Impact of Corporate Takeovers on Automobile Industry- a review Naresh Kumar Goel



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CASE STUDIES ON ACQUISITIONS

A review of the following case studies reveals the purpose, objective and outcome behind the corporate takeover deals:



  1. FORD/JAGUAR: 1989

Pre-deal

Deal development & details

  • In 1974 ailing Jaguar was nationalized into British Leyland but continued to run large losses




  • Margaret Thatcher installed John Egan as CEO in 1980, with instructions, “Fix Jaguar or kill it”




  • Egan works turnaround such that Jaguar is publicly floated in 1984 for £300 million




  • But the company is still in very weak state:

– Aging factory (built during the war to make Spitfire parts)

– Aging products: XJ5 dated to 1975 and XJ6 was older (but fully updated in 1986)
– Terrible labor situation (many workers on daily piece quota); in 1981 8,000 employees built 14,000 cars

– Very poor quality (“Always buy 2 Jags: one to drive and one for parts!”)

– Nothing good in the product pipeline

– Running at 60% of 80,000 unit capacity





  • In late 1980s Egan reluctantly considers alliance with larger car company as Jaguar profits drop (£89 million in 1985, £29 million in 1988), due to strengthening pound chopping export sales* and 1987 U.S. stock market crash cutting demand . . . while the Japanese launched new competition




  • GM was approached first, as it wanted to go “up market” in Europe (beyond Opel) and would accept a minority stake in Jaguar (Jaguar also knew GM from parts purchases)




  • Ford, desperate for upscale brand as well, is “at the end of its rope” after several failed attempts:

– Imported German Fords to U.S. as Capri - discontinued

– Imported DeTomaso Pantera - halted

– Imported German Fords as Merkur - discontinued

– Tried to buy Alfa in 1986

– Got Aston Martin in 1987 but too small

– Was talking to Saab in 1989



  • When Saab talks collapse Ford turns to Jaguar and, fearing GM will win, buys a forestalling 15% of shares in October 1989




  • British government (owner of controlling “golden share”) lets Ford proceed to avoid sparking nationalistic crisis between U.S. and UK




– £3 in January 1989

– £8 in October 1989




  • Ford hammers out deal with Jaguar board at £8.50: $2.6 billion




  • $2.1 billion of price was goodwill, as book value was $500 million




  • Compare: Ford MV of $20 billion on sales of $100 billion; Jaguar bought for $2.6 billion on sales of $1.6 billion




  • Total cost by 1995: $6.5 billion (acquisition + losses + investments)




  • Pledges to Jaguar:

– Manufacturing stays in UK

– Headquarters stays in Coventry

– Cars sold only through Jaguar dealers



– Separate Board of Directors

Source: gerpisa.org/rencontre/9.rencontre/S10Mercer.pdf

Ford/Jaguar Objectives and Outcomes

Acquisition objectives

Outcomes

  • Forestall GM purchase of Jaguar

  • To enlarge presence in luxury/executive segment

  • To turn Jaguar around by injecting capital and management

  • To boost output to 150000 by 2000

  • Do not dilute or hurt Jaguar brand

  • Accomplished: but GM went on to buy Saab

  • Not yet: no improvement in U.S. sales, minimal gains in Europe- slate of new products in next 2-3 years may change that

  • Done:

  • Product pipeline now full

  • Quality dramatically improved

  • Breakeven cut in half, profitable by 1995

  • Jury is out : hit 85000 in 1999

  • Successful: MORI poll of Triad countries reports Jaguar the most recognized car brand in the world; but now combining Ford and Jaguar platforms after early 1990s pledge not to do so.

  • Jaguar SUV hybrid planned for 2000+

Ford/Jaguar Lessons Learned

Discussion

Lessons learned

  • Jaguar deal ran into a mixture of bad luck (U.S. recession, oil price hike, Lexus et al. onslaught) and poor due diligence (disastrous factories, empty product pipeline)

  • Deal terms required substantial Jaguar independence, which it took years for Ford to work around (Jaguar is now just a part of the firm, with little special treatment)

  • Ford has not until now been sure how to integrate Jaguar, or not (shared platforms or not? Niche models or, recently stated, 350,000 units goal?)

