Advances in Systems Science and Applications (2013) Vol.13 No.4 334-354 Agent Based Modeling of Integration of Organizational Cultures in Mergers and Acquisitions Albert R. Bakhtizin1 and Svetlana V. Denisova2 1Central Economics and Mathematics Institute of Russian Academy of Sciences, Moscow, Russia 2Moscow Aviation Institute (National Research University), Moscow, Russia Abstract In the article a new approach to the analysis of compatibility of organizational cultures during merges and acquisition using the Agent based simulation model (ABM) is considering. The choice of this method is substantiated. Using ABM makes the considerable economy of time possible. Usually companies spend a lot of time on estimation of possible results of merge. Also ABM allows promptly change the initial parameters of the model. Results of the research experiments are presented in the article. They showed that the Agent based simulation model can be successfully used as a tool of prompt analyzing and prediction of the re- sult of organizational culturesąŕ integration. In addition to this it can take into account features of each culture separately. Keywords agent based model, modeling organizational culture, merger and ac- quisition, culture integration, corporate mutual relations 1 Introduction The number of mergers and acquisitions is growing up every year. Russian compa- nies also are using potential of such transactions for development of their success- ful businesses. Mergers and acquisitions open opportunities to enter new markets, gain access to promising modern technologies, and transition to the new, more promising economic sectors. Regular changes of economic environment, together with increase of information flows with fast access to data and acquisition of new knowledge, create precon- ditions for development of internal sources of economic growth, which allow the company to operate progressively in rapidly changing environment. Organizational culture of company provides resources designed to support flex- ible, adaptive and efficient business systems. Organizational culture determines how and in what way created and controlled business processes are. Organizational culture creates foundation for joint activities of company team and formation of organizational culture, corresponding to the current external en- vironment, and it also provides effective organizational development of the com- pany. On the other hand, study of organizational culture itself makes it possible to obtain objective assessment of many processes occurring in the company, which becomes especially important in the process of implementing mergers and acquisi- Advances in Systems Science and Applications (2013) Vol.13 No.4 335 tions, when merging of companies with already established organizational cultures greatly increase resistance of their personnel to conducted organizational changes. Influence of organizational culture upon results of merger or acquisition deal is often underestimated. Organizational culture, as a cohesive core of company, can produce significant impact on many aspects of company activities, promoting or delaying its development. It depends primarily on characteristics of the culture itself and its compliance with current situation and goals, in the context of which it manifests. Creating of organizational culture of such type, which will be more consistent with structure and goals of the company formed as the result of merger or acquisition, is one of challenges that must be met at an early stage of planning of the deal. Large-scale changes in mergers and acquisitions initiate resistance of the per- sonnel of merging companies to these changes, which may result in substantially lower to expected effectiveness of merger or acquisition deal. Solution to this prob- lem can become establishment of informational support of the coming changes, when employees are regularly informed about all events inside the company, which creates a favorable working atmosphere and greatly impedes spread of rumors and thus mitigates negative reaction of team. As far as possible, company employees should be involved in reorganization process, which significantly increase the role of communications. But if resistance of personnel to changes in the period of integration is a spe- cial case of reaction of employees to any organizational changes, and the ways to solution of this problem are indicated, than solution to wide-range problems still is not fully determined. In this way, the potential conflict of organizational cultures should be analyzed at the early stage of merger or company takeover deal. But in practice, to conduct such analysis is very problematic case. The main difficulty is that it is impossible to predict the future culture of a new company after merger deal and to evaluate its effectiveness. Options may vary depending on many factors, like : organizational cultures type prior to merging, their strength and level, similarity and ability to changes. According to consultants any change of organizational culture requires at least three years. In other words, it takes a long time for assessment of the results of integration of organizational cultures. While if in the process of cultural integration were