Mergers acquisitions automotive_industry

2011
vivek
Grizli777
1/1/2011
Mergers & Acquisitions in
Automotive Industry

Table of Contents
1. STUDENT BACKGROUND & COURSE DETAILS..................................................................................................3
1.1 COURSE DETAILS...............................................................................................................................................................................3
1.2 SEMESTER DETAILS..........................................................................................................................................................................3
1.3 STUDENT DETAILS............................................................................................................................................................................3
1.4 ACADEMIC ADVISOR..........................................................................................................................................................................3
2. TOPIC OF RESEARCH................................................................................................................................................ 4
2.1 RESEARCH TOPIC .............................................................................................................................................................................4
2.3 STATEMENT OF PURPOSE................................................................................................................................................................4
3.1 INTRODUCTION TO MERGERS & ACQUISITIONS IN AUTOMOTIVE INDUSTRY.........................................................................5
3.2 RATIONALE OF RESEARCH PROJECT...............................................................................................................................................5
3.3 STATEMENT OF RESEARCH OBJECTIVES.......................................................................................................................................6
4. THEORETICAL FRAMEWORK................................................................................................................................. 6
4.1 MERGERS & ACQUISITIONS.............................................................................................................................................................6
4.2 RECENT TRENDS IN AUTOMOTIVE MERGERS & ACQUISITIONS...............................................................................................6
4.3 DEBATES IN THE FIELD OF M & A.................................................................................................................................................7
4.4 KEY RESEARCH COMPONENTS........................................................................................................................................................7
4.5. SCHEMATIC DIAGRAM......................................................................................................................................................................8
5. LITERATURE REVIEW.............................................................................................................................................. 9
5.1 MERGERS& ACQUISITIONS............................................................................................................................................................10
5.2 TYPES OF MERGERS & ACQUISITIONS........................................................................................................................................10
5.3 ADVANTAGES OF MERGERS & ACQUISITIONS...........................................................................................................................10
5.4 DISADVANTAGES OF MERGERS & ACQUISITIONS.....................................................................................................................12
5.5 DRIVING FORCES BEHIND AUTOMOTIVE MERGERS AND ACQUISITIONS.............................................................................12
5.6 THE LONG-TERM SUCCESS OF M&A IN THE AUTOMOBILE INDUSTRY:.................................................................................14
5.7 CASE STUDY - MERGER OF DAIMLER-BENZ & CHRYSLER AG..............................................................................................15
5.9 CASE STUDY – NISSAN RENAULT ALLIANCE ............................................................................................................................17
5.10 CASE STUDY – TATA- JAGUAR LAND ROVER.........................................................................................................................18
THE TATA ACQUISITION OF JAGUAR LAND ROVER (JLR) FROM FORD MOTORS IN 2008 IS A GOOD EXAMPLE OF AN
ACQUISITION THAT WAS PERCEIVED TO BE A BAD DEAL AND WAS CRITICIZED FOR IT’S BAD TIMING AND QUESTIONED ON
ITS VIABILITY AND SUSTAINABILITY OF THE DEAL. (M ANAND,2008). FOLLOWING THE ACQUISITION BY TATA, THE
DEMAND IN THE GLOBAL LUXURY MARKET DIPPED AS A RESULT OF THE GLOBAL FINANCIAL CRISIS (GFC) AND TATA
UNDERWENT LOSSES. THIS FORCED TATA TO REFINANCE ITS INVESTMENT BUT NOW HAS RECOVERED AND IS FINALLY
SHOWING VALUE BY ADDING VALUE TO SHAREHOLDERS FOR TATA AS WELL AS FROM STAKEHOLDERS OF JAGUAR LAND
ROVER IN UK. ........................................................................................................................................................................................18
..................................................................................................................................................................................................................19
6. METHODOLOGY....................................................................................................................................................... 20
7. DATA ANALYSIS....................................................................................................................................................... 21
7.1. INDUSTRY ANALYSIS.....................................................................................................................................................................21
8. CONCLUSION............................................................................................................................................................. 22
9. BIBLIOGRAPHY........................................................................................................................................................ 23

10. APPENDIX............................................................................................................................................................... 27
1. Student Background & Course Details
1.1 Course Details
Field Research Project (FRP) - An IIP initiative under the GMBA program
1.2 Semester Details
GMBA December 2012 batch
December –March leg (Sydney Campus)
1.3 Student Details
Specialization – Investment Banking
1.4 Academic Advisor

2. Topic of Research
2.1 Research Topic
Merger & Acquisitions in Automobile Industry
2.3 Statement of Purpose
There has been a surge in the mergers and acquisitions (M&A) activity in the motor vehicle
industry since 1995 due to many factors such as technological factors, cost considerations, excess
capacity, political and regulatory factors. This research examines the recent trends and drivers of
mergers and acquisitions (M&A) in the automobile industry. Additionally the research also explores
the relative impact of such a consolidation on the motor vehicle industry as a whole and the future of
the industry post such consolidation activities.

