A PROJECT REPORT ON

‘MERGERS AND ACQUISITIONS’

SUBMITTED BY:
CHETAN OSWAL
MFM SEM - V (2010-2011)
ROLL NO. 30

PROJECT GUIDE:
PROF. ASHOK RAINA

LALA LAJPATRAI INSTITUE OF

MANAGEMENT, MUMBAI

SUBMITTED TO:
UNIVERSITY OF MUMBAI
(2010 – 2011)
 PROJECT GUIDE CERTIFICATE FORM

This is to certify that the dissertation submitted in partial fulfillment of the

requirement for the award of MFM of the University of Mumbai is a result of the
bonafide work carried out by Mr. Oswal Chetan Amar under my supervision and
guidance no part of this report has been submitted for award of any other degree,
diploma fellowship or other similar titles or prizes. The work has also not been
published in any scientific journals/ magazines.

Date: Name: Oswal Chetan Amar

Place: Mumbai Roll No.: M.F.M-30

------------------------------ ---------------------------

(Director, LLIM) (Project Guide)

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 ACKNOWLEDGEMENTS

I would like to express my sincere gratitude to my internal guide Prof.

Ashok Raina, for his continuing support during and after my field study. I

would also like to thank my Co-ordinator Prof. M.L.Narendran, and Director of

our College, for creating confidence in me and the management of, for

supporting me in my Endeavour towards education. I would also like to thank

all the contributors for my project from various sources for providing me with

this stimulating opportunity and encouragement to explore and study practical

aspects on analytical study on working of Merger & Acquisition.

(Chetan A. Oswal)

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 CONTENTS

SR. NO. PARTICULARS PAGE NO.

1. EXECUTIVE SUMMARY 5–9

2. CLASSIFICATION OF MERGER 10 – 18

3. MOTIVE BEHIND MERGER & ACQUISATION 19 – 34

4. WHY MERGERS & ACQUISATIONS DO NOT 35 – 43

SUCEED?

5. CASE STUDY

A) DAILMER BENZ & CHRYSTER 44 – 51

B) RENAULT & VOLVO 52 – 57

C) FORD & VOLVO 58 – 65

6. LATEST NEWS ON MERGERS & 66

ACQUISATIONS

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 LIST OF TABLES

SR. NO. PARTICULARS PAGE NO.

1. LARGEST MERGER & ACQUISATION 39

2. TOP 10 ACQUISATIONS 40

LIST OF CHARTS

SR. NO. PARTICULARS PAGE NO.

1. STAGES OF MERGER 22

2. MAGIC CIRCLE FOR A SUCESSFUL MERGER 26

3. MOTOR VEHICLE & PARTS 43

MANUFACTURING FOR CROSS BORDER
MERGER & ACQUISATION

EXECUTIVE SUMMARY

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 Industrial maps across the world have been constantly redrawn over the years
through various forms of corporate restructuring. The most common method of
such restructuring is Mergers and Acquisitions (M&A). The term "mergers &
acquisitions (M&As)" encompasses a widening range of activities, including joint
ventures, licensing and synergising of energies. Industries facing excess capacity
problems witness merger as means for consolidation. Industries with growth
opportunities also experience M&A deals as growth strategies. There are stories of
successes and failures in mergers and acquisitions. Such stories only confirm the
popularity of this vehicle.
Merger is a tool used by companies for the purpose of expanding their
operations often aiming at an increase of their long term profitability. There are 15
different types of actions that a company can take when deciding to move forward
using M&A. Usually mergers occur in a consensual (occurring by mutual consent)
setting where executives from the target company help those from the purchaser
in a due diligence process to ensure that the deal is beneficial to both parties.
Acquisitions can also happen through a hostile takeover by purchasing the
majority of outstanding shares of a company in the open market against the wishes
of the target's board. In the United States, business laws vary from state to state
whereby some companies have limited protection against hostile takeovers. One
form of protection against a hostile takeover is the shareholder rights plan,
otherwise known as the "poison pill".
Mergers and acquisitions (M&A) have emerged as an important tool for growth
for Indian corporates in the last five years, with companies looking at acquiring
companies not only in India but also abroad.

INTRODUCTION

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The words Mergers and Acquisitions are often used as an interchangeable term, a
convenient but inaccurate usage. Mergers refer to deals where two or more
companies take virtually equal stakes in each other’s businesses, whereas an
acquisition is the straightforward purchase of a target company by another
company.

What is a Merger?
A "merger" or "merger of equals" is often financed by an all stock deal (a stock
swap). An all stock deal occurs when all of the owners of the outstanding stock of
either company get the same amount (in value) of stock in the new combined
company. The terms "demerger," "spin-off" or "spin-out" are sometimes used to
indicate the effective opposite of a merger, where one company splits into two, the
second often being a separately listed stock company if the parent was a stock
company. Merger is a legal process and one or more of the companies lose their
identity.

What is an Acquisition?
In a layman’s language an “acquisition” is one company acquiring a controlling
interest in another company. An acquisition (of un-equals, one large buying one
small) can involve a cash and debt combination, or just cash, or a combination of
cash and stock of the purchasing entity, or just stock. An acquisition occurs when
an organization acquires sufficient shares to gain control/ownership of another
organization. Acquisitions can also happen through a hostile takeover by
purchasing the majority of outstanding shares of a company in the open market
against the wishes of the target's board. In an acquisition there are clear winners or
losers; power is not negotiable, but is immediately surrendered to the new parent
on completion of the deal. `Those who hold the title also hold the pen to draw the
organisational chart'.