  • The GM “wet firecracker” stampeded Ford into over payment

  • Leaving “potential” aside, $6.5 billion for on average 45,000 cars per year?!

  • Do the due diligence : there was a reason Egan wanted to sell

  • Beware early pledges hard to change later!

  • Know your integration plan

  • Watch out for being rushed into a deal

  • Can you really not grow a brand from scratch, if this is what it costs to buy one?

Source: gerpisa.org/rencontre/9.rencontre/S10Mercer.pdf

  1. RENAULT / DACIA: 1999

Pre-deal

Deal development & details

  • Dacia was one of the industrial bastions of Romania’s Communist regime. Founded in 1966, the company dominated its home market but made little impact in the west, where cars from the Eastern bloc were regarded as cheap but unreliable.

  • Before acquisition, Dacia factory in Mioveni was making 85500 cars with 26500 workers.

  • Renault acquired 51% of Dacia and gradually increased its stake (Miercuri, 2009).

  • The Renault Group invested €489 million over five years to modernize the Pitesti plant in Romania.

  • Aiming for a target price of US$6000, Renault took a stringent cost-to-design approach.

  • Introduced Dacia into new markets as a completely separate brand.

  • In 2014, the European Automobile Manufacturers’ Association’s figures showed that Dacia’s sales soared by nearly 24% to 359141 in the EU.



Acquisition objectives

Outcomes

  • In September 1999, Dacia was bought by the Renault group, with a view to make Romania its hub of automobile development in both Central and Eastern Europe.

  • Dacia sold 53000 vehicles in 2002 and it holds an almost 50% market share in Romania.

  • In the first five months of 2009, Dacia, grew by 15.5% on markets that fell by 16% with sales of almost 120000 vehicles.

  • Renault modernized the Dacia factory in Mioveni, as part of a €2bn (US$3bn) investment.

  • By 2014, Mioveni plant was producing 340000 cars with 14000 staff



  1. MAHINDRA & SSANGYONG: 2010

Pre-deal

Deal development & details

  • A US$ 7.1 billion multinational group based in Mumbai, Mahindra employs more than 112000 people in over 79 countries.

  • SsangYong was founded in 1954 and it has been manufacturing automobiles for more than five decades.

  • The acquisition was completed in February 2011, with Mahindra’s 70% stake in SsangYong

  • Total cost of acquisition of US$ 463 million with US$ 378 million in new stocks and US$ 85 million in corporate bonds

  • Exchange rate used: US$ 1= KRW 1129



Acquisition objectives

Outcomes

  • Outbreak of labour crisis in South Korea

  • SsangYong- a loss making unit

  • Sound background of M&M

  • An opportunity for SsangYong to grow in global markets

  • An opportunity for M&M to launch a new portfolio of SUVs in India

  • In 2013, it started second shift at its plant, opened a new design studio and recruited more than 450 workers so that it can clear the order backlog for its SUVs

  • M&M has benefited out of the extensive R&D capabilities of SsangYong

  • SsangYong’s core competency in the high end SUV helped&M to expand its profile.

  • M&M has got the support of the strong dealership network of SsangYong spread around in 98 countries.

  • M&M has derived savings from joint sourcing and joint product development

  • SsangYong has encashed on the global repute



  1. VOLKSWAGEN & PORSCHE: 2012

Pre-deal

Deal development & details

  • Volkswagen Aktiengesellschaft (VW) was the second-largest car producer worldwide, with a market share of 12.3% in terms of passenger car unit sales in 2011

  • In 2011, VW operated in 53 countries worldwide and sold its cars in 153 countries, with strong market shares particularly in Western Europe (ranked #1, market share 23%), China (#1, market share 18%) and Brazil (#2, market share 22.3%)

  • Volkswagen and Stuttgart based Porsche signed an agreement in 2009

  • VW bought 49.9% of Porsche’s car making business in 2009 for €3.9 bn. (Bryant, 2012)

  • The Porsche’s holding company’s asset remains at 50.7%

  • In 2012, Volkswagen AG (Frankfurt: VOW) shares rose 5.82% to €127.16

  • In 2012, Porsche Automobile Holding SE (Frankfurt: PAH3) shares fell 1.52% to €41.29 (Reeves, 2012).



