopt the practices of the companies we buy," says Benjamini.
"Globes": Can you give examples?
Benjamini: "For instance, the Dutch company we acquired had an excellent level of internal communications. The Dutch management used stories to make contact with the employees, which was very effective. We took the concept to use as an example at our other plants in Europe, as well as in Israel. We also borrowed incentives methods from the Americans."
How does having employees from many countries affect salaries?
"Our philosophy states that salaries, including pension conditions, vacations and holidays are a local matter, while salary costs are global."
The 1996 merger between Israel's Aladdin Knowledge Systems (Nasdaq: ALDN) and Germany's FAST is already being taught as a case study at Harvard Business School. Since then, Aladdin has acquired companies in France, Japan and the US.
"Mergers are never easy," says Aladdin CFO Erez Rosen. "They require a lot of work in the field and travel. As far as we're concerned, the most important thing is for the employees at the acquired company to feel that they're a part of you as quickly as possible." Rosen cites an example: Aladdin acquired two French distributors on Thursday, and by Monday morning, the French employees were linked to Aladdin's computer network.
"Whenever there's a merger or acquisition, we immediately send the CEO and human resources director to meet with the new employees. They also attend all of our events," says Rosen.
In the high-tech world, says Rosen, it's easier to overcome cultural problems because, "people who grew up with high-tech have basically grown up with the same culture." There are always initial problems, however, as Rosen's following example shows:
"After the merger with FAST, its CEO arrived for his first meeting in Israel. As usual, during the meeting we Israelis interrupted each other. The German manager simply sat and watched us open-mouthed. 'I've never seen such a thing in my life,' he told us afterwards. 'How can you work like that?'"
Rosen continues, "After a year, he too would interrupt us. We told him, 'You've finally become an Israeli'."
Traps: Time-wasting and the need to think
Pearl works with Proctor & Gamble Belgium, Ericsson (Nasdaq:ERICY; SAX:ERIC), Creo Products (Nasdaq: CREO; TSX:CRE), Check Point (Nasdaq: CHKP), the Weizmann Institute of Science, and the Ministry of Foreign Affairs and other companies and institutions. She notes several characteristic traps in transcultural mergers:
- Work hours. "In Israel, work hours are from morning to night. If you don’t stay late, it's a sign that you don’t care. In contrast, in Europe, free time is taken into account, and Israelis can't understand why Europeans go home at 5 pm."
- Being on time. "Israelis tend to arrive late for meetings and to disregard time, because the content is more important. Other cultures think, 'If your wasting my time, you're disrespectful of me'."
- Single-tasking versus multi-tasking. "Israelis tend to multi-task. At meetings, they will talk on the phone and look at their computers. That might be acceptable in Israel, but not elsewhere."
- Transferring information. "In the US, information in sent from the top down. In Israel, information moves in every direction. A development employee can walk down the corridor and get important information from a secretary. From this perspective, it's hard for Israelis to work at foreign companies."
- Authority. "Israelis head the list of nationalities who won't accept a manager's authority. This is the complete opposite of the Japanese, for example. When a marketing manager in Japan sits next to the CEO at a meeting, he won't dare speak. Israeli marketing managers believe they must contribute, otherwise why are they there?"
- Directness versus evasiveness: "Israel respects directness - dugri in Hebrew. Israelis want to say everything openly. Elsewhere, directness might be perceived as arrogance."
- Feedback. "Israelis need constant feedback. A Swedish manager once asked me, 'Why do I constantly have to tell my Israeli employees congratulations, you were great?' It turns out that isn't the same everywhere."
- E-mail. "When Israelis write e-mails, they're very blunt, sometimes insultingly so. They answer e-mails, 'Yes', 'No', 'Good'. I sometimes have to teach them that when writing to someone overseas, they should add an opening sentence, a closing sentence, and 'Best regards'."
- Communications. "Israelis love to talk on the phone and hold face-to-face meetings. They don’t like working with virtual teams, which is normal in other countries.
So, who should adopt which culture when an Israeli company acquires a foreign one?
Pearl: "It isn’t black and white. It's necessary to sit down together and decide what will be done our way and what will be done yours. It's necessary to examine which things are unacceptable in other cultures. It's necessary to simply say, 'This ought to be uprooted and that should be preserved."
Published by Globes [online] - www.globes.co.il - on November 19, 2003