3. INTRODUCTION
3.1 Introduction to Mergers & Acquisitions in Automotive Industry
Globalization is rampant and the meaning of physical borders is becoming less and less important
day by day. We live in a multicultural and multifaceted world, which is dominated by multinational
corporations and cross border transactions. Mergers and Acquisitions (M&A) whether cross border or
whether domestic have garnered significant attention since the last century. Automotive industry hailed
as ‘industry of industries’ by Peter Drucker, the pioneer of the study of management, has continuously
evolved from craft production in 1890s to mass production in 1910s to lean production techniques in
the 1970s (ChithraGopal). From horseless carriages to production of modern cars and commercial
vehicles reached to approximately 80 million in 2011 (OICA).
Automobiles for the public market came into existence in 1896 and have since undergone
dramatic changes (Automotive History). The ride for sure hasn’t been smooth. Taking a case in
perspective the global financial crises (GFC), which started in 2008, completely altered the dynamics
of the global automotive industry whether the player be a light vehicle producer or whether it be a
supplier. GFC lead to significant volume falloffs in production, however at the same time the industry
went into a major consolidation mode. Through a major wave of mergers, acquisitions, bankruptcy
filings, spinoffs, etc. in 2008 and 2009 which culminated with the IPO of general motors in November
2010 the industry has a renewed interest and has a positive outlook for the future. (Deloitte Automotive
M&A, 2010). In 2009 alone due to various deals passed and restructuring undertaken by the United
States treasury along with the Volkswagen and Porsche merger pushed the total deals and transaction
volume reached to 120 billions USD (Driving Value Automotive M&A Insights 2011).
3.2 Rationale of research project
The global automotive industry including suppliers is an oligopoly with a handful of players
dominating the market. Though the number of players is limited and access is restricted to a select few,
the industry acts as a linchpin to modern economics and commerce. It is important to note that the
spectrum of the game has been changed by the Global Financial Crises. Much has been said about the
mergers and acquisitions industry and its impact globally, however comparatively the field of research
on mergers and acquisitions in automotive sector has been quite limited.

3.3 Statement of Research Objectives
This paper deals with the importance of mergers and acquisitions in automobile industry. It
focuses on what challenges today’s automotive industry face while doing mergers and acquisitions,
driving forces, the advantages and disadvantages of mergers and acquisitions and explores relevant
cases. Finally the paper makes an attempt to explain what companies should do in this global
environment.
4. THEORETICAL FRAMEWORK
4.1 Mergers & Acquisitions
Mergers usually occur when two organizations collaborate with each other by combining all
their assets, liabilities and cultural values on a relatively equal basis. Contrarily, acquisition takes place
when one organization takes over another organization and its operations. (Horwitz et al. 2002).
Both the terms are usually used together as the end result of a merger and an acquisition is the
same - functioning as one company. (Halpern & Bell, 1992), thus the combination of the firm’s activity
is referred to as Merger and Acquisition (M&A).
Analysts from Bain & Company, the leading consulting firm, have analysed that mergers and
acquisitions are at a very critical point and the cyclical pattern of deal making has provided a sense of
relief. They strongly suggest that executives will need to focus on inorganic growth to meet the
expectations of their investors (Harding, Shakar& Jackson).
4.2 Recent Trends in Automotive Mergers & Acquisitions
The global financial crises have certainly skewed the trends both in terms of deal value and
number of transactions happening around the globe. The year 2009 was shaped by unusually high-
disclosed deal values due to United States government bailouts and also due to mega deals around the
globe. The deals are not only limited to United States, but since 2007 cross border deals have
accounted for approximately 36% of all automotive deal activity (Deloitte Automotive M&A, 2011).
According to data provided by Thomson Reuters the global light vehicle assembly is projected
to increase by a compound annual growth rate of 5.2% the assembly volumes are expected to increase
from 79 million to 106 million from 2011 to 2018. (Driving Value Automotive M&A Insights 2011).
Increase in vehicle will certainly lead to more mergers and acquisitions in Auto Industry. PWC mergers
and acquisitions department reports that every year from 2000 to 2011 more than 500 deals are closed
and the value of transactions in 2009 reached around 120 billion while in 2011 it was around 40 billion.
(Driving Value Automotive M&A Insights 2011)

M&A international opines that corporate M&A deals involving BRIC companies will remain
high due to both an attractive cost advantage and large domestic consumer markets (M& A
Consulting). It is expected that overall activity will increase, however there are potential headwinds,
which include a prolonged European debt crises and monetary tightening in emerging economies such
as India and China. There is a ray of hope though that the interest rates are peaking in these countries
and there is a high possibility of reduction of interest rates leading to more activity (Automotive M&A
Consulting, 2012).
4.3 Debates in the field of M & A
Large number of studies focuses on the effect of internationalization on short-term value
creation for acquirers, but yield mixed results. While some conclude that international diversification in
form of cross-border transactions yield positive returns for acquirers (Goergen and Renneboog 2004),
others argue that these effects are characteristic to certain industries and countries (Dewenter 1995;
Kiymaz and Mukherjee 2000). For the automotive supply industry, (Mentz and Schiereck 2006) do not
find significant short-term return differences between national and crossborder transactions for
acquirers while transcontinental deals have a negative influence. The literature on long-run
performance is less ambiguous and uniformly points to long-run negative returns to acquiring
companies in cross-border deals due to the more challenging post-merger integration and imperfect
information.
As per (Mentz and Schiereck 2006), the automotive industry is not largely affected in short term
by national or international transactions. Transcontinental deals might have a negative impact. In the
long run, lack of integration and to sustain in a challenging environment becomes critical and usually
leads to a negative return.
Apart from the long run and short run analysis, there are discussions also on the environment
factors that affects M&A. Some are of the opinion that M&A is applicable only when the economy is
booming whilst some who believe it does benefit in a bearish economy as well.
Some analyst have concluded that it’s a favourable deal when the markets are bad as they
believe that the acquirer would have bargaining power and that cannot be the case of a bullish
economy. Powerful and strong players would be readily available and would not be expensive too.
Analysts are of the opinion that in such a market, the company can plan a long term growth strategy
and achieve successful results when the economy recovers.
Contrary to which, there are few other analyst who have observed and believe that in a slowed
down and bullish market, entering in to an M&A might only worsen things and drop down the share
price even further because the acquired company’s share price would be at its lowest. The risk
involved would be high and it might require more liquidity than using it for such a transaction.
4.4 Key Research components