High-yield
In some cases, a company may acquire another company by issuing high-yield debt
(high interest yield, "junk" rated bonds) to raise funds (often referred to as a

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leveraged buyout). The reason the debt carry a high yield is the risk involved. The
owner can not or does not want to risk his own money in the deal, but third party
companies are willing to finance the deal for a high cost of capital (a high interest
yield).
The combined company will be the borrower of the high-yield debt and it will be
on its balance sheet. This may result in the combined company having a low
shareholders' equity to loan capital ratio (equity ratio).
Examples
In a 1985 merger between Pantry Pride and Revlon, Pantry Pride had to issue 2.1
billion dollars of high-yield debt to buy Revlon. The target Revlon was worth 5
times the acquirer.

Consolidation
Technically speaking consolidation is the fusion of two existing companies into a
new company in which both the existing companies extinguish.
Merger and Consolidation can be differentiated on the basis that, in a merger one of
the two merged entities retains its identity whereas in the case of consolidation an
entire new company is formed.

Takeovers
A takeover bid is the acquisition of shares carrying voting rights in a company with
a view to gaining control over the management. The takeover process is unilateral
and the offer or company decides the maximum price.

Demerger
It means hiving off or selling off a part of the company. It is a vertical split as a
result of which one company gets split into two or more.

Amalgamation
Halsbury’s Laws of England describe amalgamation as a blending of two or more
existing undertaking into one undertaking, the shareholders of each blending

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company becoming substantially the shareholders in the company which is to carry
on the blended undertaking.

DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

Although they are often uttered in the same breath and used as though they were
synonymous, the terms merger and acquisition mean slightly different things.
When one company takes over another and clearly established itself as the new
owner, the purchase is called an acquisition. From a legal point of view, the target
company ceases to exist, the buyer "swallows" the business and the buyer's stock
continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of about the
same size, agree to go forward as a single new company rather than remain
separately owned and operated. This kind of action is more precisely referred to as
a "merger of equals." Both companies' stocks are surrendered and new company
stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to
exist when the two firms merged, and a new company, DaimlerChrysler, was
created.
In practice, however, actual mergers of equals don't happen very often. Usually,
one company will buy another and, as part of the deal's terms, simply allow the
acquired firm to proclaim that the action is a merger of equals, even if it's
technically an acquisition. Being bought out often carries negative connotations,
therefore, by describing the deal as a merger, deal makers and top managers try to
make the takeover more palatable.
A purchase deal will also be called a merger when both CEOs agree that joining
together is in the best interest of both of their companies. But when the deal is
unfriendly - that is, when the target company does not want to be purchased - it is
always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really depends on
whether the purchase is friendly or hostile and how it is announced. In other

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words, the real difference lies in how the purchase is communicated to and
received by the target company's board of directors, employees and shareholders.

CLASSIFICATIONS OF MERGERS

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Mergers are generally classified into 5 broad categories. The basis of this
classification is the business in which the companies are usually involved. Different
motives can also be attached to these mergers. The categories are:

Horizontal Merger
It is a merger of two or more competing companies, implying that they are firms
in the same business or industry, which are at the same stage of industrial
process. This also includes some group companies trying to restructure their
operations by acquiring some of the activities of other group companies.

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The main motives behind this are to obtain economies of scale in production by
eliminating duplication of facilities and operations, elimination of competition,
increase in market segments and exercise better control over the market.
There is little evidence to dispute the claim that properly executed horizontal
mergers lead to significant reduction in costs. A horizontal merger brings about all
the benefits that accrue with an increase in the scale of operations. Apart from cost
reduction it also helps firms in industries like pharmaceuticals, cars, etc. where
huge amounts are spent on R & D to achieve critical mass and reduce unit
development costs.

Vertical Mergers
It is a merger of one company with another, which is involved, in a different
stage of production and/ or distribution process thus enabling backward
integration to assimilate the sources of supply and / or forward integration
towards market outlets.
The main motives are to ensure ready take off of the materials, gain control over
product specifications, increase profitability by gaining the margins of the previous
supplier/ distributor, gain control over scarce raw materials supplies and in some
case to avoid sales tax.

Conglomerate Mergers
It is an amalgamation of 2 companies engaged in the unrelated industries. The
motive is to ensure better utilization of financial resources, enlarge debt capacity
and to reduce risk by diversification.
It has evinced particular interest among researchers because of the general curiosity
about the nature of gains arising out of them. Economic gain arising out of a
conglomerate is not clear.
Much of the traditional analysis relating to economies of scale in production,
research, distribution and management is not relevant for conglomerates. The
argument in its favour is that in spite of the absence of economies of scale and
complimentaries, they may cause stabilization in profit stream.

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Even if one agrees that diversification results in risk reduction, the question that
arises is at what level should the diversification take place, i.e. in order to reduce
risk should the company diversify or should the investor diversify his portfolio?
Some feel that diversification by the investor is more cost effective and will not
hamper the company’s core competence.
Others argue that diversification by the company is also essential owing to the fact
that the combination of the financial resources of the two companies making up the
merger reduces the lenders risk while combining each of the individual shares of
the two companies in the investor’s portfolio does not. In spite of the arguments
and counter- arguments, some amount of diversification is required, especially in
industries which follow cyclical patterns, so as to bring some stability to cash flows.

Concentric Mergers
This is a mild form of conglomeration. It is the merger of one company with
another which is engaged in the production / marketing of an allied product.
Concentric merger is also called product extension merger. In such a merger, in
addition to the transfer of general management skills, there is also transfer of
specific management skills, as in production, research, marketing, etc, which have
been used in a different line of business. A concentric merger brings all the
advantages of conglomeration without the side effects, i.e., with a concentric
merger it is possible to reduce risk without venturing into areas that the
management is not competent in.

Consolidation Mergers:
It involves a merger of a subsidiary company with its parent. Reasons behind such
a merger are to stabilize cash flows and to make funds available for the subsidiary.