Outcomes

  • Accelerated integration model permitted combination of automotive business

  • Porsche’s automotive business contributed in full to the Volkswagen Group ahead of schedule for around €4.46 billion plus one Volkswagen ordinary share

  • Net synergies of approximately €320 million from the accelerated integration split 50:50 between the two companies



  1. BMW & ROVER: 1994

Pre-deal

Deal development & details

  • In 1993, Rover produced 440000 cars

  • Rover’s share of the UK car market has shrunk from more than 30% in the late 1970s to 13% in 1993 (Harrison, 1994).

  • BMW sold 382758 units in the first quarter of 2011 (21.3% increase from the previous year) achieving the best start to the financial year in the group’s history




  • BMW bought Rover for £800m in 1994 including MINI and the Land Rover brands

  • The deal included a 20% buyout stake of Honda’s share of Rover

  • Invested the extra £2 billion mostly in wrong places (Heller, 2006).

  • In the first eight months of 1999, BMW sales were up 19% and Land Rover’s soared by 35% (Feast, 1999).

  • Rover never received the investment it needed to develop a BMW 2 series equivalent to replace its ageing 200 series

  • BMW owned Rover from 1994 to 2000 by which time the company was piling up losses at a rate of £2 million a day (Whiteley, 2012).



Acquisition objectives

Outcomes

  • BMW had a number of motives behind the acquisition of the Rover company. The primary among them was to grow

  • BMW wanted to increase their market spread while achieving a greater volume spread

  • They saw Rover, which came up for sale at the right time as the perfect deal at that time

  • Rover had acquired significant cost advantages due to its association with Japanese production methods.

  • They also had the front-wheel driving and the 4 x 4 technology that BMW wanted to acquire.

  • Another major factor in the acquisition was the low level of cost in the British manufacturing sector compared to the costs in Germany

  • Rover also has in its repository brands such as Mini and MG Rover, which offered BMW the chance to exploit new markets and segments.

  • A failed integration process

  • Demoralized workers

  • A drain of engineering resources from BMW to Rover

  • Reasons for failure:

  • Poor due diligence

  • Culture clash

  • Poor leadership




  • BMW sold Rover in 2000 to Phoenix Consortium for ₤10.



  1. VW & SEAT: 1986-1990

Pre-deal

Deal development & details

  • 1950s-1981 SEAT was a JV between Fiat and Spanish National Holding Company INI; Fiat provided technology, products, and management




  • Fiat pulled out in 1981, leaving SEAT to solo operations; the Firm increasingly turned to VW for technical help




  • The situation was dire: SEAT was losing $200 million per year by 1984 and had not turned a profit since 1976, due to:

– Elderly Barcelona plant (built in 1953); 2 others in better shape


Aggressive Socialist unions

– Outdated products (“Fiat hand-me-downs”)

– Increasing competition as Spain opened its markets


  • Government could not afford more losses but also could not risk labor unrest of closure, so sought a buyer




  • VW had “tested the waters” by investing just in SEAT’s Pamplona plant in 1984, which was now building Polo’s on contract of about 100,000 per year




  • Given absence of other bidders and difficult political challenges, both sides went slowly, negotiating for all of 1985

Government paid off about $1.2 billion in accumulated debt


• VW paid $560 million for a 51% share in early 1986, bought 30% more later the same year, and completed all 100% in 1990, for a total of about $1 billion
• VW received complete managerial control in 1988
• Other pledges:
– Both parties to invest $500 million more
– Government accepts retirement costs for about 4,500 workers**

– VW allowed to cut workforce to 18,000 by 1990**

– Aim for 400,000 units by 1990 (SEAT and VW Polos), from 340,000 in 1986
– VW allowed to convert Pamplona to VW (not SEAT) direct ownership (completed in 1994)
• SEAT mostly lost money in the 1990s (about $2 billion), which required more capital from VW; the Spanish government and the EU injected several hundred million in aid, the latter requiring capacity reduction in return




Acquisition objectives

Outcomes

  • Dominate Spanish market, expected to grow dramatically with liberalization





  • Upgrade SEAT capabilities via capital and management



  • Embed SEAT into the VW European plant network




  • Develop SEAT as another brand (low end) in the VW portfolio

  • Not successful: SEAT market share in Spain has run 10-12% since 1985; VW share there has actually grown more, from almost nothing to 6%