The phenomenon of M&As has got considerable attention from the academic research community
over the last 50 years. (King et al., 2004).
Given the plethora of definitions used by academic researchers to understand the corporate
restructuring events, the research will introduce the developments, after which the main motivations for
M&As will be put forward. The global automotive sector will be introduced, including a detailed
analysis of the market dynamics, history of consolidation activities and the drive for such
consolidations. A detailed study of the automotive industry forms the base of our analysis, along with
the M&A trends in the industry help us assess the factors that may drive the success or failure of
M&As as well as predict what does the future have in store for restructuring activities in the global
automotive space.
4.5. Schematic Diagram

5.1 Mergers& Acquisitions
Mergers usually occur when two organizations collaborate with each other by combining all
their assets, liabilities and cultural values on a relatively equal basis. Contrarily, acquisition takes place
when one organization takes over another organization and its operations. (Horwitz et al. 2002).
Both the terms are usually used together as the end result of a merger and an acquisition is the
same - functioning as one company. (Halpern & Bell, 1992), thus the combination of the firm’s activity
is referred to as Merger and Acquisition (M&A).
Analysts from Bain & Company, the leading consulting firm, have analysed that mergers and
acquisitions are at a very critical point and the cyclical pattern of deal making has provided a sense of
relief. They strongly suggest that executives will need to focus on inorganic growth to meet the
expectations of their investors (Harding, Shakar& Jackson).
5.2 Types of Mergers & Acquisitions
According to Minority Business Development Agency, United States Department of
Commerce, there are three types of company mergers namely Conglomerate, Horizontal Merger and
Vertical Mergers (MBDA).
Conglomerate mergers are the most complex and most controversial of all types. The
widespread interest in conglomerate mergers stems from three particular reasons: Firstly, differences in
antitrust philosophy, predominance of conglomerate mergers in the current merger movement, and
thirdly the current inadequacy of the theory of the multi market firm. (Narver J.C 1967).
Horizontal Merger is a business integration occurring between companies in the same spectrum.
Various synergies are possible with horizontal mergers such as coordination of joint operations, sharing
complementary skills: manufacturing and distribution, improved interoperability, combining a patent
with manufacturing and distribution, network configuration and fleet rationalization (Joseph &
Shapiro, 1990).
Vertical mergers on the other hand occur between companies having buyer seller relationships.
Noriarki Matsushima in his paper on vertical mergers and product differentiation proves that vertical
integration enhances the degree of product differentiation of the integrated firm. He further
demonstrates that partial integration in reality arises in equilibrium that in some circumstances
increases the profit of nonintegrated downstream firm. (Noriarki Matsushima, 2009).
5.3 Advantages of Mergers & Acquisitions
The advantages of a merger and acquisition can be linked to the factors that usually lead to an M
& A. The value of a merger depends on the economic and financial gains a company would derive by
entering in such a deal. Benefits of a M&A range from economies of scale, tax gains, diversification,
synergies and financial benefits and are explained as below (International Finance E2 By Ephraim
Clark: Pg. 609):

Economies of Scale: Economies of scale is one of the important factors for a merger, as when two
companies are combined the firm expands and produces in larger quantity, thus being able to provide
products at lower prices and still make higher profits. (International Finance E2 By Ephraim Clark:
Pg. 609):
Greater Value Generation: As there would be a larger unit to function after a merger, there would
be an increase in the value of shareholder, market share and profitability. The prospective expansion
and growth prospects will drive the merger (G. Alexandridis, D. Petmezas, and N.G. Travlos; 2010)
Accelerates growth in downturn phase: M&A’s are beneficial to acquirer and target companies
both as the acquirers will get a larger market share for a not so expensive cost as the less powerful
companies would agree to be acquired and the target companies also would be benefitting as if they are
small units, they would not have to struggle to sustain in a downturn phase as a combination would
yield higher efficiency and larger market share. (G. Alexandridis, D. Petmezas, and N.G. Travlos;et.al)
As the two companies have combined, the larger unit would now be more cost effective as the
production will be on a larger scale by creating economies of scale and if the output production
increases, the cost of per unit would reduce (G. Alexandridis, D. Petmezas, and N.G. Travlos; et.al)
Increase in Liquidity and more access to funds: The target company will have more liquidity
especially if the target company is a small firm, the target company would find it considerably better as
there would be more access to the funds and a healthy liquidity. (G. Alexandridis, D. Petmezas, and
N.G. Travlos; et.al)
Larger market share: Two companies together would have comparatively more market share than
individually, also would be more competitive as would now hold a stronger position in the market. (G.
Alexandridis, D. Petmezas, and N.G. Travlos; et.al))
Diversification: One of the reasons a company might want to enter in to a merger would be to
save themselves from a volatile market and so would acquire a company of another segment to hedge
against the volatility of its own industry/market. Some companies acquire or merge with another
company from a different location which gives them geographical diversification and broader region to
function. (G. Alexandridis, D. Petmezas, and N.G. Travlos; et.al)
Synergy Benefits: Such benefits can be due to two reasons namely, increase in economies of
scale which leads to decrease in cost or increase in revenues. For instance, if the merger of companies
is from the same line of business, the overhead or some common cost can be reduced by eliminating
the duplication of work, as the same functions would be at both the companies. (G. Alexandridis, D.
Petmezas, and N.G. Travlos;et.al)
Effective management, better skills, expertise and technology: A combination of two companies
would result in to more knowledge; both the companies together can share their expertise, produce
better results from their specialization and assets with the best of the technologies and strive to perform
better as the management would have the best of the two companies. (G. Alexandridis, D. Petmezas,
and N.G. Travlos;et.al)