made mistakes, than negative results show up only with time, and to make adjustments and get the desired results would take more time and additional capital inputs. The purpose of all the mergers and acquisitions transactions, without any ex- ception, is integration carried-out successfully. Integration is understood as ele- ment joining-up resulted in forming a single whole. As a rule, the process of merging and acquiring companies, integration, results in creation of a new orga- nizational structure capable to dispose available resources in a way more efficient 336 Albert R. Bakhtizin : Agent Based Modeling of Integration of Organizational Cultures in ... and rational, to optimize material, financial, labor and informational flows of the integrated companies. Statistical data show that 70% cases of prospectively ad- vantageous transactions fail because of the low-quality preparation and carrying out integration. So, selection of an organizational form for companies integration in compliance with the purpose and objectives stated is an important step that can facilitate to unify resources and flows efficiently. Integration is carried out in various directions. Though, whereas corporate strategy integration, product series management systems, product distribution and delivery management systems are predictable and subject to numerical com- putation on the base of data available, organizational culture integration is often unpredictable. Integration of united enterprises organizational cultures is a crucial compo- nent in forming the corporate interaction efficiently. Resistance exhibited by the personnel to the process in the period of companies mergers and acquisitions is conditioned, first of all, by the difference among various (in the majority of cases) corporate values and organizational cultures. The mergers of ąőequalsąŕ finishes frequently with the matter that a stronger group imposes their organizational culture on a unilateral basis. There is no doubt, mergers and acquisitions propose a lot of advantages for business development. Nevertheless, some erroneous illusion might be created that such transactions are relatively easy, inexpensive and represent the only way to increase business considerably. However, most investigations on mergers and acquisitions efficiency evidence that 60 to 80% companies even armed with potentially advantageous strategy do not accomplish the objectives. It is often concerned with mistakes committed in the course of enterprise integration as well as incorrect organization of the transaction itself. Mistakes and inadvertences can appear in every phase of mergers and acquisitions. Thus, in addition to the in- correctly chosen object for merger and acquisition, low-quality preparation for transactions, and erroneous financial estimation, there could be chosen erroneous ways to implement integration. Particularly, serious mistakes can be made in the course of changing and forming the enterprise organizational culture resulted from mergers or acquisitions. In this phase, the mistakes committed can be conditioned by the lack of detailed integration plan and the lack of appropriate approach. The main cause for most failed mergers is inconsistence and incompatibility of orga- nizational cultures. The cause for most failed mergers and acquisitions consists in the joining com- panies inability to overcome organizational culture contradictions. Cultural prob- lems are to be solved even for most successful mergers. In other words, cultural and organizational problem solving acquires the utmost importance for each integra- tion, both successful and failed one. Although this area has not been investigated Advances in Systems Science and Applications (2013) Vol.13 No.4 337 properly yet, experts working in this area stated that enterprises which completed integration successfully had paid a lot of attention to the following aspects : management team forming : how to target the management ranks to the tasks issued by the Director General and the Board ; organizational structure : how to create a structure that would mostly corre- spond to the new enterprise strategy ; highly-efficient culture : how to work-out and develop a culture that would fa- cilitate for efficiency increase and would help the new enterprise to realize their long-term objectives ; expert employee administration : how to reveal the most various employees in both enterprises and what actions to undertake for involving them into the pro- cess of new enterprise creation. In order to avoid mistakes, it is necessary to elaborate a plan for mergers and acquisition procedure, and, as it has already been noted and never before stated, the question on organizational culture and emerging companies personnel is to be formulated in the phase of choosing the object for mergers and acquisitions. In case the merged enterprises remain existing independently from each other, as a rule, there are no big problems with the personnel. However, if the enterprises start functioning as a single whole, the question on organizational cultures inte- gration becomes exceptionally acute. The new organizational culture could not be acquired by simply joining two old cultures. In theory, if promoting people, introducing