mergers and acquisitions full & final
TRANSCRIPT
A PROJECT REPORT ON
‘MERGERS AND ACQUISITIONS’
SUBMITTED BY:
CHETAN OSWAL
MFM SEM - V (2010-2011)
ROLL NO. 30
PROJECT GUIDE:
PROF. ASHOK RAINA
LALA LAJPATRAI INSTITUE OF
MANAGEMENT, MUMBAI
SUBMITTED TO:
UNIVERSITY OF MUMBAI
(2010 – 2011)
PROJECT GUIDE CERTIFICATE FORM
This is to certify that the dissertation submitted in partial fulfillment of the requirement for the award of MFM of the University of Mumbai is a result of the bonafide work carried out by Mr. Oswal Chetan Amar under my supervision and guidance no part of this report has been submitted for award of any other degree, diploma fellowship or other similar titles or prizes. The work has also not been published in any scientific journals/ magazines.
Date: Name: Oswal Chetan Amar
Place: Mumbai Roll No.: M.F.M-30
------------------------------ ---------------------------
(Director, LLIM) (Project Guide)
1
ACKNOWLEDGEMENTS
I would like to express my sincere gratitude to my internal
guide Prof. Ashok Raina, for his continuing support during and
after my field study. I would also like to thank my Co-ordinator
Prof. M.L.Narendran, and Director of our College, for creating
confidence in me and the management of, for supporting me in
my Endeavour towards education. I would also like to thank all
the contributors for my project from various sources for
providing me with this stimulating opportunity and
encouragement to explore and study practical aspects on
analytical study on working of Merger & Acquisition.
(Chet
an A. Oswal)
2
CONTENTS
SR.
NO.
PARTICULARS PAGE NO.
1. EXECUTIVE SUMMARY 5 – 9
2. CLASSIFICATION OF MERGER 10 – 18
3. MOTIVE BEHIND MERGER & ACQUISATION 19 – 34
4. WHY MERGERS & ACQUISATIONS DO NOT
SUCEED?
35 – 43
5. CASE STUDY
A) DAILMER BENZ & CHRYSTER
B) RENAULT & VOLVO
C) FORD & VOLVO
44 – 51
52 – 57
58 – 65
6. LATEST NEWS ON MERGERS &
ACQUISATIONS
66
3
LIST OF TABLES
SR.
NO.
PARTICULARS PAGE
NO.
1. LARGEST MERGER & ACQUISATION 39
2. TOP 10 ACQUISATIONS 40
LIST OF CHARTS
SR.
NO.
PARTICULARS PAGE
NO.
1. STAGES OF MERGER 22
2. MAGIC CIRCLE FOR A SUCESSFUL
MERGER
26
3. MOTOR VEHICLE & PARTS MANUFACTURING
FOR CROSS BORDER MERGER &
ACQUISATION
43
4
EXECUTIVE SUMMARY
Industrial maps across the world have been constantly redrawn over
the years through various forms of corporate restructuring. The most
common method of such restructuring is Mergers and Acquisitions
(M&A). The term "mergers & acquisitions (M&As)" encompasses a
widening range of activities, including joint ventures, licensing and
synergising of energies. Industries facing excess capacity problems
witness merger as means for consolidation. Industries with growth
opportunities also experience M&A deals as growth strategies. There are
stories of successes and failures in mergers and acquisitions. Such
stories only confirm the popularity of this vehicle.
Merger is a tool used by companies for the purpose of expanding
their operations often aiming at an increase of their long term
profitability. There are 15 different types of actions that a company can
take when deciding to move forward using M&A. Usually mergers occur
in a consensual (occurring by mutual consent) setting where executives
from the target company help those from the purchaser in a due
diligence process to ensure that the deal is beneficial to both parties.
Acquisitions can also happen through a hostile takeover by purchasing
the majority of outstanding shares of a company in the open market
against the wishes of the target's board. In the United States, business
laws vary from state to state whereby some companies have limited
protection against hostile takeovers. One form of protection against a
hostile takeover is the shareholder rights plan, otherwise known as the
"poison pill".
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Mergers and acquisitions (M&A) have emerged as an important tool
for growth for Indian corporates in the last five years, with companies
looking at acquiring companies not only in India but also abroad.
INTRODUCTION
The words Mergers and Acquisitions are often used as an
interchangeable term, a convenient but inaccurate usage. Mergers refer
to deals where two or more companies take virtually equal stakes in
each other’s businesses, whereas an acquisition is the straightforward
purchase of a target company by another company.
What is a Merger?
A "merger" or "merger of equals" is often financed by an all stock deal (a
stock swap). An all stock deal occurs when all of the owners of the
outstanding stock of either company get the same amount (in value) of
stock in the new combined company. The terms "demerger," "spin-off" or
"spin-out" are sometimes used to indicate the effective opposite of a
merger, where one company splits into two, the second often being a
separately listed stock company if the parent was a stock company.
Merger is a legal process and one or more of the companies lose their
identity.
What is an Acquisition?
In a layman’s language an “acquisition” is one company acquiring a
controlling interest in another company. An acquisition (of un-equals, one
large buying one small) can involve a cash and debt combination, or just
cash, or a combination of cash and stock of the purchasing entity, or just
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stock. An acquisition occurs when an organization acquires sufficient
shares to gain control/ownership of another organization. Acquisitions
can also happen through a hostile takeover by purchasing the majority of
outstanding shares of a company in the open market against the wishes
of the target's board. In an acquisition there are clear winners or losers;
power is not negotiable, but is immediately surrendered to the new
parent on completion of the deal. `Those who hold the title also hold the
pen to draw the organisational chart'.
High-yield
In some cases, a company may acquire another company by issuing
high-yield debt (high interest yield, "junk" rated bonds) to raise funds
(often referred to as a leveraged buyout). The reason the debt carry a
high yield is the risk involved. The owner can not or does not want to risk
his own money in the deal, but third party companies are willing to
finance the deal for a high cost of capital (a high interest yield).
The combined company will be the borrower of the high-yield debt and it
will be on its balance sheet. This may result in the combined company
having a low shareholders' equity to loan capital ratio (equity ratio).
Examples
In a 1985 merger between Pantry Pride and Revlon, Pantry Pride had to
issue 2.1 billion dollars of high-yield debt to buy Revlon. The target
Revlon was worth 5 times the acquirer.
Consolidation
Technically speaking consolidation is the fusion of two existing
companies into a new company in which both the existing companies
extinguish.
Merger and Consolidation can be differentiated on the basis that, in a
merger one of the two merged entities retains its identity whereas in the
case of consolidation an entire new company is formed.
Takeovers
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A takeover bid is the acquisition of shares carrying voting rights in a
company with a view to gaining control over the management. The
takeover process is unilateral and the offer or company decides the
maximum price.
Demerger
It means hiving off or selling off a part of the company. It is a vertical
split as a result of which one company gets split into two or more.
Amalgamation
Halsbury’s Laws of England describe amalgamation as a blending of two
or more existing undertaking into one undertaking, the shareholders of
each blending company becoming substantially the shareholders in the
company which is to carry on the blended undertaking.
DISTINCTION BETWEEN MERGERS AND ACQUISITIONS
Although they are often uttered in the same breath and used as though
they were synonymous, the terms merger and acquisition mean slightly
different things.
When one company takes over another and clearly established itself
as the new owner, the purchase is called an acquisition. From a legal
point of view, the target company ceases to exist, the buyer "swallows"
the business and the buyer's stock continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of
about the same size, agree to go forward as a single new company
rather than remain separately owned and operated. This kind of action is
more precisely referred to as a "merger of equals." Both companies'
stocks are surrendered and new company stock is issued in its place. For
example, both Daimler-Benz and Chrysler ceased to exist when the two
firms merged, and a new company, DaimlerChrysler, was created.
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In practice, however, actual mergers of equals don't happen very often.
Usually, one company will buy another and, as part of the deal's terms,
simply allow the acquired firm to proclaim that the action is a merger of
equals, even if it's technically an acquisition. Being bought out often
carries negative connotations, therefore, by describing the deal as a
merger, deal makers and top managers try to make the takeover more
palatable.
A purchase deal will also be called a merger when both CEOs agree that
joining together is in the best interest of both of their companies. But
when the deal is unfriendly - that is, when the target company does not
want to be purchased - it is always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really
depends on whether the purchase is friendly or hostile and how it is
announced. In other words, the real difference lies in how the purchase is
communicated to and received by the target company's board of
directors, employees and shareholders.
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CLASSIFICATIONS OF MERGERS
Mergers are generally classified into 5 broad categories. The basis of this
classification is the business in which the companies are usually
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involved. Different motives can also be attached to these mergers. The
categories are:
Horizontal Merger
It is a merger of two or more competing companies, implying that
they are firms in the same business or industry, which are at the same
stage of industrial process. This also includes some group companies
trying to restructure their operations by acquiring some of the
activities of other group companies.
The main motives behind this are to obtain economies of scale in
production by eliminating duplication of facilities and operations,
elimination of competition, increase in market segments and exercise
better control over the market.
There is little evidence to dispute the claim that properly executed
horizontal mergers lead to significant reduction in costs. A horizontal
merger brings about all the benefits that accrue with an increase in the
scale of operations. Apart from cost reduction it also helps firms in
industries like pharmaceuticals, cars, etc. where huge amounts are spent
on R & D to achieve critical mass and reduce unit development costs.
Vertical Mergers
It is a merger of one company with another, which is involved, in a
different stage of production and/ or distribution process thus enabling
backward integration to assimilate the sources of supply and / or
forward integration towards market outlets.
The main motives are to ensure ready take off of the materials, gain
control over product specifications, increase profitability by gaining the
margins of the previous supplier/ distributor, gain control over scarce raw
materials supplies and in some case to avoid sales tax.
Conglomerate Mergers
It is an amalgamation of 2 companies engaged in the unrelated
industries. The motive is to ensure better utilization of financial
resources, enlarge debt capacity and to reduce risk by diversification.
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It has evinced particular interest among researchers because of the
general curiosity about the nature of gains arising out of them. Economic
gain arising out of a conglomerate is not clear.
Much of the traditional analysis relating to economies of scale in
production, research, distribution and management is not relevant for
conglomerates. The argument in its favour is that in spite of the absence
of economies of scale and complimentaries, they may cause stabilization
in profit stream.
Even if one agrees that diversification results in risk reduction, the
question that arises is at what level should the diversification take place,
i.e. in order to reduce risk should the company diversify or should the
investor diversify his portfolio? Some feel that diversification by the
investor is more cost effective and will not hamper the company’s core
competence.