Thus, many companies usually tend to decide based on one or more benefits as mentioned above
while analysing the various factors before entering in to such a transaction as the new firm would have
better ideas and strategies, however it is critical to also see the downside of a merger as there are
potential disadvantages too which might lead to failure of a merger.
5.4 Disadvantages of Mergers & Acquisitions
According to Gadiesh and Ormiston the five primary reasons for the failure of merger are poor
strategic rationale, overpayment for the acquisition, inadequate integration planning and execution, a
void in executive leadership and cultural mismatch. (Gadiesh&Ormiston, 2002).
Bellinger and Hillman (2000) provided an excellent summary of reasons for merger and
acquisition failures: M&A failure has been attributed to many reasons: imitation of other M&A
strategies without proper understanding (Haunschild, 1993), lack of integration (Haspeslagh&
Jemison, 1991; Nahavandi& Malekzadeh, 1988), managerial hubris (Haunschild, 1993), inadequate
estimation of target, lack of commitment, lack of leadership or strategic guidance after the negotiations
of M&As, and a reduction in slack resources (Haspeslagh& Jemison, 1991).
Some of the other potential disadvantages of a merger & acquisition are:
Cultural Clash: One of the major reasons for a failure of a merger is Cultural mismatch. Its
highly important for the two firms involved in a merger to see the cultural compatibility with each
other as the ethics, way of doing things and overall structure of the company revolves around the
adapted culture of that company. If two firms have very different cultures, the risk and chances of
conflicts are high and might lead to an unhealthy work environment. (Badrtalei, J., & Bates, D. L.
(2007).
Dis-economies of Scale: Two companies usually merge to benefit from the economies of scale,
however, sometimes the cost of production goes higher if the firms are large and the cost on co
ordination and other sub levels between the companies is high.
Consumer Perceptions: If the consumers do not favor either of the companies that are involved
in a merger, it may alienate the customers from the new firm and would lead to a non-profitable or non-
favorable situation. (International Finance E2 By Ephraim Clark: Pg. 609)
Layoffs: Though layoff would act as a cost saver for the new firm after the merger of two
companies, it would also affect the image of the company, as employees might feel in secured to work
in the company and also get demotivated which will affect the productivity as well. (The
Disadvantages of Merging Companies | eHow.com. (n.d.). eHow)
5.5 Driving Forces Behind Automotive Mergers and Acquisitions
Mergers and acquisitions (M&A) in the motor vehicle industry has been a dynamic event that is
both popular and controversial. The study of various literatures has traditionally recognized three main
motivations that lead to M&A activities namely synergy, agency and hubris (Berkovitch& Narayanan,
1993). Synergy refers to the positive effect of the combined forces of two or more entities result in
greater benefits than individual effects. Even though we may presume that synergies in an organization
advocate that M&As occur because of the probable economic gains, there is also a theory of agency
that imply that there are motivations for such M&A activities that also occur because of the desire of

the acquiring entities to maximize their personal benefits and thus motives action at the expense of the
acquiring firm shareholders, leading to negative overall wealth effects (Seth, Song & Pettit, 2000).
Furthermore, the concept of hubris in M&A refers to the activities that occur because of erroneous
valuation techniques for the potential target companies.
There have been many theories regarding the reasons that drive these activities in the
automobile industry. Many have hypothesized that it is mainly shareholder value creation that drives
mergers and acquisitions in the automobile industry. (Cross-Border Mergers, Acquisitions, and
Valuation 2008)
The automobile industry has come a long way since 1990 and there have been constant changes
in the dynamic environment such as technology, changing capital markets and favorable regulatory
framework. Such changes present both opportunities and risks that need to be managed by the
companies. According to The United Nations Conference on Trade and Development (UNCTAD,
formerly the U.N. Centre for Transnational Corporations) in their latest world development report
highlighted the main drivers are both at the micro and macro level as shown in the diagram (Table 2)
Many new research studies have also been undertaken to understand the M&A drivers since the
motives and characteristics may change over time. The major M&A activities have been observed to
occur in spurts, with periodic increases in M&A activity when there was a surge in the stock market
(Mueller, 1989). Apart from correlations to the stock market, there are correlations with economic
recessions and booms can affect the level of global M&A activity and its regional focus. Another
important trend in the industry is the emergence of cross-border M&A. Factors such as competition;
market structure and growth potential provide a conducive environment for cross-border mergers.
When the economy is going through a lull period of slow growth, robust competition and over-
capacity, this is a situation wherein M&As activities are more preferable to Greenfield investments.
This situation was seen in the automobile industry wherein there were sudden spurts of M&A activity
between 2008-2009 (Driving Value Automotive M&A Insights 2011)
The biggest driver for increased automotive transactions in the recent times has been the strategic
value that M&A include –expanding geographic footprint, capturing maximum market share,
broadening the customer base, constant technology upgrades; and increasing exposure to untapped
markets or growth-oriented market trends such as reduced vehicle emissions, green production et al.
(Driving Value Automotive M&A Insights 2011).
The literature reviewed puts forward many reasons for the reason companies resort to M&As. One
of the main factor considered are synergies. (Kode, Ford and Sutherland’s 2003) identified seven main
motivations, including industry specific requirements, scale requirements due to globalization, speed
and cost consideration of growth, product and service range expansion, risk reduction and
diversification, and leveraging of core competencies and technological changes, that all inherit some
synergistic benefits.
The other two theories that were discussed are agency and hubris. The agency theory states that
the acquiring firm managers will be allured to voluntarily overpay in order to amplify their own
benefits at the expense of their company shareholders (Seth et al., 2002). It is a common practice that a
manager’s compensation scheme is based on the scale of the organization is in terms of market cap,
geography and revenue. This usually induces managers to work on M&A valuations and activities with
the sole purpose of increasing the scale of the company rather than maximizing the wealth of the
shareholder. (Seth et al., 2000).