Market-extension merger
Two companies that sell the same products in different markets.

Product-extension merger
Two companies selling different but related products in the same market.

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 WAYS OF HANDLING A MERGER OR AN ACQUISITION

There are 4 ways in which a merger can be handled

1 ) Friendly merger
A merger whose terms are approved by the management of both companies.
Usually such mergers have a high probability of success

2 ) Hostile merger
A merger in which the target firms’ management resists the acquisition or
merger.

3 ) Tender offer
The offer of one firm to buy the stock of another by going directly to the
stockholders, frequently (but not always) over the opposition of the target
company’s management

4 ) Proxy Fight
An attempt to gain control of a firm by soliciting stockholders to vote for a new
management team.

THE WHACKY WORLD OF M&A’S

Terms like "dawn raid", "poison pill", and "shark repellent" might seem like they
belong in James Bond movies, but there's nothing fictional about them - they are
part of the world of mergers and acquisitions (M&A). Owning stock in a company
means you are part owner, and as we see more and more sector-wide
consolidation, mergers and acquisitions are the resultant proceedings. So it is
important to know what these terms mean for your holdings.
Mergers, acquisitions and takeovers have been a part of the business world for
centuries. In today's dynamic economic environment, companies are often faced
with decisions concerning these actions - after all, the job of management is to
maximize shareholder value. Through mergers and acquisitions, a company can (at

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least in theory) develop a competitive advantage and ultimately increase
shareholder value.
There are several ways that two or more companies can combine their efforts. They
can partner on a project, mutually agree to join forces and merge, or one company
can outright acquire another company, taking over all its operations, including its
holdings and debt, and sometimes replacing management with their own
representatives. It’s this last case of dramatic unfriendly takeovers that is the source
of much of M&A’s colorful vocabulary.

Hostile Takeover
This is an unfriendly takeover attempt by a company or raider that is strongly
resisted by the management and the board of directors of the target firm. These
types of takeovers are usually bad news, affecting employee morale at the targeted
firm, which can quickly turn to animosity against the acquiring firm. Grumblings
like, “Did you hear they are axing a few dozen people in our finance
department…” can be heard by the water cooler. While there are examples of
hostile takeovers working, they are generally tougher to pull off than a friendly
merger.
Dawn Raid
This is a corporate action more common in the United Kingdom; however it has
also occurred in the Unites States. During a dawn raid, a firm or investor aims to
buy a substantial holding in the takeover-target company’s equity by instructing
brokers to buy the shares as soon as the stock markets open. By getting the brokers
to conduct the buying of shares in the target company (the “victim”), the acquirer
(the “predator”) masks its identity and thus its intent.
The acquirer then builds up a substantial stake in its target at the current stock
market price. Because this is done early in the morning, the target firm usually
doesn't get informed about the purchases until it is too late, and the acquirer now
has controlling interest. In the U.K., there are now restrictions on this practice.

Saturday Night Special

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This is a sudden attempt by one company to take over another by making a public
tender offer. The name comes from the fact that these maneuvers used to be done
over the weekends. This too has been restricted by the Williams Act in the U.S.,
whereby acquisitions of 5% or more of equity must be disclosed to the Securities
Exchange Commission.
Takeovers are announced practically everyday, but announcing them doesn't
necessarily mean everything will go ahead as planned. In many cases the target
company does not want to be taken over. What does this mean for investors?
Everything! There are many strategies that management can use during M&A
activity, and almost all of these strategies are aimed at affecting the value of the
target's stock in some way. Let's take a look at some more popular ways that
companies can protect themselves from a predator. These are all types of what is
referred to as "shark repellent".

Golden Parachute
This measure discourages an unwanted takeover by offering lucrative benefits to
the current top executives, who may lose their job if their company is taken over by
another firm. Benefits written into the executives’ contracts include items such as
stock options, bonuses, liberal severance pay and so on. Golden parachutes can be
worth millions of dollars and can cost the acquiring firm a lot of money and
therefore act as a strong deterrent to proceeding with their takeover bid.

Greenmail
A spin-off of the term "blackmail", greenmail occurs when a large block of stock is
held by an unfriendly company or raider, who then forces the target company to
repurchase the stock at a substantial premium to destroy any takeover attempt.
This is also known as a "bon voyage bonus" or a "goodbye kiss".

Macaroni Defense

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This is a tactic by which the target company issues a large number of bonds that
come with the guarantee that they will be redeemed at a higher price if the
company is taken over. Why is it called macaroni defense? Because if a company is
in danger, the redemption price of the bonds expands, kind of like macaroni in a
pot! This is a highly useful tactic, but the target company must be careful it doesn't
issue so much debt that it cannot make the interest payments.
Takeover-target companies can also use leveraged recapitalization to make
themselves less attractive to the bidding firm.

People Pill
Here, management threatens that in the event of a takeover, the management team
will resign at the same time en masse. This is especially useful if they are a good
management team; losing them could seriously harm the company and make the
bidder think twice. On the other hand, hostile takeovers often result in the
management being fired anyway, so the effectiveness of a people pill defense really
depends on the situation. 
Poison Pill
With this strategy, the target company aims at making its own stock less attractive
to the acquirer. There are two types of poison pills. The 'flip-in' poison pill allows
existing shareholders (except the bidding company) to buy more shares at a
discount. This type of poison pill is usually written into the company’s
shareholder-rights plan. (To learn more about these and other shareholders’ rights,
see Knowing Your Rights as a Shareholder.) The goal of the flip-in poison pill is
to dilute the shares held by the bidder and make the takeover bid more difficult
and expensive.
The 'flip-over' poison pill allows stockholders to buy the acquirer's shares at a
discounted price in the event of a merger. If investors fail to take part in the poison
pill by purchasing stock at the discounted price, the outstanding shares will not be
diluted enough to ward off a takeover.
An extreme version of the poison pill is the "suicide pill" whereby the takeover-
target company may take action that may lead to its ultimate destruction.