Others argue that diversification by the company is also essential owing
to the fact that the combination of the financial resources of the two
companies making up the merger reduces the lenders risk while
combining each of the individual shares of the two companies in the
investor’s portfolio does not. In spite of the arguments and counter-
arguments, some amount of diversification is required, especially in
industries which follow cyclical patterns, so as to bring some stability to
cash flows.
Concentric Mergers
This is a mild form of conglomeration. It is the merger of one company
with another which is engaged in the production / marketing of an allied
product. Concentric merger is also called product extension merger. In
such a merger, in addition to the transfer of general management skills,
there is also transfer of specific management skills, as in production,
research, marketing, etc, which have been used in a different line of
business. A concentric merger brings all the advantages of
conglomeration without the side effects, i.e., with a concentric merger it
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is possible to reduce risk without venturing into areas that the
management is not competent in.
Consolidation Mergers:
It involves a merger of a subsidiary company with its parent. Reasons
behind such a merger are to stabilize cash flows and to make funds
available for the subsidiary.
Market-extension merger
Two companies that sell the same products in different markets.
Product-extension merger
Two companies selling different but related products in the same market.
WAYS OF HANDLING A MERGER OR AN ACQUISITION
There are 4 ways in which a merger can be handled
1) Friendly merger
A merger whose terms are approved by the management of both
companies. Usually such mergers have a high probability of success
2) Hostile merger
A merger in which the target firms’ management resists the
acquisition or merger.
3) Tender offer
The offer of one firm to buy the stock of another by going directly to
the stockholders, frequently (but not always) over the opposition of
the target company’s management
4) Proxy Fight
An attempt to gain control of a firm by soliciting stockholders to vote
for a new management team.
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THE WHACKY WORLD OF M&A’S
Terms like "dawn raid", "poison pill", and "shark repellent" might seem
like they belong in James Bond movies, but there's nothing fictional
about them - they are part of the world of mergers and acquisitions
(M&A). Owning stock in a company means you are part owner, and as we
see more and more sector-wide consolidation, mergers and acquisitions
are the resultant proceedings. So it is important to know what these
terms mean for your holdings.
Mergers, acquisitions and takeovers have been a part of the business
world for centuries. In today's dynamic economic environment,
companies are often faced with decisions concerning these actions -
after all, the job of management is to maximize shareholder value.
Through mergers and acquisitions, a company can (at least in theory)
develop a competitive advantage and ultimately increase shareholder
value.
There are several ways that two or more companies can combine their
efforts. They can partner on a project, mutually agree to join forces and
merge, or one company can outright acquire another company, taking
over all its operations, including its holdings and debt, and sometimes
replacing management with their own representatives. It’s this last case
of dramatic unfriendly takeovers that is the source of much of M&A’s
colorful vocabulary.
Hostile Takeover
This is an unfriendly takeover attempt by a company or raider that is
strongly resisted by the management and the board of directors of the
target firm. These types of takeovers are usually bad news, affecting
employee morale at the targeted firm, which can quickly turn to
animosity against the acquiring firm. Grumblings like, “Did you hear they
are axing a few dozen people in our finance department…” can be heard
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by the water cooler. While there are examples of hostile takeovers
working, they are generally tougher to pull off than a friendly merger.
Dawn Raid
This is a corporate action more common in the United Kingdom; however
it has also occurred in the Unites States. During a dawn raid, a firm or
investor aims to buy a substantial holding in the takeover-target
company’s equity by instructing brokers to buy the shares as soon as the
stock markets open. By getting the brokers to conduct the buying of
shares in the target company (the “victim”), the acquirer (the
“predator”) masks its identity and thus its intent.
The acquirer then builds up a substantial stake in its target at the current
stock market price. Because this is done early in the morning, the target
firm usually doesn't get informed about the purchases until it is too late,
and the acquirer now has controlling interest. In the U.K., there are now
restrictions on this practice.
Saturday Night Special
This is a sudden attempt by one company to take over another by
making a public tender offer. The name comes from the fact that these
maneuvers used to be done over the weekends. This too has been
restricted by the Williams Act in the U.S., whereby acquisitions of 5% or
more of equity must be disclosed to the Securities Exchange
Commission.
Takeovers are announced practically everyday, but announcing them
doesn't necessarily mean everything will go ahead as planned. In many
cases the target company does not want to be taken over. What does
this mean for investors? Everything! There are many strategies that
management can use during M&A activity, and almost all of these
strategies are aimed at affecting the value of the target's stock in some
way. Let's take a look at some more popular ways that companies can
protect themselves from a predator. These are all types of what is
referred to as "shark repellent".
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Golden Parachute
This measure discourages an unwanted takeover by offering lucrative
benefits to the current top executives, who may lose their job if their
company is taken over by another firm. Benefits written into the
executives’ contracts include items such as stock options, bonuses,
liberal severance pay and so on. Golden parachutes can be worth
millions of dollars and can cost the acquiring firm a lot of money and
therefore act as a strong deterrent to proceeding with their takeover bid.
Greenmail
A spin-off of the term "blackmail", greenmail occurs when a large block
of stock is held by an unfriendly company or raider, who then forces the
target company to repurchase the stock at a substantial premium to
destroy any takeover attempt. This is also known as a "bon voyage
bonus" or a "goodbye kiss".
Macaroni Defense
This is a tactic by which the target company issues a large number
of bonds that come with the guarantee that they will be redeemed at a
higher price if the company is taken over. Why is it called macaroni
defense? Because if a company is in danger, the redemption price of the
bonds expands, kind of like macaroni in a pot! This is a highly useful
tactic, but the target company must be careful it doesn't issue so
much debt that it cannot make the interest payments.
Takeover-target companies can also use leveraged recapitalization to
make themselves less attractive to the bidding firm.
People Pill
Here, management threatens that in the event of a takeover, the
management team will resign at the same time en masse. This is
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especially useful if they are a good management team; losing them could
seriously harm the company and make the bidder think twice. On the
other hand, hostile takeovers often result in the management being fired
anyway, so the effectiveness of a people pill defense really depends on
the situation.
Poison Pill
With this strategy, the target company aims at making its own stock less
attractive to the acquirer. There are two types of poison pills. The 'flip-in'
poison pill allows existing shareholders (except the bidding company) to
buy more shares at a discount. This type of poison pill is usually written
into the company’s shareholder-rights plan. (To learn more about these
and other shareholders’ rights, see Knowing Your Rights as a
Shareholder.) The goal of the flip-in poison pill is to dilute the shares held
by the bidder and make the takeover bid more difficult and expensive.
The 'flip-over' poison pill allows stockholders to buy the acquirer's shares
at a discounted price in the event of a merger. If investors fail to take
part in the poison pill by purchasing stock at the discounted price,
the outstanding shares will not be diluted enough to ward off a takeover.
An extreme version of the poison pill is the "suicide pill" whereby the
takeover-target company may take action that may lead to its ultimate
destruction.
Sandbag
With this tactic the target company stalls with the hope that another,
more favorable company (like “a white knight”) will make a takeover
attempt. If management sandbags too long, however, they may
be getting distracted from their responsibilities of running the company.
White Knight
This is a company (the “good guy”) that gallops in to make a friendly
takeover offer to a target company that is facing a hostile takeover from
another party (a “black knight”). The white knight offers the target firm a
way out with a friendly takeover.
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HISTORY OF MERGERS IN THE 20 TH CENTURY
In 1998 there were a large number of “blockbuster” mergers and
acquisitions that made past mergers and acquisitions look small by
comparison. For example, the largest announced mergers in 1998 were
the marriage between Citicorp and Traveler’s Group estimated at $77
billion in value and Exxon’s acquisition of Mobil for an estimated $79
billion. Closely following were transactions between SBC and Ameritech
values at approximately $61.8 billion and between Nations Bank Corp
and BancAmerica Corp. valued at approximately $60 billion. AT&T
announced the acquisition of Tele-Communications, Inc, valued at
approximately $43 billion. One of the largest industrial mergers and
acquisition was between Chrysler Group and Daimler Benz AG Valued at
$45.5 billion, was also announced. These were all larger than the
acquisition of MCI by WorldCom announced in 1997 and characterized as
a megamerger by many at approximately $37 billion.
The size and number of M&A transactions continue to grow worldwide.
For example one of the largest mergers in history was announced in
1999 MCI WorldCom and Sprint agreed to a merger values by analyst at
$ 115 billion and $129 billion. But it did not receive regulatory approval
and the respective boards of directors called off the merger agreement in
July 2000. Had the merger been completed it would have been the
second largest global telecommunications company behind only AT&T.
IMPORTANCE OF MERGERS AND ACQUISITIONS
The 1980’s produced approximately 55,000 mergers and acquisitions in
the United States alone. The value of the acquisitions during this decade
was approximately $1.3 trillion as impressive as these figures are; they
are small in comparison to the merger wave that began in the earlier
1990’s approximately in 1993. The number and value of mergers and
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acquisitions have grown each year since 1993. For example in 1997
there were approximately 22,000 mergers and acquisitions roughly 40%
of the total acquisitions during the whole decade of the 1980s. Perhaps
more significant, the value of these mergers in 1997 was $1.6 trillion. In
other words, the acquisitions completed in 1997 were valued at $300
billion more than the value of acquisitions during the 1980s. Interestingly
1980s was often referred to as the decade of “Merger Madness”. The
year 1998 was no different, as noted by the huge Merger and
Acquisitions transactions listed earlier; it was predicted to be another
record year. Interestingly the 6,311 domestic mergers and acquisitions
announced in 1993 had a total value of $234.5 billion for an average
$37.2 million, whereas the mergers and acquisitions announced in 1998
had an average value of $168.2 million for an increase of 352% over
those of 1993. Approximately $2.5 trillion in mergers were announced in
1999, continuing the upward trend.
The merger and acquisitions in the 1990s represent the fifth merger
wave of the twentieth century and their size and numbers suggest that
the decade of 1990s might be remembered for the megamerger mania.
With five merger waves throughout the twentieth century, we must
conclude that mergers and acquisitions are an important, if not
dominant. Strategy for twenty first century organizations
THE MOTIVE BEHIND MERGERS AND
ACQUISITIONS
The strategic Goals of mergers and acquisitions
1) Economies of Scale
2) Consolidation : -
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Media buyers are now consolidating to increase ad rates
3) Globalization : -
For Example Kerry Group an Irish milk processor and dairy cooperative
has become a global player after a string of acquisitions in the food and
ingredients business.
4) Create or gain access to distribution channels : -
A lack of distribution has been one of the main hindrances to growth of
the wine companies. They are overcoming this by a string of acquisitions
for example Fosters.