Finally, the hubris theory suggests that many M&A activities occur due valuation errors by
managers (Roll, 1986). Errors in valuation techniques lead managers to believe that engaging in
particular M&A transactions would result in more value and believe they have the hubris to be able to
spot such profitable opportunities and hence outperform the other management teams in the
organisation. (Mueller &Sirower, 2003). This approach invariable leads to wrong decisions taken by
the managers who are evaluating the proposals and even overpayment for a transaction, assuming that
the synergies in this case are zero. (Roll, 1986)
Both the hubris and agency theories estimate more gains in the transaction and loss of the acquirer.
However, they may be differentiated by the fact that hubris only results in a wealth transfer, leaving
total gains unaffected, while agency results in value creation to the acquiring firm’s management,
reducing the total wealth increases from the transaction (Berkovitch& Narayanan, 1993).
5.6 The long-term success of M&A in the automobile industry:
This study is based on a sample of 230 takeover announcements from 1981-2007. It explains the
significance of M&A, the success story over the years and the impact of globalization.
Over the years, it’s been seen that companies usually step in to mergers and acquisitions for
wealth creation. The urge to produce better and improve over time, by producing more and more
equipped and less expensive automobiles with specialized and expertise knowledge has led to growth
and expansion of businesses through mergers and acquisitions.
In the short run, M&A have shown positive returns to the acquiring companies as the factors
such as reaction of the share market, shareholders of the acquired companies, global synergy and the
expected future returns have shown a positive impact.
However, the same cannot apply to long run, as there have been companies who have incurred
losses due to M & A’s in the long run. The main question is whether the firms can sustain a merger or
acquisition for too long, beyond the short term gain and can make it a good deal by balancing various
factors like the methodological difficulties, cultural issues, understanding of the industry and firm
segment market etc. This study is mainly based on understanding the differences & effects of
geography, product range and transaction size and market reaction on M&A’s in the long run. The
analyses of the industry in long run are spread over three phases and dates back to 1970’s. In 1970’s-
80’s, the observations by done by Mandelkar (1974) were based on 241 mergers and it concluded a
negative long run return. Malesta (1983) another analyst also said that there also have a shown a
negative return. There were few more observations done by Barnes (1984), Bradley and Jarrell (1988),
and Franks and Harris (1989). Agrawal and Jaffe (2000) who have given their conclusions on the
same.
Eventually, Frank (1991) came up with a segmented benchmark and combined the calendar and
time approaches that gave a detailed study as compared to the basic statistic approach used in 1970-
80’s. After making changes in the short comings of his model of approach, they came up with a
character based matching approach based on factors like Risk, size, and market to book ratios. After the
analysis, the model shows that there still was a negative return.

The model has been refined over the years post 1990’s the analysis and study of different
observers using this model which is based on market value, ratios, size show that as compared to short
term returns, the long term effect of a M&A is slightly negative.
M&A’s in automobile industry is complex and the competition is intense, as there is a wide
range of products from high tech electrical equipment to tired and small parts and the diversified nature
of the products and product lines leads to a negative impact on returns.
However, if the transaction is a larger one, it might give a positive return in the long run. As
automobile industry can be termed as a production industry, the larger the transaction, and the better
the economies of scale and stronger would be the impact of returns and are mostly positive. The study
says that if the acquirer has been in the industry for too long and has integrated such multiple
transactions, they gain experience and can leverage out the additional transactions and thus give a
positive return on a M&A. (Haleblian and Finkelstein, 1999).
As we know, the strategies used in past and the analysis done for an M&A wasn’t robust enough
as was mainly based on statistical data like ratios and financial statements and ignored some of the
main determinants for a M&A. They were mainly of conglomerate type of merger and only operations
takeover were common and hence the culture of the two organizations involved didn’t affect an M&A
significantly. (Hunt, 1988).
Gradually and eventually, with the globalization and integration of industries increasing, there
was more scope of getting in to horizontal or related business types of mergers. (Cartwright & Cooper,
1992). However, though cultural compatibility played a significant role, the same was not considered in
the analysis stage while deciding upon an M&A deal. (Horwitz et. al., 2002). One researcher confessed
to "no knowledge of firms developing a comprehensive cultural fit audit as a component of due
diligence." (Carleton, 1997).
Organizational culture is a powerful source that can lead to a success or failure of a merger as
culture involves all facets of an organization (Gibbon, 2002). The beliefs, expectations and way of
doing things of an individual, team, group or an organization forms a part of the Culture and the same
needs to be well integrated and compatible with another company’s values and culture, while combing
the two for a smooth and successful transaction. (Schein, 1985).
The automobile industry has a long history of horizontal mergers and acquisitions and the study
says some of the successful M&A’s are Chrysler-Jeep in 1987, Renault-Nissan in 1999, and Ford-
Volvo in 1999 (Feast, 2003). However, there have been some unsuccessful mergers as well like Ford
Motor Company partnered with Jaguar. General Motors has been in partnership with Saab for 13 years
and is also unlikely to recover its costs (Feast, 1998). VW's brand buying of Lamborghini, Bentley and
Bugaiti has yet to benefit stockholders (Feast, 2003). The automobile industry has a long history of
successful and unsuccessful mergers. Most often, the reasons for failure have been due to the
differences in understanding and adapting cultural barriers, nationalities and technologies. (Feast,
2003).
5.7 Case Study - Merger of Daimler-Benz & Chrysler AG