  • Partly: Spanish wages are lower but rose to near-European average levels faster than expected, and unions have been very aggressive*




  • Successful in part**, but at high cost

– $1.2 billion spent to modernize ZF was insufficient and the plant closed in 1997-98


– $2.1 billion spent to develop the very advanced Martorell plant (supplier park, teams, Kaizen, JIT)


  • Very successful: due to aggressive “platforming” all SEAT cars can be built elsewhere in the network


Conclusions

In this paper, the researcher sought to discover the possible impact of mergers and acquisitions regarding the brand perspective in the automotive industry, through analyzing some former takeovers. Moreover the study focused to understand the consequences of the acquisition process on the targeted company. And on the basis of analysis it can be said that overall the takeovers seem to have an important impact on both the corporate brand strategy and the portfolio on the companies engaged.



The impact of mergers on corporate identities & brand portfolios in the automotive industry

In the merger cases, sometimes the firms involved face difficulties in establishing the corporate identity of their new formed company. This issue stays mostly on the basis of the high differences between each of the merging brand equity. Since the brands that suffered an M&A process have different associations, there is a low probability that the two corporate names offer the same value. This can be even more problematic when the merged companies are very protective with their own brand and persuasive in keeping its brand equity.

However, this issue has consequences also on the portfolio of the organization created after the merger process. When both companies are too concerned on keeping their own corporate and product brands, the portfolio of the new company becomes too complex and does not allow cost savings synergies in terms of components equalization, production rationalization or marketing.

The impact of acquisitions on corporate identities & brand portfolios in the automotive industry

In the case of acquisitions, the process of adopting a new corporate identity applies mostly to the acquired company, which is usually the smallest and less powerful one. In these cases, the targeted firm benefits more than the acquirer, from brand perspective, since the association with a more powerful brand adds more equity to the weakest one. This happened with Skoda or Sear after being acquired by Volkswagen. Both companies took the original VW car function of reliable quality, affordable price and good technology. Moreover the case of Dacia & Renault sustains this conclusion. Since it was acquired by Renault till now, Dacia adopted a new corporate brand strategy that boosted the company’s sales and revived its identity. The strategy does not follow a straight pattern all over the world and consists in two totally different brand strategies in parallel, depending on the markets.

However, it is also important to mention that in some cases, while the less powerful brand enjoys more equity from the strongest one, the dominant brand can also be influenced through its association with the weakest one but in a negative way. For instance after being bought by BMW, Rover started to damage its acquirer brand, so that after only six years BMW had to sell the English car manufacturer.

On what concerns the portfolio of the acquired company, it can become more competitive due to the investments that the acquiring company makes. However getting closer to the quality that the acquirer offers, raises the risk of overlapping with the brand from the buyer portfolio. For instance in the case of Dacia & Renault the Romanian brand Logan or Sandero tends to overlap with the French brand Clio. But, the reformation of the portfolio after the acquisition process requires chronological experience. For instance Dacia and Renault initially prepared the audience for a robust and reliable car that offers a common sense of qualitative features on a very good price and it was only after few years when the company launched the most successful brand from its portfolio - Logan. In the present time this values are consolidated by the three models from Dacia‟s portfolio - Logan, Sandero and Duster and doubled by each model’s specific equity. Logan is a spacious sedan designed mostly for middle income families, Sandero a hatchback with a modern design that targets mostly young people, and Duster a SUV with excellent abilities for rough terrain that targets customers with a slightly higher purchasing power that normally don’t afford to buy a SUV. So, the brands complement themselves in order to address a wider spectrum of customer needs and thus a broader market (Petromilli et al., 2002; Pierce & Moukanas, 2002).



Moreover, it was discovered that since it was acquired by Renault, Dacia‟s portfolio evolved more and more into a dynamic one. Before the acquisition, for 33 years Dacia‟s portfolio was only composed of three main models – 1300, 1310 and Nova, while after 1999 the brands within the portfolio proved to be way more dynamic. Dacia Groupe Renault used SuperNova and Solenza for a few years, to announce Dacia‟s new orientation in automotive industry, and in 2004 it has totally renewed the portfolio with the Logan range. Moreover, in 2010 Dacia will enrich once more its portfolio with a new model. If Logan, Sandero and Duster were built on Logan platform, the new model will be built on a new platform.