5) Gain access to new products and technologies : -
Pooling resources helps pharmaceutical companies to speed up research
and development of new drugs and also to share the risks and place a
number of bets on emerging technologies. In the 1990’s 23
pharmaceutical merger to form the top ten players.
6) Enhance or increase products and/or services : -
Mergers between large banks specializing in different sectors for
example when Allianz AG acquired Dresdner Bank.
7) Increase market share or access to new markets : -
Car manufacturers turn to mergers and acquisition for this reason. For
example when Daimler Benz and Chrysler Group merged, when Ford
acquired Jaguar.
8) Diversification
9) To offset threatened loss of market
10)To increase the rate of growth
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11)To improve cyclical and seasonal stability
12)To improve effectiveness of the marketing effort
13)To employ excess capital
14)To change from a holding company to a operating company
THE ALTERNATIVE PROSPECTS OF MERGERS AND
ACQUISITIONS / WHY MERGERS AND ACQUISITIONS?
1) The quest for bigness : -
Many mergers and acquisitions are driven by the simple urge to be
bigger as John Johnstone, retired C E O of Texaco says
2) Saving face : -
As done Mr. Bossidy C E O of AlliedSignal, when he realized he would fail
to meet his promise of achieving growth $20 billion by 2000. So they in
order to save face AlliedSignal acquired Honeywell in 1999 and reached
revenues of $24 billion.
3) Short Term Pressure : -
Mergers and acquisition are undertaken to show good quarterly earnings
as there is intense focus on it.
4)Boredom
5) Fear of being left on the shelf : -
For example when Nestle acquired Ralston Purina, a pet food company, it
was mirrored by Mars’s acquisition of Royal Canin, a French pet-food
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manufacturer. BP’s merger with Amco shortly led to the Mobil’s merger
with Exxon.
6) C E O Hubris
Sometimes Mergers happen to satisfy the egos of C. E. O.
These motives are considered to add shareholder value:
1)Economies of scale
2) Increased revenue/Increased Market Share
3)Cross Selling
4)Synergy: Better use of complementary resources.
5)Taxes
6)Geographical or other diversification
These motives are considered to not add shareholder value:
1) Diversification
2) Overextension
3) Manager's hubris
4) Empire Building
5) Manager's Compensation
6) Bootstrapping
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STAGES OF A MERGER
Pre-mergers are characteristics by the following stages: -
1) COURTSHIP : -
The respective management teams discuss the possibility of a merger
and develop a shared vision and set of objectives. This can be
achieved through a rapid series of meetings over a few weeks, or
through several months of talks and informal meetings
2) EVALUATION AND NEGOTIATION : -
Once some form of understanding has been reached the purchasing
company conducts “due diligence” a detailed analysis of the target
company assets, liabilities and operations. This leads to a formal
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announcement of the merger and an intense round of negotiations,
often involving financial intermediaries. Permission is also sought from
trade regulators. The new management team is agreed at this point,
as well as the board structure of the new business. This phase
typically lasts three or four months, but it can take as long as a year if
regulators decide to launch an investigation into the deal. “Closure” is
a commonly referred term to describe the point at which the legal
transfer of ownership is completed.
3) PLANNING : -
More and more companies use this time before completing a merger
to assemble a senior team to oversee the merger integration and to
begin planning the new management and operational structure.
Post Merger is characterized by the following phases: -
4) THE IMMEDIATE TRANSITION : -
This typically lasts three to six months and often involves intense
activity. Employees receive information about whether and how the
merger will affect their employment terms and conditions.
Restructuring begins and may include site closures, redundancy
announcements, divestment of subsidiaries (sometimes required by
trade regulators), new appointments and job transfers.
Communications and human resources strategies are implemented.
Various teams work on detailed plans for integration.
5) THE TRANSITION PERIOD : -
This lasts anywhere between six months to two years. The new
organizational structure is in place and the emphasis is now on fine
tuning the business and ensuring that the envisaged benefits of the
mergers are realized. Companies often consider cultural integration at
this point and may embark on a series of workshops exploring the
values, philosophy and work styles of the merged business.
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PHASES OF MERGERS & ACQUISITIONS
PHASE I: STRATEGIC PLANNING
Stage 1: Develop or Update Corporate Strategy
To identify the Company’s strengths, weaknesses and needs
1) Company Description
2) Management & Organization Structure
3) Market & Competitors
4) Products & Services
5) Marketing & Sales Plan
6) Financial Information
7) Joint Ventures
8) Strategic Alliances
Stage 2: Preliminary Due Diligence
1) Financial
2) Risk Profile
3) Intangible Assets
4) Significant Issues
Stage 3: Preparation of Confidential Information memorandum
1) Value Drivers
2) Project Synergies
PHASE II: TARGET/BUYER IDENTIFICATION & SCREENING
Stage 4: Buyer Rationale
1) Identify Candidates
2) Initial Screening
Stage 5: Evaluation of Candidates
1) Management and Organization Information
2) Financial Information (Capabilities)
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3) Purpose of Merger or Acquisition
PHASE III: TRANSACTION STRUCTURING
Stage 6: Letter of Intent
Stage 7: Evaluation of Deal Points
1) Continuity of Management
2) Real Estate Issues
3) Non-Business Related Assets
4) Consideration Method
5) Cash Compensation
6) Stock Consideration
7) Tax Issues
8) Contingent Payments
9) Legal Structure
10)Financing the Transaction
Stage 8: Due Diligence
1) Legal Due Diligence
2) Seller Due Diligence
3) Financial Analysis
4) Projecting Results of the Structure
Stage 9: Definitive Purchase Agreement
1) Representations and Warranties
2) Indemnification Provisions
Stage 10: Closing the Deal
PHASE IV: SUCCESSFUL INTEGRATION
1) Human Resources
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2) Tangible Resources
3) Intangible Assets
4) Business Processes
5) Post Closing Audit
MAGIC CIRCLE FOR A SUCCESSFUL MERGER
A company’s integration process can ensure the formation of such a
circle. It acts rather like the Gulf Stream, where the flow of hot and cold
water ensures a continuous cyclical movement. A well designed
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integration process ensures that the new entity’s designed strategy
reaches deep into the organisation, ensuring a unity of purpose. Basically
everyone understands the purpose and logic of the deal. The integration
process can ensure that the ideas and the creativity can are not
dissipated but are fed into the emergent strategy of the organisation this
is achieved through the day to day job of the encouraging and
motivating people and also creating forums where people can think the
impossible. The chart below demonstrates the relationship between
designed and emergent strategy and merger integration. It suggests how
merging organizations can become learning organisation; strategy
formulation and implementation merges into collective learning.
Some merger failures can be explained by this model. For example,
serious problems arise when a company relies too heavily on designed
strategy. If the management team is not getting high quality feedback
and information from the rest of the organisation, it runs the risk of
becoming cut off. Employees may perceive their leaders as being out of
touch with reality of the merger, leading to a gradual loss of confidence
in senior management’s ability to chart the future of the new entity.
Similarly, the leadership team may not receive timely information about
external threats, brought about perhaps by the predatory actions of
competitors or dissatisfies customers with the result that performance
suffers and the new management is criticized for failing to get grips with
the complexities of the changeover.
However, too much reliance on emergent strategy can lead to the sense
of a leadership vacuum within the combining organizations. The
management team may seem to lack direction or to be moving too slow.
This often leads political infighting and territory building and the
departure of many talented people.
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Therefore it is very important that a careful balance is struck between
designed and emergent strategy for integration after the merger
between two companies is done.
SYNERGY
When most people talk about mergers and acquisitions they talk about
synergy. But what is synergy?
Synergy is derived from a Greek word “synergos”, which means working
together, synergy “refers to the ability of two or more units or companies
to generate greater value working together than they could working
apart”. The ability to make 2 + 2 = 5 instead of 4.
Typically synergy is thought to yield gains to the acquiring firm through
two sources
1) Improved operating efficiency based on economies of scale or
scope
2) Sharing of one or more skills.
For managers synergy is when the combined firm creates more value
than the independent entity. But for shareholders synergy is when they
acquire gains that they could not obtain through their own portfolio
diversification decisions. However this is difficult to achieve since
shareholders can diversify their ownership positions more cheaply.
For both the companies and individual shareholders the value of synergy
must be examined in relation to value that could be created through
other strategic options like alliances etc.
Synergy is difficult to achieve, even in the relatively unusual instance
that the company does not pay a premium. However, when a premium is
paid the challenge is more significant. The reason for this is that the
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payment of premium requires the creation of greater synergy to
generate economic value.
The actual creation of synergy is an outcome that is expected from the
managers’ work. Achieving this outcome demands effective integration
of combined units’ assets, operations and personnel. History shows that
at the very least, creating synergy “requires a great deal of work on the
part of the managers at the corporate and business levels”. The activities
that create synergy include
1) Combining similar processes
2) Co-ordinating business units that share common resources
3) Centralizing support activities that apply to multiple units
4) Resolving conflict among business units
The Types of Synergy
1) Operations Synergy
This is obtained through integrating functional activities. It can be
created through economies of scale / or scope.
2) Technology Synergy
To create synergies through this, firms seek to link activities
associated with research and development processes. The sharing of
R&D programs, the transfer of technologies across units, products and
programs, and the development of new core business through access
to private innovative capabilities are examples of activities of firms
trying to create synergies
3) Marketing – Based Synergy
Synergy is created when the firm successfully links various marketing-
related activities including those related to sharing of brand names as
well as distribution channels and advertising and promotion
campaigns.
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4) Management Synergy
These synergies are typically gained when competitively relevant
skills that were possessed by managers in the formerly independent
companies or business units can be transferred successfully between
units within the newly formed firm.
5) Private Synergy
This can be created when the acquiring firm has knowledge about the
complementary nature of its resources with those of the target firm
that is not known to others.
REVENUES
Revenue deserves more attention in mergers; indeed, a failure to focus
on this important factor may explain why so many mergers don’t pay off.
Too many companies lose their revenue momentum as they concentrate
on cost synergies or fail to focus on post merger growth in a systematic
manner. Yet in the end, halted growth hurts the market performance of a
company far more than does a failure to nail costs.
The belief that mergers drive revenue growth could be a myth. A study of
160 companies shows that measured against industry peers, only 36
percent of the targets maintained their revenue growth in the first
quarter after the merger announcement. By the third quarter, only 11
percent had avoided a slowdown. It turned out that the targets’
continuing underperformance explained only half of the slowdown;
unsettled customers and distracted staff explained the rest.
Only 12 percent of these companies managed to accelerate their growth
significantly over the next three years. In fact, most sloths remained
sloths, while most solid performers slowed down. Overall, the acquirers
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managed organic growth rates that were four percentage points lower
than those of their industry peers; 42 percent of the acquirers lost
ground.