The study below explains the historic merger of Daimler-Benz & Chrysler AG in 1998 and the
effect of cultural clashes in a M&A deal. The merger was deemed as the ‘merger of equals’ (Rowe
Kevin).
Chrysler AG was one of the most successful and profitable vehicle producers in the 1990’s. They
aimed at capturing the US market in 1997 with their market share in US surging to 27%. As their
revenues increased, they managed to keep their costs low and made them competitive in the Global
market.
Daimler-Benz, was also looking for proper avenues of growth. Even though the US economy was
booming, it was able to capture a meagre 1% of the American luxury car market (Standard & Poors
Stock Reports. New York: Standard & Poors, In., 1997). They realised that they needed to achieve
economies of scale to keep the costs low. They were looking for an avenue to take their growth story
forward and Chrysler seemed to be the perfect match.
On May 7th, 1998, Chrysler and Daimler-Benz announced a merger deal and was branded as as "a
merger of equals”. This newly formed company, with 442,000 employees and a market capitalization
approaching $100 billion, was all set to leverage on the synergies obtained from of synergy savings in
mass sales, purchasing, distribution, product design, and research and development. This deal was
looked as the biggest deal in the automobile industry
In 2001, three years after the merger with Daimler-Benz, the opinion of people towards the scale
and future of the deal changed. DaimlerChrysler's market capitalization stands at $44 billion,
comparable to the market capitalization of Daimler-Benz prior to the merger (Standard & Poors Stock
Reports, 2001). The stock was removed S&P 500, and Chrysler Group's shares fell to a third of its pre-
merger values.
The reason for this failure can mainly be attributed to a major culture clash and
mismanagement. As auto analyst, Maryann Keller noted on this merger, "... Merging corporate culture
is the biggest uncertainty. When it comes to the culture of these two companies [Chrysler and Daimler-
Benz], they are oil and water" (Feast, 2003).
The merger process of an organization contains the below steps- Prospect search and
identification, Due diligence, Negotiation, Transition Management and Operating as an integrated unit.
The Cultural clashes of Germans and Americans did not support the merger of Daimler-Chrysler.
The analysis stage was done efficiently and was carried out keeping in mind the overall objective
of the new company. However, some of the issues as listed below posed to be a problem in the coming
years. The management of Daimler decided to have a leading role in the merger and the same was not
explicitly conveyed in the discussions with the management of Chrysler. Instead, it was portrayed as a
‘merger of equals’.
Both the companies were aware of the cultural differences and so had decided that for purpose of
tax benefits and to make it acceptable for the management of Daimler (a German company), the new
entity would be recorded as a German Entity. Furthermore, the company’s name was also announced to
be as Daimler-Chrysler, in opposition to the name initially proposed to be as “Chrysler-Daimler-
Benz” which was to act as trade off for the entity being recorded as German Entity. During the course

of the process of M&A, the management of Chrysler made lot of such compromises and the deal
appeared more like an acquisition than a merger, which made it difficult to work as an integrated unit.
The domination of work culture of Daimler (German Company) over Chrysler (American Company) in
factors such as executive compensation, business travel facilities discrimination, work habits and
styles, the difference in the approach of decision making process and the clash of accounting systems
lead to closure of some of the units of their business. The positives and negative of the merger of
Daimler-Chrysler and the foreseen success as individual companies can be discussed and argued over ,
however it does act as a learning and addresses some major considerations to refine the decision
making stage of a merger deal.
5.9 Case study – Nissan Renault Alliance
The study of the Nissan Renault alliance is an example of a strategic partnership between
Japanese automaker Nissan and French automobile manufacturer Renault.
Prior to the alliance, Nissan was facing huge operational issues leading to massive cuts in
production and continued losses. Such inefficiencies affected their solvency and they had accumulated
a substantial amount of debt (approximately US$200million). Furthermore, the Japanese company was
suffering from their Keirtesu partnerships. These Keirtesu partnerships were backed by the Japanese
tradition of holding equity stakes in their partner companies. This led to a massive lock up of capital in
many of Nissan’s partner companies and an inability to free their investments when it was required to
improve their operational and financial position. Nissan had approximately US$4 billion invested in
many of their partner companies and were not entitled to managerial benefits from these investments.
(Ghosn, 2002).
Such a situation called on for urgent steps to be taken by the management of Nissan to encourage
a turnaround. Rather than resorting to traditional forms of corporate restructuring, Nissan and Renault
decided to engage in a cross-shareholding agreement. This sort of alliance was unique in the
automobile industry during their times and such a consolidation model was later adopted by many
automakers such as General Motors and PSA Peugeot Citroën, PSA Peugeot Citroën and Mitsubishi,
and Volkswagen and Suzuki.
Nissan looked through a number of options and in 1999 signed a cross-shareholding deal with
Renault. Research proved that creating such a common platform for common organizational processes
and synergy-based activities is the most conducive for knowledge transfer (Segrestin, 2003). Renault
acquired 37 per cent of Nissan stock, (increased to 44 per cent in 2001) and Nissan also acquired 15 per
cent of Renault - while maintaining their individual brand names and independent corporate cultures,
but agreed to share their knowledge of what they did best: for Renault they were very good in was
design and management, for Nissan they were leaders in manufacturing and engineering.
In the Nissan- Renault alliance, Renault offered Nissan the much required financial support and
global management skills, whereas Nissan contributed to Renault’s manufacturing capabilities, since
Nissan was world renowned for consistent world class manufacturing skills (Fujimoto, 2001)
We can assess the success of the alliance by delving into the performances of both the companies.
Since the agreement, Nissan has achieved a remarkable financial turnaround from the pre agreement
financial mess they were in. Renault has used the technical expertise and know how of Nissan to
strengthen its production and financial performance. Their combined vehicle sales increased from 4.9m
units in 1999 to about 8.03m units in 2011. In 2011, they were the world’s third largest automobile
producing company. (The Renault-Nissan Alliance, 2013).

