Firms of a Feather Merge Together: the Coordination Benefits of Compatible Cultures

In this paper, I argue that the culture compatibility acquirer and target exhibit at the time of a deal announcement—defined as the strength of the overall culture they would form, if combined—entails coordination benefits, positively affecting M&A outcomes. By parsing the recombination and coordination effects of an organizational culture and theorizing about the coordination benefits that strong cultures engender (while controlling for the recombination potential), this paper reconciles the mixed evidence found so far when studying the effect of cultural differences on M&A performance. I measure organizational culture using text reviews employees post on Glassdoor.com about their companies. I develop an approach based on topic modeling, a machine learning algorithm for natural language processing, to measure culture compatibility based on the distribution of reviews in the space of topics that individuals consider important when writing about their companies. Using a sample of 349 technology acquisitions, matched to counterfactual “pseudo-deals,” and about 780,000 Glassdoor text reviews, I find that pre-deal acquirer-target culture compatibility is positively associated with (a) the likelihood of deal announcement, (b) completion, and (c) superior stock returns. The effect is stronger for cross-border deals, in which coordination is expected to be more challenging to achieve than in domestic deals.