Why should one worry so much about revenue growth in mergers?
Because, ultimately, it is revenue that determines the outcome of a
merger, not costs; whatever the merger’s objectives, revenue actually
hits the bottom line harder
Fluctuations in revenue can quickly outweigh fluctuations in planned cost
savings. Given a 1 percent shortfall in revenue growth, a merger can stay
on track to create value only if a company achieves cost savings that are
25 percent higher than those it had anticipated. Beating target revenue-
growth rates by 2 to 3 percent can offset a 50 percent failure on costs.
Furthermore, cost savings are hardly as sure as they appear: up to 40
percent of mergers fail to capture the identified cost synergies. The
market penalizes this slippage hard: failing to meet an earnings target by
only 5 percent can result in a 15 percent decline in share prices. The
temptation is then to make excessively deep cuts or cuts in
inappropriate places, thus depressing future earnings by taking out
muscle, not just fat.
Finally, companies that actively pursue growth in their mergers generate
a positive dynamic that makes merger objectives, including cost cutting,
easier to achieve.
Out of the 160 companies studied only 12 percent achieved organic
growth rates (from 1992 to 1999) that were significantly ahead of the
organic growth rates of their peers, and only seven of those companies
had total returns to shareholders that were better than the industry
average. Before capturing the benefits of integration, such merger
masters look after their existing customers and revenue. They also target
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and retain their revenue-generating talent—especially the people who
handle relations with customers.
Thus it can be noted that if revenue is not monitored properly and if one
does not make an effort to maintain revenue it can result in significant
losses to the company.
MANAGING CULTURES DURING THE PROCESS OF
MERGERS AND ACQUISITIONS
Basing a merger decision purely on financial criteria is similar to deciding
that your in-laws must move in to help share the rent. It may make
financial sense, but it certainly doesn't take into account the disruption
or impact this will have on your family life.
What is culture?
Culture concerns the internalization of a set of values, feelings, attitudes,
expectations and the mindsets of the people within an organization. This culture
provides meaning, order and stability to their lives and influences their behaviour.
Organizational culture exists at two levels.
1) Those values that are shared by the people working in the organization, values that
tend to persist within the organization even if its membership changes.
2) The behaviour patterns or style of an organization. New employees are
automatically encouraged to behave in a similar fashion by their colleagues.
Culture can be categorized into various types such as Power Cultures, Support
Cultures, Task \ Achievement Cultures and Role Cultures.
The various aspects of culture can also be synthesized into a number of dimensions
such as conflict resolution, culture management, customer orientation, and
disposition towards change.
Prior to a merger, the cultures of both organizations should be measured on these
dimensions in order to determine the level of compatibility (or incompatibility) of the
two organisations.
Measuring and understanding the diverse organisational cultures should
form part of the due diligence process, as it provides the negotiators
from both parties with a sound understanding of the human resource
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issues. In this way, the cost of dealing with these issues can then be
factored into the acquisition price of the company. Unless this is done,
an acquirer might, in many cases, find that they have bought less than
they bargained for.
The other advantage of conducting an organisational culture audit before
the companies are officially merged is that it provides a basis to measure
later interventions to merge organisational culture. In addition, it
focuses the energies of the executives in creating a unified organisation
that maximises potential synergies.
The tendency in mergers is to take the easy route and adopt the stronger
culture; however, an opportunity to merge the best of both cultures is
then missed. The earlier the direction of the new company and its
identity is decided upon, as well as which parts of both contributing
cultures are going to be kept, the easier the decision-making process will
be, and the less the chance of losing a valuable aspect from either
culture.
The merger of two culturally different organizations could result in conflict during the
period immediately following the merger or acquisition. This often results in a
decrease in employee morale, anger, anxiety, communication problems and a
feeling of uncertainty about the future.
The organisation that does not take the positive aspects of organisational
culture and the human resources within the acquired company into
account, is missing one of the most valuable assets of that organisation:
Intellectual capital. Executives who fail to consider these issues when
acquiring a company are not serving themselves or their shareholders.
An example of a merger that failed due to improper integration or
understanding of cultures is the Daimler-Benz and Chrysler merger.
People said that even seemingly mundane communication differences
between the employees of the German and the American auto giants
challenged the stability of the combined entity. The basic differences in
the merger started cropping up because their, mentalities were opposite.
Americans were bothered only with the vision and they would fill in the
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details in later. Germans are trained to think deductively and they kept
thinking how they would make it work. Even something as innocuous as
the office-seating layout started straining the relations. The Germans
kept the doors of their office cabins closed because that’s how they are
trained but Americans always thought that the Germans were having
meetings excluding them. The formal Germans and the informal
Americans had a tough time trusting each other.
People in Mergers
An announcement of a merger or an acquisition sends a strong a
message to your competitors and to the recruiting firms that serve them:
your employees are ripe for the picking.
Competitors understand that your employees don’t know whether they
have a job or, if they do, where it will be located, where they fit into the
new company’s structure, how much pay they will receive, or how their
performance will be measured. Key employees usually receive inquiries
within five days of a merger announcement—precisely when uncertainty
is at its highest. And no organizational level is exempt.
Plenty of attention is paid to the legal, financial, and operational
elements of mergers and acquisitions. But executives who have been
through the merger process now recognize that in today’s economy,
the management of the human side of change is the real key to
maximizing the value of a deal.
DISADVANTAGES OF MERGERS AND ACQUISITIONS
1) All liabilities assumed (including potential litigation)
2) Two thirds of shareholders (most states) of both firms must
approve
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3) Dissenting shareholders can sue to receive their “fair” value
4) Management cooperation needed
5) Individual transfer of assets may be costly in legal fees
6) Integration difficult without 100% of shares
7) Resistance can raise price
8) Minority holdouts
9) Technology costs - costs of modifying individual organizations
systems etc.
10) Process and organisational change issues – every organisation
has its own culture and business processes
11) Human Issues – Staff feeling insecure and uncertain.
12) A very high failure rate (close to 50%).
WHY MERGERS & ACQUISITIONS DO NOT
SUCCEED?
Despite the popularity and importance of mergers and acquisitions
among large and small firms, many mergers and acquisitions do not
produce the benefits that are expected or desired by the buying firm.
Some of the reasons could be:
1) High cost of financing
A study conducted by Mckinsey shows that 60% of the acquisitions
examined failed to earn returns greater than the annual cost of capital
required to finance the acquisitions.
2) The potential for managerial hubris
This may preclude an adequate analysis of the target firm or may
produce substantial premiums paid for the firm that is acquired. In
such a case the mergers and acquisitions may not be for the benefit
of the company. An e.g. is Sony’s $5 billion takeover of Columbia
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Studios in which Walter Yetnikoff, the CEO of Sony paid almost $800
million to acquire two producers from their contract at the Warner
Bros. This was a part of the battle with the Warner Bros CEO,
Steven Ross. Yetnikoff convinced his superiors at Sony that the
producers would earn millions of $ for them. Unfortunately both of
them set records for underachievement.
3) Failure to integrate
Diverse cultures, structures and operating systems of the two firms.
4) Failure to do proper due diligence
During the pre-merger or acquisition stage.
5) Bankruptcy of strategy
There is a strong belief that mergers and acquisitions indicate a
bankruptcy of strategy, an inability to innovate. CEO’s in order to
defend their merger plans are often quoted saying “Only the biggest
survive”. This rationale is largely spacious; size does not inoculate a
company from rule-busting innovation. Thus lack of innovation is
another reason for mergers floundering.
6) Employees of the organization
1) The sought-after benefits of greater size and efficiency are nullified by
increased losses related to top-heavy organizations which mean that
the people increase as a result the benefits etc provided to the top
management also substantially increase.
2) There are problems of: reduced job security, increased work loads,
anxiety and stress all of which have a negative effect on the morale of
the employees which in turn affects their productivity.
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3) If the employees and the culture of the companies are not integrated
then this can be a major reason for the failure of the merger and
acquisition
A SURE GUIDE TO UNSUCESSSFUL MERGERS / REASONS
FOR FAILURE OF MERGERS
COSTLY OVERSIGHTS
Overlooking the scientific development of new competitive materials and
new is only one of the faults that sometimes lead to unhappy merger
results. Another costly oversight is failure to consider those new
developments in chemistry, physics, metallurgy, plastics and so on which
are now still in the pre-patent stage but which, when in full boom, may
completely wipe out the market of the for the acquired company’s chief
product. Patents maybe developed for new scientific processes which
chop production costs radically, may make machinery and equipment
obsolete and undermine many of the older processes.
For example, a major manufacturer of electronic organ part decided it
was sound strategy to diversification was a sound move. With the help pf
its major bank, this manufacturer acquired a well-run electronic company
which specialized in electronic circuitry. This west coast producer had a
new process in its lab it was of creating circuitry on glass and plastics
this was done by specially treating glass and plastics and then scratching
a circuit on its surface with a mechanical stylus. The result was a sort of
primitive printed circuit which had an excellent potentiality for savings in
material and labour costs.
About two years after this costly acquisition, the parent manufacturer
discovered that new chemical techniques were available which would
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produce uniform circuits on plastics and glass, outmoding the entire
process of scratching such circuits with a mechanical stylus.
How can this sad but common error be avoided? The answer lies in
understanding how scientific innovations are detected in every industry.
Many branches of the various scientific disciplines run along parallel
path. In this above case actually clues to the new chemical development
were all in the scientific literature of the industry at the time of the
acquisition – but no one had been asked to look.
The Need for Research
The likelihood of making acquisitions mistakes is especially strong
among large companies which are buying a scattered selection of
smaller companies operating in many diverse fields in which technical
products or processes are involved. That this approach is quite common
today is evidenced by the Federal Trade Commission, which indicated
that conglomerate acquisitions were on the rise in many manufacturing
industries. For example purchase if a canning-machinery concern by a
diesel engine manufacture.
The variety of actual conglomerate acquisitions is truly astounding, for
example a truck assembler acquiring a chain of department stores.
Some of these companies have taken the plunge because of a variety of
reasons like they had a lot of cash in the corporate till and were in a
hurry to grow. Others have wanted a leap out of a stagnant industry in
one jump. Still others have chosen to diversify in order to escape their
own industry’s bust-or-boom cycle. A few have decided to move into new
fields because they might run afoul of antitrust laws if they acquired
firms in their own industry.