5.10 Case study – Tata- Jaguar Land Rover
The Tata acquisition of Jaguar Land Rover (JLR) from Ford Motors in 2008 is a good example of an
acquisition that was perceived to be a bad deal and was criticized for it’s bad timing and
questioned on its viability and sustainability of the deal. (M Anand,2008). Following the
acquisition by Tata, the demand in the global luxury market dipped as a result of the Global
Financial Crisis (GFC) and Tata underwent losses. This forced Tata to refinance its investment
but now has recovered and is finally showing value by adding value to shareholders for Tata as
well as from stakeholders of Jaguar Land rover in UK.
Ford Bought Jaguar in 1990 and Land Rover from BMW in 2000. These acquisitions were made
predominantly to penetrate into the luxury market. Unfortunately these acquisitions did not translate
into higher sales. Following the acquisition, Jaguar was unable to generate profits and incurred up to
US$600million per year under Ford mainly due to high manufacturing expenses. On the other hand
Land Rover was achieving good sales and profit levels (All business online, 2009). Ford was
undergoing a very tough phase of losses due to the rising fuel prices, labor issues and the shrinking
market demand for cars owing to the slump in the economy. All these factors along with robust
competition from its Asian counterparts lead to Ford posting an all time lowest loss of US12.7 billion
in 2006. (All business online, 2009). These factors lead to Ford deciding to sell both Jaguar and Land
Rover in 2007 because of the production of these two brands were connected.
Tata group was India’s largest commercial and vehicle producer. They were aiming at rapid growth
and after acquisition of companies such as Corus Steel (Jaguar Land Rover’s largest supplier),
attempted to penetrate into luxury goods market with the City Rover model. Once their launch failed, it
was imperative for them to think of a strategy to create its identity in the luxury car space. Keeping in
mind their struggling brand image and rising material costs, Tata went ahead with the JLR deal.
Tata acquired JLR March 2008 for US$2.3 billion ("Tata Group, Tata Motors, Media releases, Tata
Motors completes acquisition of Jaguar Land Rover.”) and following the crash of the market due to the
GFC; Tata refinances the takeover with US$3bn of new long-term loans. Tata also received aid from
the UK government in 2008 and a loan from the European Investment Bank in February 2010 to
support the JLR operations. Tata paid Ford for the JLR deal an amount less than half of what Ford paid
for both the companies. Ford Still had significant investments in Jaguar and Tata realized that it would
need the support from Ford who was the primary car component suppliers to Jaguar and Land rover.
Tata went through many issues and accrued benefits too with this deal. Some of the problems
Tata faced were – fall in share prices, increased debt due to high costs in UK, reduction in sales and
difficulty in obtaining loans. Tata motors reported losses and suffered a slowdown in domestic sales as
well. (Mehul Srivastava, 2009),
Though the company faced a lot of issues, there were many positives that came from this deal.
This Acquisition relieved Ford of Jaguar – a loss-making unit and was helpful in improving their
financial condition. Acquiring JLR provided Tata considerable revenue synergies, including giving

Tata greater exposure and channels of international distribution, diverse range of products, up- to date
customer service skills and access to the best engineering facilities. Tata was able to reduce dependence
on the Indian automobile industry as well as mature markers and focus on emerging markets. They got
to the public eye and could work on their brand image.
The deal did not go through friction from the employees as the deal was passed through the
employees and trade unions and were The deal has been approved by the trade unions, which required
Tata to commit to continuing operations at the JLR facilities till 2011 end.
After the near- death experience in 2008, currently Tata and its JLR division are now profitable,
aided by soaring sales by Jaguar and Land Rover, record profits by Tata and surging share prices. (For
Tata Motors, Jaguar A Gold Mine – Forbes, 2012)