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Sandbag
With this tactic the target company stalls with the hope that another, more
favorable company (like “a white knight”) will make a takeover attempt. If
management sandbags too long, however, they may be getting distracted from
their responsibilities of running the company.

White Knight
This is a company (the “good guy”) that gallops in to make a friendly takeover
offer to a target company that is facing a hostile takeover from another party (a
“black knight”). The white knight offers the target firm a way out with a friendly
takeover.

HISTORY OF MERGERS IN THE 20TH CENTURY

In 1998 there were a large number of “blockbuster” mergers and acquisitions that
made past mergers and acquisitions look small by comparison. For example, the
largest announced mergers in 1998 were the marriage between Citicorp and
Traveler’s Group estimated at $77 billion in value and Exxon’s acquisition of Mobil
for an estimated $79 billion. Closely following were transactions between SBC and
Ameritech values at approximately $61.8 billion and between Nations Bank Corp and
BancAmerica Corp. valued at approximately $60 billion. AT&T announced the
acquisition of Tele-Communications, Inc, valued at approximately $43 billion. One of
the largest industrial mergers and acquisition was between Chrysler Group and
Daimler Benz AG Valued at $45.5 billion, was also announced. These were all larger
than the acquisition of MCI by WorldCom announced in 1997 and characterized as a
megamerger by many at approximately $37 billion.

The size and number of M&A transactions continue to grow worldwide. For
example one of the largest mergers in history was announced in 1999 MCI
WorldCom and Sprint agreed to a merger values by analyst at $ 115 billion and $129
billion. But it did not receive regulatory approval and the respective boards of

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directors called off the merger agreement in July 2000. Had the merger been
completed it would have been the second largest global telecommunications
company behind only AT&T.

IMPORTANCE OF MERGERS AND ACQUISITIONS

The 1980’s produced approximately 55,000 mergers and acquisitions in the United
States alone. The value of the acquisitions during this decade was approximately
$1.3 trillion as impressive as these figures are; they are small in comparison to the
merger wave that began in the earlier 1990’s approximately in 1993. The number
and value of mergers and acquisitions have grown each year since 1993. For
example in 1997 there were approximately 22,000 mergers and acquisitions roughly
40% of the total acquisitions during the whole decade of the 1980s. Perhaps more
significant, the value of these mergers in 1997 was $1.6 trillion. In other words, the
acquisitions completed in 1997 were valued at $300 billion more than the value of
acquisitions during the 1980s. Interestingly 1980s was often referred to as the
decade of “Merger Madness”. The year 1998 was no different, as noted by the huge
Merger and Acquisitions transactions listed earlier; it was predicted to be another
record year. Interestingly the 6,311 domestic mergers and acquisitions announced
in 1993 had a total value of $234.5 billion for an average $37.2 million, whereas the
mergers and acquisitions announced in 1998 had an average value of $168.2 million
for an increase of 352% over those of 1993. Approximately $2.5 trillion in mergers
were announced in 1999, continuing the upward trend.

The merger and acquisitions in the 1990s represent the fifth merger wave of the
twentieth century and their size and numbers suggest that the decade of 1990s
might be remembered for the megamerger mania. With five merger waves
throughout the twentieth century, we must conclude that mergers and acquisitions
are an important, if not dominant. Strategy for twenty first century organizations

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 THE MOTIVE BEHIND MERGERS AND ACQUISITIONS

The strategic Goals of mergers and acquisitions

1 ) Economies of Scale

2 ) Consolidation: -
Media buyers are now consolidating to increase ad rates

3 ) Globalization: -
For Example Kerry Group an Irish milk processor and dairy cooperative has become
a global player after a string of acquisitions in the food and ingredients business.

4 ) Create or gain access to distribution channels: -

A lack of distribution has been one of the main hindrances to growth of the wine
companies. They are overcoming this by a string of acquisitions for example Fosters.

5 ) Gain access to new products and technologies: -

Pooling resources helps pharmaceutical companies to speed up research and
development of new drugs and also to share the risks and place a number of bets
on emerging technologies. In the 1990’s 23 pharmaceutical merger to form the top
ten players.

6 ) Enhance or increase products and/or services: -

Mergers between large banks specializing in different sectors for example when
Allianz AG acquired Dresdner Bank.

7 ) Increase market share or access to new markets: -

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Car manufacturers turn to mergers and acquisition for this reason. For example
when Daimler Benz and Chrysler Group merged, when Ford acquired Jaguar.
8 ) Diversification

9 ) To offset threatened loss of market

1 0 ) To increase the rate of growth

1 1 ) To improve cyclical and seasonal stability

1 2 ) To improve effectiveness of the marketing effort

1 3 ) To employ excess capital

1 4 ) To change from a holding company to a operating company

THE ALTERNATIVE PROSPECTS OF MERGERS AND

ACQUISITIONS / WHY MERGERS AND ACQUISITIONS?

1 ) The quest for bigness: -

Many mergers and acquisitions are driven by the simple urge to be bigger as John
Johnstone, retired C E O of Texaco says

2 ) Saving face: -
As done Mr. Bossidy C E O of AlliedSignal, when he realized he would fail to meet
his promise of achieving growth $20 billion by 2000. So they in order to save face
AlliedSignal acquired Honeywell in 1999 and reached revenues of $24 billion.

3 ) Short Term Pressure: -

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Mergers and acquisition are undertaken to show good quarterly earnings as there is
intense focus on it.