new values, orientations, in- troducing new behavioral models, remunerating them, forming models to emulate, these behavioral models will be repeated and will be fixed in the personnel minds. This way, a new culture is being created. Though, in practice, organizational cul- ture integration is rather complicated, as far as it is a multiphase complex process that needs comprehensive planning and accurate implementation. Detailed calcu- lations along with competent and thoughtful actions of the managing personnel will guarantee the successfully implemented integration. Nevertheless, the potential of organizational culture confrontation is rarely an- alyzed in this phase, preceding the mergers or acquisition transaction. As a result, the culture confrontation creates a serious problem for merger procedure. From this we can conclude that during the period of mergers and acquisitions the most important is issue of compatibility of organizational cultures of the merg- ing organizations. And at planning stage of the deal, for future development of effective merging strategy, it is very important to be aware of possible results of integration of cultures. At the moment there is no tool of diagnostics of organizational cultures com- patibility, which can during short period of time to play off a large number of possible scenarios for merging organizational cultures and get expected results of 338 Albert R. Bakhtizin : Agent Based Modeling of Integration of Organizational Cultures in ... integration, in order to subsequently select among all possible variants the most optimal one. In this regard, the main objective of study is building of tool that allows dur- ing short period of time to study large number of possible scenarios of merging of organizational cultures targeted on getting of expected integrated culture, and then choose from all options the most suitable one. In this way, one of the ob- jectives of study is task of taking into account individual characteristics of micro level individual agents in order to obtain more realistic assessment of impact of organizational changes on production indicators. As the above mentioned tool, we decided to develop agent-oriented computer simulation model, related to the class of models based on individual behavior of agents. Due to its advantages, namely : 1) ability to simulate close to reality system, 2) emergency, 3) flexibility, 4) possibility of specification of model parameters without knowledge of global dependencies within the frameworks of simulating of relevant subject area, we assume that the agent based model will allow us to achieve objectives of study. 2 Literature Review It should be noted that in Russia an agent-oriented models have been developed relatively recently and their development is mainly concentrated in the Central Economics and Mathematics Institute (CEMI RAS) (under leadership of Aca- demician V.L. Makarov), as well as the company’s “XJ Technologies” (St. Peters- burg). For more details about theoretical aspects of this model class see articles of V.L. Makarov and A.R. Bakhtizin [1]. In the world practice there is some experience in developing agent-oriented models of organizational culture and corporate relations. Examples of the most advanced works are shown below. A multi-agent simulation platform for modeling perfectly rational and bounded- rational agents in organizations [2]. This paper presents an agent-based simulation framework for the analysis of the equilibria that emerge in a complex structure such as an organization ; we can think of some of these equilibria as corporate culture. Authors concentrate on modeling the effort exerted by heterogeneous agents in an organization, and how the interaction between them may lead to a common level of effort (corporate culture). The simple model authors propose is a system in which agents interact in a dynamic, adaptive and evolving way. The model shows how different compo- sitions of the population may lead the system to different common behaviours ; the implications of result findings are both descriptive and normative, and shed Advances in Systems Science and Applications (2013) Vol.13 No.4 339 light on some core problems of the economics of organization design. How Groups Can Foster Consensus : The Case of Local Cultures [3]. This work is based on an idea that a local culture denotes a set of rules on business behaviour among firms in a cluster. Similar to social norms or conven- tions, it is an emergent feature of interaction in an economic network. To model its emergence, authors consider a distributed agent population, representing clus- ter firms. The model introduces a feedback mechanism of agent behaviour and in-group structure. Studying its consequences by means of agent-based computer simulations, authors find that for narrow-minded agents the feedback mechanism helps find consensus more often, whereas for open-minded agents this does not necessarily hold. Overall, the dynamics of agent interaction in clusters as mod- elled here, are conducive to consensus among all or a majority of agents. Computer Mediated Communication and Organizational Culture : An Agent- Based Simulation Model [4]. This paper examines the mutual relationship between