Reference

  1. Aldea, S.V. (2011, May 24). The impact of mergers & acquisitions on corporate identities and brand portfolios in the automotive industry. Retrieved May 26, 2016 from www.diva-portal.se/smash/get/diva2:426315/FULLTEXT01.pdf



  1. Automobile Dacia. Retrieved May 26, 2016 from https://en.wikipedia.org/wiki/Automobile_Dacia



  1. BMW: A Strategy built on Premium Brands. Retrieved May 28, 2016 from www.slideshare.net/patricksgallagher/bmw-a-strategy-built-on-premium-brands



  1. Bryant, C. (2012, July 5). VW-Porsche merger ends years of wrangles. Retrieved May 27, 2016 from www.ft.com › Companies › Industrials › Automobiles



  1. Driving Value: 2015 Midyear Automotive M&A Insights. Retrieved May 26, 2016 from https://www.pwc.com/gx/en/automotive/publications/assets/pwc-auto-m-and-a-insights.pdf



  1. Feast, R. (1999, October). With Rover, BMW Got More and Less Than It Asked For. Retrieved May 27, 2016 from www.nytimes.com/.../with-rover-bmw-got-more-and-less-than-it-asked-for.html

  2. Harrison, M. (1994, February 1). The Rover Takeover: Car-making tradition dies with BMW deal: The Industry: End of British-owned volume production. Retrieved May 28, 2016 from www.independent.co.uk › News › UK

  3. Heller, R. (2006, July 8). Takeovers, mergers and acquisitions – avoid these common mistakes and thrive.  Retrieved May 28, 2016 from http://www.leadershipreview.net/takeovers-mergers-and-acquisitions-%E2%80%93-avoid-these-common-mistakes-and-thrive



  1. How Mahindra & Mahindra turned around SsangYong (2013, June 27). Retrieved May 26, 2016 from www.rediff.com › Business



  1. Mercer, G. (2001). Case Studies of Automotive M&A. Retrieved May 28, 2016 from gerpisa.org/rencontre/9.rencontre/S10Mercer.pdf



  1. Mergers & Acquisitions: An insight into Value Creation and Post Merger Synergies (2014, March 9). Retrieved May 27, 2016 from www.pbr.co.in/march2014/10.pdf



  1. Mergers and Acquisitions of Mahindra & SsangYong. Retrieved May 27, 2016 from www.slideshare.net/ashu141194/mergers-and-acquisitions-of-mahindra-and-ssanyong



  1. Miercuri. (2009, July 1). Dacia and Renault: ten years of shared success. Retrieved May 25, 2016 from www.daciagroup.com/node/2117



  1. Reeves, B. (2012, May 7). Porsche and Volkswagen Finally Complete Merger, Will Pay ?100M in Taxes. Retrieved May 27, 2016 from http://www.ibtimes.com/porsche-volkswagen-finally-complete-merger-will-pay-100m-taxes-721439.



  1. SsangYong Motor. Retrieved May 27, 2016 from https://en.wikipedia.org/wiki/SsangYong_Motor



  1.  Two case studies in Mergers and Acquisitions: Why some succeed while other fail?. Retrieved May 28, 2016 from http://www.dhardhar.com/2013/09/two-case-studies-in-mergers-and-acquisitions-why-some-succeed-while-others-fail/



  1. Volkswagen Aktiengesellschaft (2012, OCTOBER 4). Retrieved May 28, 2016 from www.volkswagenag.com/.../20121004+Moody's+Volkswagen_Company_Profile.pdf



  1. Volkswagen and Porsche create integrated automotive group (2012, July 4). Retrieved May 27, 2016 from http://www.volkswagenag.com/content/vwcorp/info_center/en/news/2012/07/Automotive_Group.html.



  1. What Dacia can teach consumer brands. Retrieved May 26, 2016 from https://home.kpmg.com/xx/en/home/.../what-dacia-can-teach-consumer-brands.html



  1. Whiteley, S. (2012, May 10). Takeovers and Mergers - one that went badly wrong (BMW and Rover).  Retrieved May 27, 2016 from http://www.tutor2u.net/business/blog/buss4-mergers-acquisiitons-one-that-went-wrong.-bmw-and-rover


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