4 ) Boredom

5 ) Fear of being left on the shelf: -

For example when Nestle acquired Ralston Purina, a pet food company, it was
mirrored by Mars’s acquisition of Royal Canin, a French pet-food manufacturer. BP’s
merger with Amco shortly led to the Mobil’s merger with Exxon.

6 ) C E O Hubris
Sometimes Mergers happen to satisfy the egos of C. E. O.
These motives are considered to add shareholder value:
1 ) Economies of scale
2 ) Increased revenue/Increased Market Share
3 ) Cross Selling
4 ) Synergy: Better use of complementary resources.
5 ) Taxes
6 ) Geographical or other diversification
These motives are considered to not add shareholder value:
1 ) Diversification
2 ) Overextension
3 ) Manager's hubris
4 ) Empire Building
5 ) Manager's Compensation
6 ) Bootstrapping

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 STAGES OF A MERGER

Pre-mergers are characteristics by the following stages: -

1 ) COURTSHIP: -
The respective management teams discuss the possibility of a merger and
develop a shared vision and set of objectives. This can be achieved through a
rapid series of meetings over a few weeks, or through several months of talks
and informal meetings

2 ) EVALUATION AND NEGOTIATION: -

Once some form of understanding has been reached the purchasing company
conducts “due diligence” a detailed analysis of the target company assets,
liabilities and operations. This leads to a formal announcement of the merger

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 and an intense round of negotiations, often involving financial intermediaries.
Permission is also sought from trade regulators. The new management team is
agreed at this point, as well as the board structure of the new business. This
phase typically lasts three or four months, but it can take as long as a year if
regulators decide to launch an investigation into the deal. “Closure” is a
commonly referred term to describe the point at which the legal transfer of
ownership is completed.

3 ) PLANNING: -
More and more companies use this time before completing a merger to assemble
a senior team to oversee the merger integration and to begin planning the new
management and operational structure.

Post Merger is characterized by the following phases: -

4 ) THE IMMEDIATE TRANSITION: -

This typically lasts three to six months and often involves intense activity.
Employees receive information about whether and how the merger will affect
their employment terms and conditions. Restructuring begins and may include
site closures, redundancy announcements, divestment of subsidiaries
(sometimes required by trade regulators), new appointments and job transfers.
Communications and human resources strategies are implemented. Various
teams work on detailed plans for integration.

5 ) THE TRANSITION PERIOD : -

This lasts anywhere between six months to two years. The new organizational
structure is in place and the emphasis is now on fine tuning the business and
ensuring that the envisaged benefits of the mergers are realized. Companies
often consider cultural integration at this point and may embark on a series of
workshops exploring the values, philosophy and work styles of the merged
business.
PHASES OF MERGERS & ACQUISITIONS

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PHASE I: STRATEGIC PLANNING
Stage 1: Develop or Update Corporate Strategy
To identify the Company’s strengths, weaknesses and needs
1 ) Company Description
2 ) Management & Organization Structure
3 ) Market & Competitors
4 ) Products & Services
5 ) Marketing & Sales Plan
6 ) Financial Information
7 ) Joint Ventures
8 ) Strategic Alliances

Stage 2: Preliminary Due Diligence

1 ) Financial
2 ) Risk Profile
3 ) Intangible Assets
4 ) Significant Issues

Stage 3: Preparation of Confidential Information memorandum

1 ) Value Drivers
2 ) Project Synergies

PHASE II: TARGET/BUYER IDENTIFICATION & SCREENING

Stage 4: Buyer Rationale
1 ) Identify Candidates
2 ) Initial Screening

Stage 5: Evaluation of Candidates

1 ) Management and Organization Information
2 ) Financial Information (Capabilities)

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 3 ) Purpose of Merger or Acquisition

PHASE III: TRANSACTION STRUCTURING

Stage 6: Letter of Intent

Stage 7: Evaluation of Deal Points

1 ) Continuity of Management
2 ) Real Estate Issues
3 ) Non-Business Related Assets
4 ) Consideration Method
5 ) Cash Compensation
6 ) Stock Consideration
7 ) Tax Issues
8 ) Contingent Payments
9 ) Legal Structure
1 0 ) Financing the Transaction

Stage 8: Due Diligence

1 ) Legal Due Diligence
2 ) Seller Due Diligence
3 ) Financial Analysis
4 ) Projecting Results of the Structure

Stage 9: Definitive Purchase Agreement

1 ) Representations and Warranties
2 ) Indemnification Provisions

Stage 10: Closing the Deal

PHASE IV: SUCCESSFUL INTEGRATION

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 1 ) Human Resources
2 ) Tangible Resources
3 ) Intangible Assets
4 ) Business Processes
5 ) Post Closing Audit

MAGIC CIRCLE FOR A SUCCESSFUL MERGER

A company’s integration process can ensure the formation of such a circle. It acts
rather like the Gulf Stream, where the flow of hot and cold water ensures a

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continuous cyclical movement. A well designed integration process ensures that
the new entity’s designed strategy reaches deep into the organisation, ensuring a
unity of purpose. Basically everyone understands the purpose and logic of the deal.
The integration process can ensure that the ideas and the creativity can are not
dissipated but are fed into the emergent strategy of the organisation this is
achieved through the day to day job of the encouraging and motivating people and
also creating forums where people can think the impossible. The chart below
demonstrates the relationship between designed and emergent strategy and merger
integration. It suggests how merging organizations can become learning
organisation; strategy formulation and implementation merges into collective
learning.

Some merger failures can be explained by this model. For example, serious
problems arise when a company relies too heavily on designed strategy. If the
management team is not getting high quality feedback and information from the
rest of the organisation, it runs the risk of becoming cut off. Employees may
perceive their leaders as being out of touch with reality of the merger, leading to a
gradual loss of confidence in senior management’s ability to chart the future of the
new entity. Similarly, the leadership team may not receive timely information
about external threats, brought about perhaps by the predatory actions of
competitors or dissatisfies customers with the result that performance suffers and
the new management is criticized for failing to get grips with the complexities of
the changeover.