the organizational use of Computer Mediated Communication and organizational culture. Computer Me- diated Communication supplements communication among members of an orga- nization to maintain the culture, especially when those persons cannot communi- cate by other means. On the other hand, a strong organizational culture allows a more effective use of Computer Mediated Communication by providing members with some of the necessary common ground to better understand the informa- tion exchanged. These relationships are investigated using an agent-based model. This agent-based model incorporates many partial theories into a coherent and fully defined model, which helps formalize and integrate those theories. In this paper, authors present some of the results of the agent-based model that show that organizational culture can influence the effectiveness of Computer Mediated Communication and that Computer Mediated Communication can help maintain and stabilize a culture. Social construction of organizational culture : an agent-based model [5]. This model, called “OrgNorms”, assumes that culture is important to organi- zations, and companies in particular, on two levels. First, the homogeneity of an organization’s culture affects communication and efficiency. Second, the ‘cul- tural fitness’ of an organization to local society affects its competitive advan- tage. OrgNorms is an agent-based model designed to simulate the development of and changes in organizational culture in a culturally changing society, track- ing the organization’s internal homogeneity and its external fitness to its societal environment. A central assumption is that homogeneity demands that new mem- bers adopt the organizational norms, while fitness demands that the organization adopts the views of the new members. That connection breeds similarity, that knowledge is local, and that agents take after those who are similar and the local 340 Albert R. Bakhtizin : Agent Based Modeling of Integration of Organizational Cultures in ... majority, are other key assumptions. These examples of agent-oriented simulation models related to organizational culture show that AOM can be successfully applied in studies and forecasting of various processes of transformation of organizational culture. 3 Agent-based Modeling of Organizational Mergers With regard to experience of our colleagues from Russia and other countries, in 2010 we developed an agent-based model of organizational mergers, as is described below. 3.1 Characteristics of agent . Table 1 The characteristic parameters of agent n/n Parameter description Parameter value 1 Age from 18 to 60 years 1.1 First age group 20-25 years 1.2 Second age group 25-40 years 1.3 Third age group 40-50 years 1.4 Fourth age group 50-60 years 2 Marital status 0 - agent has no family, 1 - agent has a family 3 Professionalism of agent 3.1 Education 0 - secondary, 1 - higher 3.2 Experience from 1 to 40 years 3.3 Work experience in par- ticular organization before merging from 1 to 10 years 4 Loyalty from 1 to 10 points, where minimum value of parameter means intolerance to the values of company, and 10 points means his strong com- mitment 5 Ability to adaptation from 1 to 10 points 6 Satisfaction with working conditions after integra- tion 1 to 10 points 7 Labor market demand of agent in times of integra- tion from 1 to 10 points 8 Ability to work from 1 to 10 points (1). Age. For these parameters, a distribution among four age groups : 20-25 years ; 25-40 years ; 40-50 years ; 50-60 years was specified. (2). Marital status. It includes : has no family, has a family. Advances in Systems Science and Applications (2013) Vol.13 No.4 341 (3). Professionalism of agent, which consists of concepts such as : Educa- tion(C1), Experience(C2), Work experience in particular organization before merg- ing(C3). These variables during initializing of models have random values with standard deviations enclosed in brackets. In order to create the model, 8 main parameters were chosen : age, marital status, professionalism of agent, loyalty, ability to adaptation, satisfaction with working conditions after integration, labor market demand of agent in times of integration, ability to work. Input parameter data are given in Table 1. Professionalism is determined by value within intervals from 0 to 100 points, as function of three components (C1, C2, C3) in the following as P = 33.3 · C1 + 33.3 · C2 40 + 33.3 · C3 10 (1) i.e. in case of maximum values of all components the level of professionalism of agent is also maximum - close to 100 points. (4). Loyalty. In this case, a loyal employee should share the core beliefs and values of the company (from 1 to 10 points, where minimum value of parameter means intolerance to the values of company, and 10 points means his strong com- mitment). (5). Ability to adaptation. It also can be divided from 1 to 10 points. Under adaptation we understand mutual adjustment of employee and company, which is based on gradual involvement of worker into labor activities in new professional, psychophysiological, psychosocial, organizational, administrative, and economic conditions. (6). Satisfaction with working conditions after integration. It also can be di- vided from 1 to 10 points. (7). Labor market demand of agent in times of integration. It also can be di- vided from 1 to 10 points. (8). Ability to work. It also can be divided from 1 to 10 points. 