A large plywood manufacturing company had been selling certain
plywood to aircraft manufacturer for its interiors. On the advice of its
bank it purchased a small chemical factory which had developed a
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substance which was of high transparency and could withstand high
temperatures. This the plywood company felt they could easily supply to
its aircraft manufacturers as windshields
The plywood company acquired the chemical company invested a further
six figure amount. Finally when the chemical subsidiary was ready to
produce the windshields, they found out to their considerable dismay
that researchers in another fields had discovered a better and a cheaper
material then the one they had to offer.
This development had been foreshadowed in research papers in the
learned journals of this field, which were available to any knowledgeable
technical investigator at the time the plywood company was acquiring
the chemical subsidiary. This shows us the importance of research.
CROSS BORDER MERGERS AND ACQUISITIONS
The rise of globalization has exponentially increased the market for cross
border M&A. In 1996 alone there were over 2000 cross border
transactions worth a total of approximately $256 billion. This rapid
increase has taken many M&A firms by surprise because the majority of
them never had to consider acquiring the capabilities or skills required to
effectively handle this kind of transaction. In the past, the market's lack
of significance and a more strictly national mindset prevented the vast
majority of small and mid-sized companies from considering cross border
intermediation as an option which left M&A firms inexperienced in this
field. This same reason also prevented the development of any extensive
academic works on the subject.
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Due to the complicated nature of cross border M&A, the vast majority of
cross border actions have unsuccessful results. Cross border
intermediation has many more levels of complexity to it than regular
intermediation seeing as corporate governance, the power of the
average employee, company regulations, political factors customer
expectations, and countries' culture are all crucial factors that could spoil
the transaction.
Largest M&A deals worldwide since 2000:
Rank Year Acquirer Target Transaction Value(in Mil. USD)
%
1 2000 Merger : America Online Inc. (AOL) Time Warner 164,747 21.83
2 2000 Glaxo Wellcome Plc. SmithKline Beecham Plc. 75,961 10.06
3 2004 Royal Dutch Petroleum Co. Shell Transport & Trading Co 74,559 9.87
4 2006 AT&T Inc. BellSouth Corporation 72,671 9.62
5 2001 Comcast Corporation AT&T Broadband & Internet Svcs
72,041 9.54
6 2004 Sanofi-Synthelabo SA Aventis SA 60,243 7.98
7 2000 Spin-off : Nortel Networks Corporation
59,974 7.95
8 2002 Pfizer Inc. Pharmacia Corporation 59,515 7.89
9 2004 Merger : JP Morgan Chase & Co. Bank One Corporation 58,761 7.79
10 2006 Pending: E.on AG Endesa SA 56,266 7.45
Total 754,738 100
The table above shows the ten largest M&A deals worldwide since 2000.
Table reflects that the largest M & A deal during last 6 year was between
American Online Inc and. Time Warner of worth $ 164,747 million during
2000, which account 21.83% of total transaction value of top ten
worldwide merger and acquisition deals. While second largest deal was
between Glaxo Wellcome Plc. & SmithKline Beecham Plc. Of US $ 75,961
million which was also occurred during 2000, which was 10.06 % of total
transaction value of top ten worldwide M & a deals & third largest deal
was between Royal Dutch Petroleum Co. Shell Transport & Trading Co of
worth US $ 74,559 million, it is 9.87 % of total transaction value of top
ten worldwide M & a deals.
CROSS-BORDER MERGER AND ACQUISITION: INDIA
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Until upto a couple of year’s back, the news that Indian companies
having acquired American-European entities was very rare. However, this
scenario has taken a sudden U turn. Nowadays, news of Indian
Companies acquiring foreign businesses is more common than other way
round.
Buoyant Indian Economy, extra cash with Indian corporates, Government
policies and newly found dynamism in Indian businessmen have all
contributed to this new acquisition trend. Indian companies are now
aggressively looking at North American and European markets to spread
their wings and become the global players.
The top 10 acquisitions made by Indian companies worldwide:
Acquirer Target Company Country targeted Deal value ($ ml) Industry
Tata Steel Corus Group plc UK 12,000 Steel
Hindalco Novelis Canada 5,982 Steel
Videocon Daewoo Electronics Corp. Korea 729 Electronics
Dr. Reddy's Labs
Betapharm Germany 597 Pharmaceutical
Suzlon Energy
Hansen Group Belgium 565 Energy
HPCL Kenya Petroleum Refinery Ltd. Kenya 500 Oil and Gas
Ranbaxy Labs
Terapia SA Romania 324 Pharmaceutical
Tata Steel Natsteel Singapore 293 Steel
Videocon Thomson SA France 290 Electronics
VSNL Teleglobe Canada 239 Telecom
AUTOMOBILE INDUSTRY INTRODUCTION
In the U.S., the 2006 market was approximately 16.5 million cars and
light trucks sold. Production in North America, including cars and trucks
of all types, totaled 11.8 million produced in America, 2.6 million
produced in Canada and 2 million produced in Mexico. Globally, about
49 million new cars were sold in 2006. These estimates are from
Scotiabank Group.
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For example, one result was the phenomenal demand for Toyota’s Prius
hybrid car, which was so great that many purchasers were put on waiting
lists of six months or longer. Toyota responded by raising the price of
the 2005 model and planning production increases. Meanwhile, Toyota
made investments in its Georgetown, Kentucky plant to enable it to
manufacture 48,000 hybrid Camrys yearly there by late 2006—Toyota
will likely wish it had created even more hybrid capacity. Meanwhile,
there has been exceptional demand for Toyota’s Lexus RX400h hybrid
crossover. Ford launched its first hybrids, and other carmakers, including
GM, were greatly encouraged in their own efforts to bring more hybrids
to the market. However, response to hybrids from U.S. makers has been
lukewarm at best. Consumers generally aren’t as impressed with U.S.
hybrid technology as they are with that of Toyota models, and actual
mileage results on the road have been disappointing. Over the mid-
term, many hybrids will be available from a wide variety of makers, and
technology will steadily improve.
While the Big Three struggle, Toyota is attacking mercilessly. It has the
capacity to manufacture over 1.5 million vehicles yearly in North
America.
The parts manufacturing business in the U.S. is equally dismal. Delphi
Corp, the giant parts supplier that was part of GM until 1999, lost nearly
$4.6 billion in 2004 alone and is operating in bankruptcy. In fact, many
U.S. parts manufacturers are experiencing dismal financial results.
Asian car manufacturers are generally enjoying booming success, with
Toyota and Honda at the forefront. South Korean makers Hyundai and
Kia have established themselves as true, high-quality manufacturers with
a growing global customer base.
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TRENDS OF MERGERS & ACQUISITIONS IN
AUTOMOBILES THE INDUSTRY
Recent mergers and acquisitions in the automotive industry are largely
driven by a combination of excess capacity, the increasing costs of
innovation and technical development, and regulatory changes. 1998
turned out to be a record year for M&As within the automotive industry.
In fact, more than 600 deals were undertaken, with disclosed values
exceeding US$80 billion PriceWaterhouseCoopers, 1999a). Of the total
value, more than two-thirds arose from cross-border M&As, dominated by
the “mammoth merger” between Chrysler and Daimler-Benz which alone
accounted for US$39 billion. The rapid restructuring of the automotive
industry has attracted a great deal of attention. The merger between the
US company Chrysler and Daimler-Benz of Germany together with other
large-scale deals – Volkswagen’s take-over of Rolls Royce, Ford’s take-
over of Volvo’s car division, and the alliance between Renault and Nissan
– is evidence of an industry consolidating at an accelerating speed. The
merger wave is also affecting all parts of the automotive industry:
vehicle companies, component suppliers and retail sectors, and is to a
large extent taking place across national borders.
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Figure shows the increase in deals in the motor vehicle and parts
manufacturing industry.
Consolidation and internationalisation are far from new to the automotive
industry, and especially to vehicle producer companies. The vehicle
market is already highly concentrated, with some ten leading companies
accounting for more than 50% of the total market. However, the current
restructuring trend is taking place in a somewhat new context: markets
have been liberalised and new and different countries have entered both
on the consumer and producer sides.
Case Study No.1
Daimler-Benz and Chrysler
NATIONALITY: - Germany (Daimler-Benz), U.S.A. (Chrysler)
DATE : - November 17, 1998
AFFECTED : - Daimler-Benz AG, Germany, founded 1882
Chrysler Corp., USA, founded 1924
FINANCIALS : - DAIMLER BENZ
Revenue (1998) :- $ 154.61 Billion
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Employees (1998) :- 4,41,500
CHRYSLER CORP
Revenue (1998) :- $ 91.9 Billion
Employees (1998) :- 104,000
THE OFFICERS: - DAIMLER CHRYSLER
Co-Chairman and Co-CEO : - Robert Eaton
Co-Chairman and Co-CEO : - Juergen E. Schrempp
Chief Financial Officer : - Manfred Gentz
Sr. VP. Engg. And Tech : - Bernard Robertson
Exec VP Prod Dev and Design : - Thomas C. Gale
Overview of the Merger
The $37 billion merger of Chrysler corp., the third largest car maker in
the U.S., and Germany’s Daimler – Benz AG in November of 1998 rocked
the global automotive industry. In one fell swoop, Daimler – Benz
doubled its size to become the fifth- largest automaker in the world
based on unit sales and the third-largest based on annual revenue.
Employees totalled 434,000. Anticipating $ 1.4 billion in cost savings in
1999, as well as profits of $ 7.06 billion on sales of $ 155.3 billion, the
new Daimler–Chrysler manufactured its cars in 34 countries and sold
them in more than 200 countries.
History of Daimler – Benz AG
In 1882, Gottlieb Daimler, a gunsmith who studied engineering in several
European countries, joined with researcher Wilhelm Maybach to set up
an experimental workshop. They tested their first engines on a wooden
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bicycle, a four- wheeled vehicle, and a boat. The French rights to
Daimler’s engines were sold to Panhard – Levassor.
In 1906, Ferdinand Porsche replaced Daimler’s oldest son, Paul Daimler,
as chief engineer at the company’s Austrian factory after Paul returned
to the main plant in Stuttgart, Germany.
The Daimler and Benz companies began coordinating designs and
production in 1924, but they maintained their own brand names. Two
years later, Daimler and Benz merged to become Daimler – Benz AG,
which began producing cars under the name Mercedes – Benz. The
merger allowed the two firms to avoid bankruptcy in the midst of poverty
and inflation in Germany after World War 1. In 1939, the German
government took over that nation’s auto industry, appropriating its
factories to manufacture trucks, tanks, and aircraft engines for the
Luftwaffe during World War 2.