However, too much reliance on emergent strategy can lead to the sense of a
leadership vacuum within the combining organizations. The management team
may seem to lack direction or to be moving too slow. This often leads political
infighting and territory building and the departure of many talented people.

Therefore it is very important that a careful balance is struck between designed and
emergent strategy for integration after the merger between two companies is done.

27
 SYNERGY
When most people talk about mergers and acquisitions they talk about synergy.
But what is synergy?

Synergy is derived from a Greek word “synergos”, which means working together,
synergy “refers to the ability of two or more units or companies to generate greater
value working together than they could working apart”. The ability to make 2 + 2 =
5 instead of 4.

Typically synergy is thought to yield gains to the acquiring firm through two
sources
1) Improved operating efficiency based on economies of scale or scope
2) Sharing of one or more skills.

For managers synergy is when the combined firm creates more value than the
independent entity. But for shareholders synergy is when they acquire gains that
they could not obtain through their own portfolio diversification decisions.
However this is difficult to achieve since shareholders can diversify their
ownership positions more cheaply.

For both the companies and individual shareholders the value of synergy must be
examined in relation to value that could be created through other strategic options
like alliances etc.

Synergy is difficult to achieve, even in the relatively unusual instance that the
company does not pay a premium. However, when a premium is paid the
challenge is more significant. The reason for this is that the payment of premium
requires the creation of greater synergy to generate economic value.

The actual creation of synergy is an outcome that is expected from the managers’
work. Achieving this outcome demands effective integration of combined units’

28
assets, operations and personnel. History shows that at the very least, creating
synergy “requires a great deal of work on the part of the managers at the corporate
and business levels”. The activities that create synergy include
1) Combining similar processes
2) Co-ordinating business units that share common resources
3) Centralizing support activities that apply to multiple units
4) Resolving conflict among business units

The Types of Synergy

1) Operations Synergy
This is obtained through integrating functional activities. It can be created
through economies of scale / or scope.

2) Technology Synergy
To create synergies through this, firms seek to link activities associated with
research and development processes. The sharing of R&D programs, the
transfer of technologies across units, products and programs, and the
development of new core business through access to private innovative
capabilities are examples of activities of firms trying to create synergies

3) Marketing – Based Synergy

Synergy is created when the firm successfully links various marketing-related
activities including those related to sharing of brand names as well as
distribution channels and advertising and promotion campaigns.

4) Management Synergy
These synergies are typically gained when competitively relevant skills that
were possessed by managers in the formerly independent companies or

29
 business units can be transferred successfully between units within the newly
formed firm.

5) Private Synergy
This can be created when the acquiring firm has knowledge about the
complementary nature of its resources with those of the target firm that is not
known to others.

REVENUES
Revenue deserves more attention in mergers; indeed, a failure to focus on this
important factor may explain why so many mergers don’t pay off. Too many
companies lose their revenue momentum as they concentrate on cost synergies or
fail to focus on post merger growth in a systematic manner. Yet in the end, halted
growth hurts the market performance of a company far more than does a failure to
nail costs.

The belief that mergers drive revenue growth could be a myth. A study of 160
companies shows that measured against industry peers, only 36 percent of the
targets maintained their revenue growth in the first quarter after the merger
announcement. By the third quarter, only 11 percent had avoided a slowdown. It
turned out that the targets’ continuing underperformance explained only half of the
slowdown; unsettled customers and distracted staff explained the rest.

Only 12 percent of these companies managed to accelerate their growth

significantly over the next three years. In fact, most sloths remained sloths, while
most solid performers slowed down. Overall, the acquirers managed organic
growth rates that were four percentage points lower than those of their industry
peers; 42 percent of the acquirers lost ground.
Why should one worry so much about revenue growth in mergers? Because,
ultimately, it is revenue that determines the outcome of a merger, not costs;
whatever the merger’s objectives, revenue actually hits the bottom line harder

30
Fluctuations in revenue can quickly outweigh fluctuations in planned cost savings.
Given a 1 percent shortfall in revenue growth, a merger can stay on track to create
value only if a company achieves cost savings that are 25 percent higher than those
it had anticipated. Beating target revenue-growth rates by 2 to 3 percent can offset a
50 percent failure on costs.

Furthermore, cost savings are hardly as sure as they appear: up to 40 percent of

mergers fail to capture the identified cost synergies. The market penalizes this
slippage hard: failing to meet an earnings target by only 5 percent can result in a 15
percent decline in share prices. The temptation is then to make excessively deep
cuts or cuts in inappropriate places, thus depressing future earnings by taking out
muscle, not just fat.

Finally, companies that actively pursue growth in their mergers generate a positive
dynamic that makes merger objectives, including cost cutting, easier to achieve.

Out of the 160 companies studied only 12 percent achieved organic growth rates
(from 1992 to 1999) that were significantly ahead of the organic growth rates of
their peers, and only seven of those companies had total returns to shareholders
that were better than the industry average. Before capturing the benefits of
integration, such merger masters look after their existing customers and revenue.
They also target and retain their revenue-generating talent—especially the people
who handle relations with customers.

Thus it can be noted that if revenue is not monitored properly and if one does not
make an effort to maintain revenue it can result in significant losses to the
company.

MANAGING CULTURES DURING THE PROCESS OF MERGERS

AND ACQUISITIONS

31
Basing a merger decision purely on financial criteria is similar to deciding that your
in-laws must move in to help share the rent. It may make financial sense, but it
certainly doesn't take into account the disruption or impact this will have on your
family life.