3.2 Characteristics of Environment for Functioning of Agents and Organizational Cul- tures We come to the description of environment of agent model. The agent functioning medium comprises four organizational culture types - Clan culture, Adhocratic culture, Hierarchical culture and Market culture. For determination of environment we used a simplified version of methodology for assessing of organizational culture, and below is brief description of four types of organizational cultures, used in probability function, which graph is shown in Fig.5. Type 1. Clan culture. It means very friendly working place where people have much in common. Companies are like big families. Leaders or chiefs of companies 342 Albert R. Bakhtizin : Agent Based Modeling of Integration of Organizational Cultures in ... are perceived as educators, and perhaps even as parents. The company is cemented with loyalty and traditions. There is high responsibility of the company. It is focused on a long-term benefits for improving of individual, pays attention to a high degree of team unity and morale. Success is measured in terms of good relations to consumer and care about people. The company encourages teamwork, participation of people in business and mutual consent. Type 2. Adhocratic culture. It means a dynamic, entrepreneurial and creative working place. People are willing to offer their own support and stand the risks. The leaders are considered innovators and persons who are ready to stand the risks. Cohesive spirit of this company is devotion to experiments and innovation. Necessity of work on the business forefront is emphasizes as need. The general long term policy of such company is its growth and acquiring of new resources. Success means production and performance of unique and new products and / or services. It is important to be a leader on the products and services markets. Such organization encourages individual initiative and freedom. Type 3. Hierarchical culture (bureaucratic). It is very formalized and structured place of work. Procedures dominate activities of employees. Leaders are proud of the fact that they are rationally minded coordinators and organizers. It is critical to maintain smooth running of the company. Company is united with formal rules and official policies. Long-term concern of organization is to provide stability and smooth running performance of cost-effective operations. Success is measured in terms of supply, smooth schedules and lower costs. Management is concerned about employment status and long-term predictability of employees. Type 4. Market culture. This kind of company is focused on results, the main concern of which is performance of task. People are ambitious and compete with each other. Chiefs are hard leaders and tough competitors. They are unshaken and demanding. This company is united together with emphasis on the desire to win. Reputation and success are things of common concern. Focus of strategy is targeted to a specific action, achievement of tasks and measurable goals. Success is measured in terms of markets penetration and increase of market share. Important is competitive pricing and leadership on the markets. The working style of this company is hard line targeted on competition. 3.3 Agent Behavior Behavior of agents is specified by diagram of state (state chart), transitions inside of which depend on the values of probability functions listed below. Since within the frameworks of model occurs absorption of one company by another, the agent has two options : adapt to the new conditions or leave (for simplicity it is assumed that after reorganization the absorbing company does not change its type, and, on the other hand, the absorbed company takes leading style of absorbing organization). This chart shows process in the following way : agents Advances in Systems Science and Applications (2013) Vol.13 No.4 343 of absorbed organization (Fig.1 - “Organization 2”) through conversion pass to the absorbing organization (“Organization 1”) or have to leave (this transition is shown along the arrow directed towards the ring with dot in center). In the process of work this model simulates the process of absorption, and some time after reorganization, when agent may resign (i.e. it is another transition along the arrow directed towards the ring). Fig.1 State chart of model agent For simplicity, we do not consider optimization of personnel, i.e. possible re- dundancy of employees by company. Next, we go to the more detailed description of agent state chart. First of all in the state chart of transition may work out transition 1, depending on agent’s loyalty towards values of company (in this case loyalty parameter of all agents is relevant only to absorbing company). If company’s values are alien to the agent, than he can adapt to them, depending on the values of corresponding parameter (i.e. may work out transition 2). The behavior of agent may be adjusted depending on other parameters. For example, if qualification of agent is in high demand on labor market, than proba- bility of his resignation