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

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

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

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

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  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

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  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
  

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  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)
  

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

– 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

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

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

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  Although GM never buys a Jaguar share, public debate and disclosure pushes Jaguar shares very high
  

– £8 in October 1989

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

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

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

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

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  Pledges to Jaguar:
  

– Manufacturing stays in UK

– Headquarters stays in Coventry

– Cars sold only through Jaguar dealers

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  Forestall GM purchase of Jaguar
  
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  To enlarge presence in luxury/executive segment
  
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  To turn Jaguar around by injecting capital and management
  
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  To boost output to 150000 by 2000
  
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  Do not dilute or hurt Jaguar brand
  

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  Accomplished: but GM went on to buy Saab
  
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  Not yet: no improvement in U.S. sales, minimal gains in Europe- slate of new products in next 2-3 years may change that
  
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  Done:
  

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  Product pipeline now full
  
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  Quality dramatically improved
  
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  Breakeven cut in half, profitable by 1995
  

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  Jury is out : hit 85000 in 1999
  
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  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.
  
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  Jaguar SUV hybrid planned for 2000+
  

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  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)
  
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  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)
  
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  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?)
  
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  The GM “wet firecracker” stampeded Ford into over payment
  
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  Leaving “potential” aside, $6.5 billion for on average 45,000 cars per year?!
  

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  Do the due diligence : there was a reason Egan wanted to sell
  
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  Beware early pledges hard to change later!
  
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  Know your integration plan
  
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  Watch out for being rushed into a deal
  
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  Can you really not grow a brand from scratch, if this is what it costs to buy one?
  

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

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  Renault acquired 51% of Dacia and gradually increased its stake (Miercuri, 2009).
  
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  The Renault Group invested €489 million over five years to modernize the Pitesti plant in Romania.
  
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  Aiming for a target price of US$6000, Renault took a stringent cost-to-design approach.
  
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  Introduced Dacia into new markets as a completely separate brand.
  
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  In 2014, the European Automobile Manufacturers’ Association’s figures showed that Dacia’s sales soared by nearly 24% to 359141 in the EU.
  

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  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.
  

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  Dacia sold 53000 vehicles in 2002 and it holds an almost 50% market share in Romania.
  
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  In the first five months of 2009, Dacia, grew by 15.5% on markets that fell by 16% with sales of almost 120000 vehicles.
  
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  Renault modernized the Dacia factory in Mioveni, as part of a €2bn (US$3bn) investment.
  
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  By 2014, Mioveni plant was producing 340000 cars with 14000 staff
  

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  A US$ 7.1 billion multinational group based in Mumbai, Mahindra employs more than 112000 people in over 79 countries.
  
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  SsangYong was founded in 1954 and it has been manufacturing automobiles for more than five decades.
  

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  The acquisition was completed in February 2011, with Mahindra’s 70% stake in SsangYong
  
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  Total cost of acquisition of US$ 463 million with US$ 378 million in new stocks and US$ 85 million in corporate bonds
  
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  Exchange rate used: US$ 1= KRW 1129
  

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  Outbreak of labour crisis in South Korea
  
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  SsangYong- a loss making unit
  
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  Sound background of M&M
  
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  An opportunity for SsangYong to grow in global markets
  
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  An opportunity for M&M to launch a new portfolio of SUVs in India
  

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  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
  
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  M&M has benefited out of the extensive R&D capabilities of SsangYong
  
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  SsangYong’s core competency in the high end SUV helped&M to expand its profile.
  
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  M&M has got the support of the strong dealership network of SsangYong spread around in 98 countries.
  
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  M&M has derived savings from joint sourcing and joint product development
  
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  SsangYong has encashed on the global repute
  

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  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
  
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  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%)
  

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  Volkswagen and Stuttgart based Porsche signed an agreement in 2009
  
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  VW bought 49.9% of Porsche’s car making business in 2009 for €3.9 bn. (Bryant, 2012)
  
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  The Porsche’s holding company’s asset remains at 50.7%
  
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  In 2012, Volkswagen AG (Frankfurt: VOW) shares rose 5.82% to €127.16
  
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  In 2012, Porsche Automobile Holding SE (Frankfurt: PAH3) shares fell 1.52% to €41.29 (Reeves, 2012).
  

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  Accelerated integration model permitted combination of automotive business
  
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  Porsche’s automotive business contributed in full to the Volkswagen Group ahead of schedule for around €4.46 billion plus one Volkswagen ordinary share
  
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  Net synergies of approximately €320 million from the accelerated integration split 50:50 between the two companies
  

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  In 1993, Rover produced 440000 cars
  
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  Rover’s share of the UK car market has shrunk from more than 30% in the late 1970s to 13% in 1993 (Harrison, 1994).
  
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  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
  

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  BMW bought Rover for £800m in 1994 including MINI and the Land Rover brands
  
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  The deal included a 20% buyout stake of Honda’s share of Rover
  
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  Invested the extra £2 billion mostly in wrong places (Heller, 2006).
  
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  In the first eight months of 1999, BMW sales were up 19% and Land Rover’s soared by 35% (Feast, 1999).
  
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  Rover never received the investment it needed to develop a BMW 2 series equivalent to replace its ageing 200 series
  
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  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).
  

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  BMW had a number of motives behind the acquisition of the Rover company. The primary among them was to grow
  
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  BMW wanted to increase their market spread while achieving a greater volume spread
  
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  They saw Rover, which came up for sale at the right time as the perfect deal at that time
  
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  Rover had acquired significant cost advantages due to its association with Japanese production methods.
  
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  They also had the front-wheel driving and the 4 x 4 technology that BMW wanted to acquire.
  
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  Another major factor in the acquisition was the low level of cost in the British manufacturing sector compared to the costs in Germany
  
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  Rover also has in its repository brands such as Mini and MG Rover, which offered BMW the chance to exploit new markets and segments.
  

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  A failed integration process
  
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  Demoralized workers
  
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  A drain of engineering resources from BMW to Rover
  
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  Reasons for failure:
  

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  Poor due diligence
  
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  Culture clash
  
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  Poor leadership
  

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

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

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

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  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

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

– Increasing competition as Spain opened its markets

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

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  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
  

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  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 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

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  Dominate Spanish market, expected to grow dramatically with liberalization
  

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  Capture a low-wage-cost production base
  

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  Upgrade SEAT capabilities via capital and management
  

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  Embed SEAT into the VW European plant network
  

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

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  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%
  

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

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  Successful in part**, but at high cost
  

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

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