What is culture?
Culture concerns the internalization of a set of values, feelings, attitudes, expectations and the
mindsets of the people within an organization. This culture provides meaning, order and
stability to their lives and influences their behaviour.
Organizational culture exists at two levels. 
1) Those values that are shared by the people working in the organization, values that
tend to persist within the organization even if its membership changes.
2) The behaviour patterns or style of an organization. New employees are automatically
encouraged to behave in a similar fashion by their colleagues.
Culture can be categorized into various types such as Power Cultures, Support Cultures, Task \
Achievement Cultures and Role Cultures. 
The various aspects of culture can also be synthesized into a number of dimensions such as
conflict resolution, culture management, customer orientation, and disposition towards change.
Prior to a merger, the cultures of both organizations should be measured on these dimensions in
order to determine the level of compatibility (or incompatibility) of the two organisations.
Measuring and understanding the diverse organisational cultures should form part
of the due diligence process, as it provides the negotiators from both parties with a
sound understanding of the human resource issues. In this way, the cost of dealing
with these issues can then be factored into the acquisition price of the company.
Unless this is done, an acquirer might, in many cases, find that they have bought
less than they bargained for.
The other advantage of conducting an organisational culture audit before the
companies are officially merged is that it provides a basis to measure later
interventions to merge organisational culture. In addition, it focuses the energies of
the executives in creating a unified organisation that maximises potential synergies.
The tendency in mergers is to take the easy route and adopt the stronger culture;
however, an opportunity to merge the best of both cultures is then missed. The
earlier the direction of the new company and its identity is decided upon, as well as
which parts of both contributing cultures are going to be kept, the easier the

32
decision-making process will be, and the less the chance of losing a valuable aspect
from either culture.
The merger of two culturally different organizations could result in conflict during the period
immediately following the merger or acquisition. This often results in a decrease in employee
morale, anger, anxiety, communication problems and a feeling of uncertainty about the future. 
The organisation that does not take the positive aspects of organisational culture
and the human resources within the acquired company into account, is missing one
of the most valuable assets of that organisation: Intellectual capital. Executives who
fail to consider these issues when acquiring a company are not serving themselves
or their shareholders.

An example of a merger that failed due to improper integration or understanding

of cultures is the Daimler-Benz and Chrysler merger. People said that even
seemingly mundane communication differences between the employees of the
German and the American auto giants challenged the stability of the combined
entity. The basic differences in the merger started cropping up because their,
mentalities were opposite. Americans were bothered only with the vision and they
would fill in the details in later. Germans are trained to think deductively and they
kept thinking how they would make it work. Even something as innocuous as the
office-seating layout started straining the relations. The Germans kept the doors of
their office cabins closed because that’s how they are trained but Americans always
thought that the Germans were having meetings excluding them. The formal
Germans and the informal Americans had a tough time trusting each other.

People in Mergers
An announcement of a merger or an acquisition sends a strong a message to your
competitors and to the recruiting firms that serve them: your employees are ripe for
the picking.

Competitors understand that your employees don’t know whether they have a job
or, if they do, where it will be located, where they fit into the new company’s
structure, how much pay they will receive, or how their performance will be

33
measured. Key employees usually receive inquiries within five days of a merger
announcement—precisely when uncertainty is at its highest. And no organizational
level is exempt.

Plenty of attention is paid to the legal, financial, and operational elements of

mergers and acquisitions. But executives who have been through the merger
process now recognize that in today’s economy, the management of the human
side of change is the real key to maximizing the value of a deal.

DISADVANTAGES OF MERGERS AND ACQUISITIONS

1 ) All liabilities assumed (including potential litigation)

2 ) Two thirds of shareholders (most states) of both firms must approve
3 ) Dissenting shareholders can sue to receive their “fair” value
4 ) Management cooperation needed
5 ) Individual transfer of assets may be costly in legal fees
6 ) Integration difficult without 100% of shares
7 ) Resistance can raise price
8 ) Minority holdouts
9 ) Technology costs - costs of modifying individual organizations systems etc.
1 0 ) Process and organisational change issues – every organisation has its own
culture and business processes
1 1 ) Human Issues – Staff feeling insecure and uncertain.
1 2 ) A very high failure rate (close to 50%).

WHY MERGERS & ACQUISITIONS DO NOT SUCCEED?

34
Despite the popularity and importance of mergers and acquisitions among large
and small firms, many mergers and acquisitions do not produce the benefits that
are expected or desired by the buying firm. Some of the reasons could be:

1 ) High cost of financing

A study conducted by Mckinsey shows that 60% of the acquisitions examined
failed to earn returns greater than the annual cost of capital required to finance
the acquisitions.

2 ) The potential for managerial hubris

This may preclude an adequate analysis of the target firm or may produce
substantial premiums paid for the firm that is acquired. In such a case the
mergers and acquisitions may not be for the benefit of the company. An e.g.
is Sony’s $5 billion takeover of Columbia Studios in which Walter Yetnikoff,
the CEO of Sony paid almost $800 million to acquire two producers from
their contract at the Warner Bros. This was a part of the battle with the
Warner Bros CEO, Steven Ross. Yetnikoff convinced his superiors at Sony
that the producers would earn millions of $ for them. Unfortunately both of
them set records for underachievement.

3 ) Failure to integrate
Diverse cultures, structures and operating systems of the two firms.

4 ) Failure to do proper due diligence

During the pre-merger or acquisition stage.

5 ) Bankruptcy of strategy
There is a strong belief that mergers and acquisitions indicate a bankruptcy of
strategy, an inability to innovate. CEO’s in order to defend their merger plans
are often quoted saying “Only the biggest survive”. This rationale is largely

35
 spacious; size does not inoculate a company from rule-busting innovation. Thus
lack of innovation is another reason for mergers floundering.