In 1957, convicted war criminal Friedrich Flick raised his personal stake
in Daimler-Benz to over 37%, gaining controlling interest as an individual
stockholder. Within two years, Flick’s $20 million investment had grown
in worth $200 million, making him Germany’s second ranking
industrialist. His holdings allowed him to push the firm to buy 80% of its
competitor, Auto Union, in order to gain a smaller car for the product
line; the acquisition made Daimler-Benz the fifth-largest auto-mobile
manufacturer in the world and the largest outside the U.S.
Daimler-Benz purchased Freightliner, a manufacturer of heavy trucks,
just as sales dropped with the onset of the U.S. recession in the early
1980’s.
Daimler-Benz acquired a stake in Metallgesellschaft AG, a Frankfurt-
based international supplier of raw materials and technological services,
in 1991. Several major stock acquisitions and working agreements with
international corporations – such as Fokker of Netherlands, Germany’s
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Siemens AG, and Sweden’s Electrolux – were completed in 1992. That
year, Daimler-Benz announced 7,500 layoffs in addition to 20,000
previous job losses. By 1995, 70,000 jobs had been eliminated.
With competitor BMW closing on the leadership of German luxury car
sales, Daimler-Benz relied heavily on revision of its popular Mercedes
190 compact in 1993. Instead, a $1.05 billion loss was reported, one of
the company’s worst ever. In 1994, the largest rights issued in German
history was completed as Daimler-Benz’s one-for-ten offer left U.S.
shareholders with over an 8% stake in the company. The entire
transaction totalled $1.9 billion.
History of Chrysler Corporation
In 1924, the Maxwell Motor Corporation, headed by Walter Chrysler,
produced the first Chrysler automobile. Over 32,000 models were sold for
a profit in excess of $4 million. On June 6, 1925, Chrysler was
incorporated when Walter Chrysler took over Maxwell Motor Car. On
accomplishments included the introduction of the Chrysler Four Series 58
with a top speed of 58 mph.
By 1927, Chrysler had sold 192,000 cars to become fifth in the industry.
The company acquired Dodge Brothers, Inc., quintupling its size. In 1933,
Chrysler surpassed Ford, its major competitor, in annual sales for the first
time.
The company continued to thrive, and in 1934, Chrysler developed its
first automatic overdrive transmission, as well as the industry’s first one-
piece, curved glass windshield. In 1938, Chrysler established and
became minority owner in Chrysler de Mexico.
In 1946, Chrysler began production of the first hardtop convertible. Four
years later, the company expanded outside North America by purchasing
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a majority of Chrysler Australia, Ltd. Electric powered windows were
developed as well.
The Hemi, a hemispheric combustion chamber V-8 engine, and the
Oriflow shock absorbers were designed in 1951. By 1955, drivers of
Chrysler products were the first to enjoy all-transistor car radios and the
convenience of power steering. The company ended the decade by
developing electronic fuel injection as an alternative to carburettors.
In 1960, production of the De Soto ceased. Chrysler introduced its first
5/50 warranty – five years or 50,000 miles on drive train components – in
1963. Safety innovations such as front seat shoulder harness and a self-
contained rear heater/defroster system were developed in 1966, as well
as the Air Package, a system for controlling exhaust emissions.
Continual management changes were blamed for a $4 million loss in
1969; the firm was operating at only 68% of its capacity. Chrysler fared
no better during the 1970s. After losing $52 million in 1974 and $250
million in 1975, the board tapped former Ford president Lee Iacocca to
take over as president and CEO.
In January of 1980, President Jimmy Carter signed the Chrysler Corp.
Loan Guarantee Act, which provided the company with $1.5 billion in
federal loan guarantees and stipulated that Chrysler sell its corporate
jets. In July of that year, Iacocca began appearing in Chrysler’s television
advertisements in an effort to boost sales. The next year, however,
Chrysler reported a record loss of $1.7 billion, cut inventories by $1
billion, and reduce the white collar staff by 50%.
In 1982, Iacocca released his autobiography, which became the best-
selling non-fiction hardcover book in the U.S. Hoping that interest in the
company would increase as well, Chrysler paid off its government loan
seven years early.
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Turnaround efforts paid off with the record 1984 net profit of $2.4 billion.
That year, Chrysler acquired 15.6% in Officine Alfieri Maserati SpA. In
1985, it brought Gulfstream Aerospace for $367 million and began a joint
venture, Diamond Star Motors, with Mitsubishi Motors Corp. to build
small cars in the U.S. Later in 1987, Chrysler was divided up as a holding
company with four divisions: Chrysler Motors, Chrysler Financial, Chrysler
Technologies, and Gulfstream Aerospace. The holding company’s
headquarters moved from Highland Park, Michigan, to Manhattan, New
York.
Shareholders approved the acquisition of Renault’s 46% stake in
American Motors Corp., maker of Jeep and Eagle vehicles, for $800
million.
Market forces driving the Merger
The deal between Chrysler and Daimler-Benz was pit into motion in the
early 1990’s, when executives at Daimler Benz realized that the luxury
car market they targeted with the Mercedes line was approaching
saturation. Because traditional markets had matured and consumers in
emerging markets were typically unable to afford higher prices autos,
Mercedes began to look for a partner that would both broaden its appeal
and give it the scale it needed to survive industry consolidation.
Eventually, Daimler-Benz settled on Chrysler because it’s broad range of
less costly vehicles and its third place status in the US.
The trend of globalisation had forced Chrysler to take look at foreign
market in mid 1990s. With the majority of sales coming from North
America, the company was looking for a way to break into overseas
markets. After plans in 1995 to jointly make and market automobiles in
Asia and South America with Daimler-Benz fell apart, Chrysler devised
lone star, a growth plan that called for exporting cars built in North
America instead of spending money on building plants overseas. The
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plan faltered because the firm did not have enough managers placed in
international locations to boost sales as quickly as Chrysler wanted.
Daimler-Benz also pursued growth of its own after attempts at an
alliance with Chrysler failed in 1995.the German automaker built a plant
in Alabama to manufacture its M-Class Sports Utility Vehicle and a small
A-Class model. Quality control problems with both autos plagues he
factory in 1996 and 1997. To make his firm more attractive to suitors,
Daimler-Benz CEO Jurgen Schrempp listed it on the New York Stock
Exchange, began using US GAAP guidelines, and reduced the
independence of the Mercedes by removing its separate board of
directors. A merger seemed the company’s only option.
Approach and Engagement
Daimler-Benz CEO Jurgen Schrempp called Chrysler CEO Eaton in January
of 1998. They met briefly at Chrysler’s headquarters during North
American International Auto Show in Detroit. A deal between Daimler-
Benz and Chrysler seemed inevitable until Ford’s Alex Trotman contacted
Schrempp about a possible alliance. Trotman and Schrempp met in
London in March to discuss terms. Prior to the second meeting, however
the deal fizzled after Trotman admitted to Schrempp that the Ford family
was unwilling to consider a deal that would reduce its 40% stake of
Ford’s voting stock.
Schrempp and Eaton rekindled their merger negotiations and their
merger negotiations and the $37 billion deal was officially announced on
May 7 in London. According to the terms of the agreement the new firm –
named DaimlerChrysler- would be incorporated in Germany 58% owned
by former Daimler-Benz shareholders, and managed mainly by former
Daimler-Benz Executives. Schrempp would gain full control. After more
than 98% of Daimler-Benz shares were converted into DaimlerChrysler
shares, the new firm was officially listed on worldwide stock exchanges
on November 17, 1998.
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Products and Services
After the merger, DaimlerChrysler manufactured the following makes of
automobiles: Chrysler, Dodge, Eagle, Jeep, Mercedes-Benz, Plymouth and
Smart, a compact car. Chrysler passenger car made up 41% of total
sales; Daimler passenger accounted for 24%. Other automotive
operations, which secured 17% of sales, included four wheel drive
vehicle, commercial vehicles, tucks and busses. Services accounted for
9%of sales and encompassed financial, insurance brokerage, information
technology, telecommunications and real estate management.
Aerospace operations made up another 6% of total revenues.
Changes in the Industry
The new DaimlerChrysler moved into the fifth place spot among global
automakers based on the four million vehicles it was estimated to
produce in 1999. Anticipated sales of $155.3 billion positioned the firm
as third in the world in terms of revenue. Analysts heralded the deal as
the first in a wave of intense global consolidation among the industry’s
leading players. Accordingly, DC stock continued to outperform Ford
Motor company co., General Motors Corp., Dow Jones Industrial average
in May of 1999. 1 year after the deals formal announcements
Review of Outcome
The new firm faced its first hurdle immediately. Standard & Poors chose
not to list DC in the Standard & Poor’s 500 stock index because the firm
had become the German entity Standard & Poors fund managers were
forced to sell their Chrysler shares, and because they were unable to
exchange them for DC shares the new firm lost a wide shareholder base.
On a more positive note DC did not face the expense of spending 5-10
years integrating its Computer Aided Design Systems or its financial
applications because the 2 firms already used the same system.
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The success of the merger depends upon how well the 2 disparate teams
mesh. For instance Daimler will handle Fuel-Cell and diesel technology
and Chrysler will keep it for electric-vehicle project. Other decisions are
tougher Chrysler invented the minivan but Daimler was far along in
developing its own. So the two are debating whether to ditch Daimler’s
version or offer a separate a luxury model.
To achieve the promised $1.4 billion in savings- the anticipated outcome
of the geographic reach and the product lines, but not of the lay-offs that
typify mergers of this scope-integration efforts began immediately with
the financing departments of both firms first on the list. Most analysts
consider purchasing likely to be the second candidate for cost cutting
efforts as DC works to leverage its size to garner discounts for such
commodities as steel and services like transportation.
In both Europe and North America Chrysler and Mercedes showroom will
remain separate, although warehousing, logistics, service and technical
training will be combined. Complete integration of purchasing operations
is scheduled to take 3-5 years; merging manufacturing functions will take
even longer, as might ironing out anticipated cultural clash between the
Germans and the Americans
Case Study No. 2
Renault AND VOLVO
NATIONALITY: - France (Renault), Sweden (Volvo)
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DATE : - March 31, 1999
AFFECTED : - Renault S.A., France, Founded 1989
AB Volvo, Sweden, Founded 1915
FINANCIALS : - RENAULT
Revenue (1998) :- FFr 195 Billion
Employees (1998) :- 1,38,321
AB VOLVO
Revenue (1998) :- SEK 212.9 Billion
Employees (1998) :- 79,820
THE OFFICERS: - RENAULT S.A.