6. Methodology
Our methodology on mergers and acquisitions in the automotive industry followed a top down
approach. Our research is secondary research due to the nature of the project and is based on extensive
readings of journals, periodicals, government data agencies, database websites and books. First of all
we started looking into the automotive industry and identified the key factor and trends affecting the
auto industry. We further reviewed literature on mergers and acquisitions, benefits of mergers and
acquisitions and the driving forces around the world. We were focused on the changes happening in the
industry from the year 2000 and onwards. Our primary reason to limit years was due to the structural
changes that happened in the industry due to the rise of BRIC (Brazil, Russia, India and China) nations,
and especially the global financial crises of late 2008 and 2009.
We looked at the market composition, global distribution and also identified the market share of
top competitors. A schematic diagram to understand the research has been created. We further explored
recent trends in the industry and how the industry has shaped up over the years following the financial
crises. We looked into the intricate details of companies undergoing changes in the global financial
crises. To further understand mergers and acquisitions we looked into different types of mergers,
advantages of merges, disadvantages of mergers, and effect of mergers and acquisitions on
organizational culture. We have adopted a case study method to understand the effects of M&A on the
industry and used the findings to make relevant inferences. We looked into various forces that lead
companies to merge and acquire such as Daimler – Chrysler, Nissan’s joint venture and the Tata –
Jaguar Land Rover acquisition.
We have collected quantitative data about the historic deal values and geographic distribution of
such M&A activities. We supplemented our research with the analysis of the data collected to get to the
conclusion of our research project.

7. Data Analysis
7.1. Industry Analysis
The global automotive industry including suppliers is an oligopoly with a handful of players
dominating the market. Though the number of players is limited and access is restricted to a select few,
the industry acts as a linchpin of modern economics and commerce.
The global automotive industry is not only restricted to manufacturing and sales of cars & trucks
but also includes auto part suppliers. According to research report by World Market Automotive
Research, ‘the automotive industry’s yearly growth rate is expected to exceed 5.5% from 2010 to 2015,
reaching a value of more than $5.1 trillion by 2015’. Market Line also reported that global automotive
retail sector will have total revenues of $4,911.9 billion in 2011, representing a compound annual
growth rate (CAGR) of 2.2% between 2007 and 2011. Also, the auto dealers segment was the most
lucrative of all sectors lucrative in 2011, with total revenues of $2,135.2 billion, equivalent to 43.5% of
the sector's overall value (Agency, Governmental)’. It is expected that the automotive sector will have
an anticipated compounded annual growth rate of 8% from 2011 to 2016 and the overall sector will
have a valuation of 7202.9 billion dollars (Agency Government).
The International Organization of Motor Vehicle Manufacturers considers the auto industry as
the primary driver of global economic growth. The organization has proclaimed that the global
automotive industry is the leading employer as more than nine million people are involved in
manufacturing sixty million vehicles, and precisely it sums up to be the five percent of all global
manufacturing jobs. Automotive industry also is widely connected with various other industries such as
metals, plastics rubber etc., and involves significant research and development.
In 2008, four major companies namely, Toyota Motor Corporation, General Motors
Corporation, Daimler AG and Ford Motor Company occupied 38% of the market share while all the
combined companies of the world account for approximately 62% of the market share (Data Monitor
IMAP). The global market share by region was dominated by Asia Pacific (35.80%) followed by
America (30.70%), and Europe (26.70%) (Data Monitor IMAP).
The global financial crisis completely altered the course of automotive industry. Except for
South Africa and Thailand, all countries were majorly affected by it. However only in 2009 gradually
did the production and sales started to decline in global south, but primary markets started to improve
(United Nations Industrial Development Organization). The industry is still recovering and moving
forward. The strength of the auto market recovery will be strongly associated with macroeconomic
factors—employment, housing, and consumer credit ﬂows—as well as cost factors such as gasoline
prices and vehicle prices. Though the basic patterns for personal transportation are unchanged, how
many people will be working and forming new households is critical to automobile demand (Chu &
Su).

8. Conclusion
It is a well-known fact, that globalization is creating moulds and integrating us in ways which
we never dreamed before. Not only are boundaries integrating but also businesses are consolidating and
creating cross border transactions of values bigger than the gross domestic product of certain individual
countries.
Mergers and acquisitions are surely not for the faint hearted. It involves massive risks and has
its own disadvantages and disadvantages. The Daimler Chrysler case was a classic example as two of
the greatest auto motives of our times come together and the greatest marriage ending in a better
divorce.
Companies often fall into prey of acquisition syndrome without doing much due diligence.
Animal spirits take over rationality and the overall benefits projected in many cases lead to unintended
consequences. However not all mergers go astray. There are certainly classic stories where companies
have gained from acquisitions. Mergers and Acquisitions peak during economic booms, 2008 -2009
being exception, and tend to dip during recessionary periods. Economic booms revive animal spirits
and tagged along with increasing stock prices creating a spiral effect. During recessionary times we see
more of consolidation and companies throwing their arms open for acquisitions to survive. This was
clearly evident in the global financial crises.
We foresee the future of automotive industry to be very bright. As the world economy grows
and people move higher in the economic spectrum the demand for automotive vehicles is going to
increase. Automotive companies will need to be innovative and incorporate state of the art technology.
Companies need to be vigilant and the margin for error in business needs to be miniscule. General
Motor’s failure to understand the consumer demand by rapid production of gas guzzling sports utility
vehicles was a major mistake and the company surely was punished. Such mistakes in future as well
will surely be well reprimanded by the markets. We recommend that companies whether undertaking a
horizontal or vertical merger need to study their partners diligently. A merger is no different than a
marriage and cultural mismatches can very easily happen. Qualitative factors are as important as
quantitative factors. Corporations exist to increase shareholder value and certainly care should be
exercised before delving into deal making.

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Source: Deloitte Automotive consulting

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