is high (transition 3). Otherwise “thing, which can change up his mind,” may be his age (transition 4), as well as having a family (transition 5). After the process of absorption the agent may stay unsatisfied with new con- 344 Albert R. Bakhtizin : Agent Based Modeling of Integration of Organizational Cultures in ... Fig.2 Probability (y-axis) of transition of agent into absorbing organization based on his level of loyalty (x-axis) Fig.3 Probability (y-axis) of transition of agent into absorbing organization based on his adaptation ability (x-axis) Fig.4 Probability (y-axis) of transition of agent into absorbing organization based on the level of labor market demand in times of integration (x-axis) Advances in Systems Science and Applications (2013) Vol.13 No.4 345 Fig.5(a) Probability (y-axis) of transition of agent (working in company with organizational culture of first type) into absorbing company, depending on type of organizational culture (x-axis) Fig.5(b) Probability (y-axis) of transition of agent (working in company with organizational culture of second type) into absorbing organization, depending on type of organizational culture (x-axis) Fig.5(c) Probability (y-axis) of transition of agent (working in company with organizational culture of third type) into absorbing company, depending on type of organizational culture (x-axis) 346 Albert R. Bakhtizin : Agent Based Modeling of Integration of Organizational Cultures in ... Fig.5(d) Probability (y-axis) of transition of agent (working in company with organizational culture of fourth type) into absorbing company, depending on type of organizational culture (x-axis) Fig.6 Probability (y-axis) of transition of agent into absorbing company based on age (x-axis) Fig.7 Probability (y-axis) of transition of agent into absorbing company based on satisfaction with working conditions after integration (x-axis) ditions, and in this case he may initiate transition 6 (this applies to employees of Advances in Systems Science and Applications (2013) Vol.13 No.4 347 absorbed organization, only). Transitions in state chart can work out depending on values of probability func- tions, defined by experts. Fig.2 shows a graph of probability function, where the argument (x-axis) is level of loyalty and value of function (y-axis) - probability of transition 1. Fig.3 and 6 show graphs with probabilities of working of transitions 2 and 4, depending on capacity for adaptation and age of agent, respectively. For determination of probability of transition 3 we must calculate average prob- ability on basis of functions, whose graphs are shown in Fig.4 and 5(a)-5(d). 3.4 Adequacy of Model For testing of model adequacy we have conducted three experiments on merging of different types of companies, whose parameters are provided in Tables 2-4. Table 2 Parameters of absorbing and absorbed companies for experiment No.1 Parameter Absorbing company Absorbed company Type of organizational culture Bureaucratic Market Number of employees 20 000 20 000 Age of employees 20-25 years 25% 20-25 years 60% 25-40 years 40% 25-40 years 20% 40-50 years 20% 40-50 years 10% 50-60 years 5% 50-60 years 10% Table 3 Parameters of absorbing and absorbed companies for experiment No.2 Parameter Absorbing company Absorbed company Type of organizational culture Bureaucratic Market Number of employees 300 30 Age of employees 20-25 years 25% 20-25 years 15% 25-40 years 50% 25-40 years 50% 40-50 years 20% 40-50 years 30% 50-60 years 5% 50-60 years 5% For experiments, were collected data on transactions of mergers and acquisi- tions during the period from 2004 to 2009. Companies involved in this experiment represent large retail sector and IT-sphere. In the first experiment, two organizations having manpower strength of about 20 000 persons each, were represented ; each company had associated companies. The experiment took into account the total number of employees for each enter- prise including associate companies and representative offices. 348 Albert R. Bakhtizin : Agent Based Modeling of Integration of Organizational Cultures in ... Table 4 Parameters of absorbing and absorbed companies for experiment No.3 Parameter Absorbing company Absorbed company Type of organizational culture Bureaucratic Market Number of employees 50 30 Age of employees 20-25 years 20% 20-25 years 18% 25-40 years 60% 25-40 years 70% 40-50 years 16% 40-50 years 10% 50-60 years 4% 50-60 years 2% In the second experiment, the absorbing company before reorganization had 300 people, the merged company had 30 people. In the third experiment, small enterprises took part ; the absorbing company personnel counted 50 persons for when transaction started and the merged com- pany personnel counted 30 persons. Bellow in Listing 1 adduces a code generated by AnyLogic program which is responsible for agent initialization and model initial state initialization. All the agent populations (people.size()) are distributed by groups (age groups, as well as agent groups pertaining to the first or the second organization) de- pending on the values preset (initial number of employees working for the first (AgentFirm1) and the second organization and, also, four age frames. (age1, age2, age3, age 4)). for (int i = 0 ; i