Co-Chairman and Co-CEO : - Louis Schweitzer
Exec. V.P., Worldwide Sales & Marktg : - Patrick Faure
Exec. V.P. : - Carlos Ghosn
Chief Financial Officer : - Christian Dor
AB VOLVO
Chairman : - Hakan Frisinger
President and CEO : - Leif Johansson
Deputy CEO and Exec. V.P. : - Lennart Jeansson
Executive V.P. : - Arne Wittlov
Overview of the Acquisition
The collapse of the between Renault and Volvo brought an end to their
three year engagement. The two companies had formed an alliance in
1990, and in 1993 set their official merger date as January 1994. Before
they could complete the union, however Volvo’s managers and
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shareholders voiced their objections to the terms of the agreement,
pressuring Volvo’s president, Soren Gyll, to terminate the deal.
History of Regie Nationale des Usines -Renault S.A.
After persuading his brothers, Fernand and Marcel, to invest FFr. 30,000
in his automobile company, Louis Renault formed Renault Frères in 1989
and produced the world’s first sedan. Only two years later, the company
had become competitive race car drivers to promote their company’s
products. Consequently, Marcel Renault was killed in 1903 while
competing in the Paris-Madrid car race.
The de Gaulle provisional government nationalized Renault’s company,
which it renamed Regie Nationale des Usines Renault S.A. it operated the
company along commercial lines, building up its international production
of machine tools and making it the first in Europe to use automation.
In 1948 Renault manufactured a miniature car called Qautre Chevaux (4
C.V. or hp), which had been secretly developed during the war by
Renault technicians. Two years later it released the Dauphine,
manufactured to fit into the market opening between inexpensive
economy models and the higher priced models. For five years, the
Dauphine outsold all other models.
By 1959 it ranked as the worlds sixth largest automobile manufacturer in
the world. As the American market began to shrink in 1970s, however,
sales of the Dauphine dropped 33%. Renault adjusted its products to
meet specific requirements of the American motorist, and began
production of the cylinder R-16.
In 1976 Renault merged its Peugeot-Citroen truck subsidiary with its own
Saviem truck company, thereby creating the alrget producer in France,
Renault Vehicle Industries.
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In 1980 Renault purchased 46.4% of AMC. In the years that followed,
both AMC and Renault suffered from an industry slump and increased
competition from Japanese automakers. Renault recorded a loss of $1.5
billion in 1984. George Besse took the company’s helm in 1985, and set
about instituting a cost reduction program that staff and encouraged the
concept of profit to the state owned company.
In 1987 Renault withdrew from the U.S. market by selling its stake in
AMC to Chrysler Corp. for $200 million. It formed a partnership with AB
Volvo in 1990 to cooperate in international auto and truck operations.
Renault edged toward privatization as the French government reduced
its stake in the company from 80% to 52% in 1995, and then to 46% in
1996. The firm forged a relationship with Italian car manufacturer Fiat
SpA in 1998, when it arranged to acquire part of Fiat’s Teksid subsidiary.
The two companies also joined their bus making business the following
year. In May 1999 Renault acquired 36.8% stake in Nissan for $5.4
billion.
History of AB Volvo
AB Volvo was formed in 1915 as a subsidiary of AB Svenska
Kullagerfabriken, a Swedish ball bearing manufacturer. It began the
assembly of cars in 1927 and of trucks in 1928. Two years later it
acquired the means to safeguard the delivery of engines by purchasing a
majority interest in AB Pentaverken. In 1934 Volvo began the production
bus chassis and marine engines. The following year the company gained
a listing on the Stockholm Stock Exchange.
Volvo entered the 1950s by acquiring AB Bolinder-Munktell, a Swedish
manufacturer of farm machinery. By 1951 the company concentrated on
tractor production and soon accounted for one out of every five tractors
sold in Sweden. Passenger car volume also surpassed that of trucks and
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buses, partly due to heavy demand for Volvo PV 444 model, which had
been introduced in 1944.
In 1981 Volvo diversified in oil industry with the acquisition of
Beijerinvest Group. In 1991 Volvo spent $2 billion to update its plant and
develop the 800 series of performance-oriented family sedans.
In 1999 Volvo sold its automobile operations to Ford Motor in 1999,
leaving the company with operations in only heavy duty vehicles.
Market forces driving the merger
By 1990 Sweden’s export sales had began to slow. As a result, many of
the nation’s automotive companies were squeezed financially. One such
firm, SAAB, reacted by entering into an alliance with General Motors
whereby GM gained an effective control of the company. Volvo, too
looked, for foreign assistance. That year it entered into a complex
arrangement with France-based Renault to share increasingly high cost
of research and product development. The market declined continued,
however and Volvo recorded a loss of $649 million in 1992.
Moreover, the industry showed no signs of rebounding in the immediate
future. West European car sales dropped 16.5% in the first eight months
of 1993 and increased competition would soon arise from Japanese
automakers, as the limitations on European imports were scheduled to
be lifted by the European Union in 1999.
Hoping to strengthen its position Volvo entered into a merger agreement
with Renault in September 1993. The combined company would be sixth
largest car manufacturer, after General Motors, Ford, Toyota,
Volkswagen and Nissan. It hoped to achieve gains in the sector by
reaping the rewards from cross-marketing in luxury cars, Volvo’s
strength, as well as compact cars, Renault’s speciality. Yet the merged
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company’s biggest impact would be in commercial vehicles, as the
separate companies had substantial operations in Europe and the U.S.
they would rank the combined firm second in that industry, behind
Mercedes-Benz.
Approach to the Engagement
On September 6, 1993, Renault and Volvo announced their merger
accord. Renault was a state owned company that meant that the French
government would hold stake in the combined enterprise. This brought a
patriotic tremble to those vested in Volvo, a Swedish company. And that
tremble developed into an outright shudder when the details of the
merger deal were revealed.
On October 6 the Swedish Shareholders Association, an alliance of
individual investors who combined to own 10% of Volvo, voiced its
objections to the deal.
Three points in particular that disturbed the association was, first, that
deal gave French government a “Golden Share”, which enabled it to
restrict the voting rights of any investor, including Volvo, to 20%.
Secondly, the companies failed to produce compelling benefits arising
form the merger that could not be achieved from a continuation of their
partnership. Finally French government was elusive about the date it
planned to privatize Renault, until that time merger’s benefits to the
Swedish Shareholders would be limited.
The companies tried to quell to growing number of oppositionists. Volvo
issued revised statement of the merger’s projected savings, reporting
that they would be $7.4billion, up from the $4.8billion that had been
earlier reported. But they dint explain the source of extra savings. The
French government expressed its assurance that it would not abuse its
golden share rights.
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The efforts to charm investors and managers proved ineffective, and in
November 30 the last straw broke. A leaked financial report indicated
that while Volvo’s monthly earnings increased markedly, Renault’s
dropped sharply. Soren Gyll, Volvo’s CEO, quickly conducted an informal
poll of the company’s 25 senior managers, who overwhelmingly declared
that the mergers would not work. Gyll telephoned Volvo’s chairman, Pehr
Gyllenhammer who was in the U.S. at the time, and informed him of the
developments; Gyllenhammer terminated the deal and resigned the
following day.
Products and Services
Renault was divided into two main segments passenger cars included
such brands such as Clio II, Espace, Kangoo, Laguna, Megane, Scenic,
Nevada , Safrane, Twingo and Spider. Commercial Vehicles were
comprised of vehicles for long haul goods transport, distribution
transport and passenger transport as well as construction trucks, public
service vehicles and military vehicles.
Volvo operated in five segments Volvo Buses, Volvo Trucks, Volvo
Construction Equipment Group, Volvo Penta Corp. (marine and industrial
engines) and Volvo Aero.
Review of the outcome
The breakup dint just bring about an end to the merger deal, it also
terminated their previous partnership. Volvo and Renault dissolved their
joint purchasing and quality control accords. They also surrendered most
of the seats held on the other’s board; Renault’s chairman Louis
Schweitzer, however, retained his seat on Volvo’s board. Renault
reduced its stake in Volvo to 3.45% on February 3, 1994 and Volvo sold
its 11.38% in Renault to the Union Bank of Switzerland on July 31, 1997.
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Case Study No. 3
FORD AND VOLVO
NATIONALITY: - U.S.A. (Ford), Sweden (Volvo)
DATE : - March 31, 1999
AFFECTED : - Ford Motor Co., U.S.A., Founded 1903
AB Volvo, Sweden, Founded 1915
FINANCIALS : - FORD MOTOR CO.
Revenue (1998) :- $144.4 Billion
Employees (1998) :- 345,175
AB VOLVO
Revenue (1998) :- SEK 212.9 Billion
Employees (1998) :- 79,820
THE OFFICERS: - FORD MOTOR CO.
Chairman : - William C. Ford, Jr.
President and CEO : - J. A. Nasser
Vice Chairman : - W. Wayne Booker
Vice Chairman and Chief of Staff : - Peter J. Pestillo
Exec. V.C. and C.F.O. : - John M. Devine
AB VOLVO
Chairman : - Hakan Frisinger
President and CEO : - Leif Johansson
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Deputy CEO and Exec. V.P. : - Lennart Jeansson
Executive V.P. : - Arne Wittlov
Overview of the Acquisition
Ford motor company secures its rank as the world’s number-two
automaker with its purchase of Volvo car corp., the automotive business
of AB Volvo. This $6.45 billion deal followed the previous years
DaimlerChrysler formation and perpetuated the trend of mega mergers
within the global auto industry. It also brought the industry in step closer
to consolidation of players into the last remaining Global six.
History of Ford Motor Co.
Henry ford built his first steam engine in 1978 and five years later
completed his first gasoline fed, one cylinder, and internal combustion
engine. In 1896 he built his first car, called the Quadricycle, which he
sold to finance the construction of a lighter weight race car. In 1899, he
resigned from Edison lighting company to form the Detroit Automobile
Co. Two years later, however, the company faces bankruptcy due a
production rate that was lower anticipated.
Meanwhile, Ford built two four-cylinder, 80 horsepower racecars in his
shed, the 999 and the arrow. When one of Ford’s racecars prevailed
against Alexander Winston’s champion car, the bullet, his investors
agreed to establish a car production company for him to run. Ford’s
tenure there was short-lived, However, as he spent more time in the
development of new racecars than in the type of car that the investors
planned to produce and sell. He was asked to resign.
In 1902 Ford formed a partnership with Alex Malcolmson to design and
built a prototype for a new car. Twelve investors raised $28000 to
finance the company which was capitalized at $150000. The next year,
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the Ford Motor Co. sold more than 17000 cars. It soon introduced three
new models: the model B, the model C and the model F, ranging in price
from $800 to $2000. After that there was no looking back.
The Model T was the product of Ford’s assembly-line concept that
revolutionized the manufacturing of all types including car making,
unveiled in 1908, The Model T sold more than 10,000 units in its first
year. Its success was attributed to its reliability and low price, $825. For
the first time, automobile ownership was no longer a luxury of the urban
rich. The production of the model T was stopped at its 15 millionth
product in 1927.
The Ford Mustang was introduced in 1964, and sold more than 100,000
units within the first 100 days of its availability. Targeted to American
youth, the car’s concept was credited to the general manager Lee
Iacocca.
In 1980 Ford experienced a loss of $1.54 billion first of a string of losses
during the decade. Attributed to the oil crises of the 1970s, these results
called for the closure of 15 plants and the reduction of 33% of the
workforce in 1983. The company emerged from the crisis by 1984, when
its sales and profits reached record levels.
It exited from the heavy duty truck business by selling those operations
to Freightliner, a unit of Daimler-Benz. The next year it spun off
Associated First Capital and sold its interest in Kia Motors. Ford
purchased the automaking business of Volvo for $6.45 billion in 1999.
History of AB Volvo
AB Volvo was formed in 1915 as a subsidiary of AB Svenska
Kullagerfabriken, a Swedish ball bearing manufacturer. It began the
assembly of cars in 1927 and of trucks in 1928. Two years later it
62
acquired the means to safeguard the delivery of engines by purchasing a
majority interest in AB Pentaverken. In 1934 Volvo began the production
bus chassis and marine engines. The following year the company gained
a listing on the Stockholm Stock Exchange.
Volvo entered the 1950s by acquiring AB Bolinder-Munktell, a Swedish
manufacturer of farm machinery. By 1951 the company concentrated on
tractor production and soon accounted for one out of every five tractors
sold in Sweden. Passenger car volume also surpassed that of trucks and
buses, partly due to heavy demand for Volvo PV 444 model, which had
been introduced in 1944.
In 1981 Volvo diversified in oil industry with the acquisition of
Beijerinvest Group. In 1991 Volvo spent $2 billion to update its plant and
develop the 800 series of performance-oriented family sedans.
In 1999 Volvo sold its automobile operations to Ford Motor in 1999,
leaving the company with operations in only heavy duty vehicles.
Market Forces Driving the Acquisitions
Global automobile industry in the late 1990s was showing signs of a
consolidation trend. Manufacturers throughout the world were feeling the
pinch of flat sales, pricing competition and international overcapacity. In
1998 DaimlerChrysler was formed by the merger of two automotive
giants, and erased all doubt that small independent companies would
survive on their own for much longer.
Analyst and industry players were predicting a shakeout of the industry
into the global six General Motors, Ford, DaimlerChrysler, Toyota, Honda
and Volkswagen. These super giants were expected to achieve their
entry in this elite group by securing the acquisitions of their smaller
brethren.
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As one of the relatively smaller companies AB Volvo was actively seeking
partner even though it was far from hurting. It had built a valuable
reputation as one of the safest brands available and had a socially and
environmentally responsible corporate image. Yet in the automotive
sector, this Swedish concern was slow to institute innovations, and
lacked the financial resources to enable to pick up the pace. Part of its
reticence to invest heavily in its auto operations, known as Volvo Car
Corp., was that the company’s commercial vehicle business accounted
for a greater share, 60%, of overall revenues. By divesting its auto
business, which would never survive independently anyway, Volvo could
focus on increasing its commercial business.
The addition of the Volvo brand to Ford Motor’s line-up would increase its
luxury car offerings, which at that time consisted of Jaguar, Lincoln and
Aston Martin. It would attract new classes of luxury car customers –
females and consumers under the age of 55. Volvo would also provide
Ford with European manufacturing plants, as well as the potential for the
exchange of vehicle platforms, or chassis, between the combined
company’s models.
In the months prior to the announcement of a definite deal, rumours
were flying about potential partners for Volvo. Ford and Volkswagen had
been named as possible suitors, but it was the Italian automaker Fiat SpA
that particularly wanted to acquire Volvo. According to reports, Fiat had
offered $7 Billion for the entire concern, including the commercial
vehicles business. Volvo rejected that offer, since it wanted to maintain
and develop those operations itself.
Instead, Volvo formed a [act with Ford. announced on January 28, 1999,
the deal called for the purchase of Volvo brand name on passenger
vehicles, including car, minivans, sports-utility vehicles, including cars,
minivans , sports utility vehicles and light trucks, while Volvo retained
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the right to use the Volvo name on all commercial vehicles and non auto
products.
Volvo shareholders approved the deal on March 8, 1999, and the
regulatory bodies did likewise on March 29, 1999. On March 31, 1999,
Volvo Car Corp. was transferred to Ford Motor, Which paid the Swedish
corporations $700 million and SEK 10.2 billion was scheduled to be paid
within two years.
Products and Services
Ford Motor created the Premier Automotive Group to hold its luxury
brands: Volvo, Aston Martin, Lincoln and Jaguar. Before the addition of
Volvo, Ford’s luxury operations sold 250,000 vehicles by mid 1999. With
the newly acquired brand, the company expected its global sales to
reach 750,000 in the year 2000. Ford’s other automotive brands were
Ford and Mercury, as well 33% interest in Mazda. Additionally, the
company operated in Financial Services Sector, consisting of Ford Credit,
Hertz and USL Capital.
After divesting itself to its automotive business AB Volvo in five
segments: Volvo Buses, Volvo Construction Equipment Group, Volvo
Penta Corp. (marine and industrial engines), and Volvo Aero.
Changes to the Industry
Ford secured its second-place position, behind General Motors, among
the world’s automotive companies, acquiring a 16% global market share.
Its 11.7% share of the European market just edged out GM’s 11.5%
share, although they trailed far behind the 18.4% share held by the
leader of that market Volkswagen AG.
A June 1999 issue of the Detroit Free Press reported results of a study
predicting that ford would soon overtake GM as the world’s leader in
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terms of both revenue and production. According to Autofacts Group, a
unit of the PricewaterhouseCoopers, Ford’s global production was
expected to reach 9.15 million cars and light trucks by 2005, while GM
would trail slightly behind with 9.1 million.
Review of the Outcome
Ford vowed to have minimal impact on the operations and the culture of
Volvo Car Corp. Still, employees of the newly acquired company were
somewhat anxious about being the subordinates of an aggressive
American boss, particularly Jacques Nasser, who worked so hard that he
shunned vacations. Swedish companies were traditionally run by
compromise rather than direct order and their bosses encouraged a
healthy balance of work and play.
No layoffs or closures were announced immediately after the deal, but
they were expected to be forthcoming. Additionally Swedish suppliers
admitted that they dint have the large scale capabilities to service Ford,
and neither could they ever hope to compete against Ford’s established
suppliers
Conclusion
“We’ve achieved our target”
You can almost hear the sigh of relief from everyone seated in the
boardroom. Months of sleepless nights and hours of work have boiled
down to this one-day and yes they have been victorious.
This line, this scene is the dream of every company that goes in for a
merger or an acquisition. To achieve the set target is a remarkable feat
considering the fact that most mergers don’t succeed.
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Over the years there have been millions of mergers, the value of which
keeps increasing as the years go by, but yet no one has been able to
come up with a sure shot formula for success and no one probably ever
will.
One of the main reasons for this is that every organization is different
from the other; no two firms have the same work cultures and
philosophies, just like no two people in the world are exactly similar. The
requirements for success for each firm would differ.
This does not mean that the organization does not strive to achieve
success or that it is out of reach. It is not. The company should work
towards their set goals. The issues that I have discussed in the report
should be looked at closely, because if they’ve done everything right and
it still does not work means that they were a misfit form the beginning.
Before making a final deal they must do a due diligence. This will help
them in uncovering any facts that might not be blatantly visible but can
cause a hindrance to the merger.
The people who have a stake in the firm, be it employees or customers
should be informed about the going-ons in the company. This would
assure their full support to the firm.
The price structure should be studied in detail. The company should be
on their toes all the time making sure that the competitor is not taking
advantage of their vulnerable position when they are in the process of a
merger or an acquisition.
The scope of mergers is tremendous because there are so many
fragmented players especially in India, they would not be able to
withstand competition from the multinationals. Today in a lot of sectors
there is fierce competition like telecom, this excessive competition at
some point of time will lead to consolidation in the industry because they
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cannot keep playing price games, at some point they will have to stop.
Fixed costs are rising, consumers are becoming global, their demands
have to be serviced and mergers are considered to be the simplest way
to expand since you don’t incur the start-up costs.
To conclude I would like to say that this is just the beginning...
The best is yet to come the marriages are going to get bigger
and bigger…
LATEST NEWS
Mergers And Acquisitions In First Half Of 2009
Worst In Five Years
Mergers and acquisitions (M&A) in the country slumped to their worst
since 2004 in the first half of 2009 as a liquidity crunch and mismatched
valuations marred buying plans of Indian companies.
Analysts, however, say the worst may be over.
In the first six months of 2009, Indian companies were involved in 136
M&A deals, down nearly 54% from the same period last year, according
to a study by Venture Intelligence, a research firm focused on private
equity and M&A deals in India.
In the second half of 2008, when the global slowdown started, the
number of deals declined 28% but the average deal value has recovered
from the $60 million seen then.
“The biggest reason for the fall was the lack of liquidity,” said Arun
Natarajan, chief executive, Venture Intelligence. “This particularly
affected cross-border deals as no leverage or buying finance was
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available. It was only companies with cash in hand that went hunting for
targets.”
Mismatch in valuations further dampened spirits as expectations of many
promoters had not come down as much as the markets.
At least 50% of the deals in the first half of 2009 were domestic
acquisitions, against 40% last year, according to the Venture Intelligence
study.
Information technology (IT), IT-enabled services (ITeS) and
manufacturing industries accounted for the most acquisitions in the first
half, with an 18% share each.
However, M&A activity in IT and ITeS had fallen from 27% in the first half
of 2008, and manufacturing deals from 20%.
BIBLIOGRAPHY
Books
1) Global Alliances in the Motor Vehicle Industry
- Leslie S. Hiraoka
2) Mergers and Acquisitions – A Guide to creating value for
Stakeholder
-Micheal A. Hilt
-Jefferey S. Harrison
-R. Duane Ireland
3) Independent Project on Mergers and Acquisitions in India –
A Case Study
-Kaushik Roy Choudry
-K. Vinay Kuma
4) Cases in corporate Acquisitions, Mergers and Takeovers
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-Edited by Kelly Hill
5) SUCESSFUL MERGERS getting the people issues right
– Marion Devin
Websites
1) www.investopedia.com
2) www.wallstreetjournal.com
3) www.ny-times.com
4) www.economictimes.com
5) www.google.com
6) www.wikipedia.com
News Papers
1) The Economic Times
2) Mint
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