6 ) Employees of the organization

1 ) The sought-after benefits of greater size and efficiency are nullified by increased
losses related to top-heavy organizations which mean that the people increase
as a result the benefits etc provided to the top management also substantially
increase.

2 ) There are problems of: reduced job security, increased work loads, anxiety and
stress all of which have a negative effect on the morale of the employees which
in turn affects their productivity.

3 ) If the employees and the culture of the companies are not integrated then this
can be a major reason for the failure of the merger and acquisition

A SURE GUIDE TO UNSUCESSSFUL MERGERS / REASONS FOR

FAILURE OF MERGERS

COSTLY OVERSIGHTS
Overlooking the scientific development of new competitive materials and new is
only one of the faults that sometimes lead to unhappy merger results. Another
costly oversight is failure to consider those new developments in chemistry,
physics, metallurgy, plastics and so on which are now still in the pre-patent stage
but which, when in full boom, may completely wipe out the market of the for the
acquired company’s chief product. Patents maybe developed for new scientific
processes which chop production costs radically, may make machinery and
equipment obsolete and undermine many of the older processes.

For example, a major manufacturer of electronic organ part decided it was sound
strategy to diversification was a sound move. With the help pf its major bank, this

36
manufacturer acquired a well-run electronic company which specialized in
electronic circuitry. This west coast producer had a new process in its lab it was of
creating circuitry on glass and plastics this was done by specially treating glass and
plastics and then scratching a circuit on its surface with a mechanical stylus. The
result was a sort of primitive printed circuit which had an excellent potentiality for
savings in material and labour costs.

About two years after this costly acquisition, the parent manufacturer discovered
that new chemical techniques were available which would produce uniform
circuits on plastics and glass, outmoding the entire process of scratching such
circuits with a mechanical stylus.

How can this sad but common error be avoided? The answer lies in understanding
how scientific innovations are detected in every industry. Many branches of the
various scientific disciplines run along parallel path. In this above case actually
clues to the new chemical development were all in the scientific literature of the
industry at the time of the acquisition – but no one had been asked to look.

The Need for Research

The likelihood of making acquisitions mistakes is especially strong among large
companies which are buying a scattered selection of smaller companies operating
in many diverse fields in which technical products or processes are involved. That
this approach is quite common today is evidenced by the Federal Trade
Commission, which indicated that conglomerate acquisitions were on the rise in
many manufacturing industries. For example purchase if a canning-machinery
concern by a diesel engine manufacture.

The variety of actual conglomerate acquisitions is truly astounding, for example a

truck assembler acquiring a chain of department stores.
Some of these companies have taken the plunge because of a variety of reasons like
they had a lot of cash in the corporate till and were in a hurry to grow. Others have
wanted a leap out of a stagnant industry in one jump. Still others have chosen to

37
diversify in order to escape their own industry’s bust-or-boom cycle. A few have
decided to move into new fields because they might run afoul of antitrust laws if
they acquired firms in their own industry.

A large plywood manufacturing company had been selling certain plywood to

aircraft manufacturer for its interiors. On the advice of its bank it purchased a small
chemical factory which had developed a substance which was of high transparency
and could withstand high temperatures. This the plywood company felt they could
easily supply to its aircraft manufacturers as windshields

The plywood company acquired the chemical company invested a further six
figure amount. Finally when the chemical subsidiary was ready to produce the
windshields, they found out to their considerable dismay that researchers in
another fields had discovered a better and a cheaper material then the one they had
to offer.

This development had been foreshadowed in research papers in the learned

journals of this field, which were available to any knowledgeable technical
investigator at the time the plywood company was acquiring the chemical
subsidiary. This shows us the importance of research.

CROSS BORDER MERGERS AND ACQUISITIONS

The rise of globalization has exponentially increased the market for cross border
M&A. In 1996 alone there were over 2000 cross border transactions worth a total of
approximately $256 billion. This rapid increase has taken many M&A firms by
surprise because the majority of them never had to consider acquiring the

38
capabilities or skills required to effectively handle this kind of transaction. In the
past, the market's lack of significance and a more strictly national mindset
prevented the vast majority of small and mid-sized companies from considering
cross border intermediation as an option which left M&A firms inexperienced in
this field. This same reason also prevented the development of any extensive
academic works on the subject.
Due to the complicated nature of cross border M&A, the vast majority of cross
border actions have unsuccessful results. Cross border intermediation has many
more levels of complexity to it than regular intermediation seeing as corporate
governance, the power of the average employee, company regulations, political
factors customer expectations, and countries' culture are all crucial factors that
could spoil the transaction.

Largest M&A deals worldwide since 2000:

Rank Year Acquirer Target Transaction %

Value
(in Mil. USD)
1 2000 Merger : America Online Inc. (AOL) Time Warner 164,747 21.83
2 2000 Glaxo Wellcome Plc. SmithKline Beecham Plc. 75,961 10.06
3 2004 Royal Dutch Petroleum Co. Shell Transport & Trading Co 74,559 9.87
4 2006 AT&T Inc. BellSouth Corporation 72,671 9.62
5 2001 Comcast Corporation AT&T Broadband & Internet 72,041 9.54
Svcs
6 2004 Sanofi-Synthelabo SA Aventis SA 60,243 7.98
7 2000 Spin-off : Nortel Networks   59,974 7.95
Corporation
8 2002 Pfizer Inc. Pharmacia Corporation 59,515 7.89
9 2004 Merger : JP Morgan Chase & Co. Bank One Corporation 58,761 7.79
10 2006 Pending: E.on AG Endesa SA 56,266 7.45
    Total   754,738 100
The table above shows the ten largest M&A deals worldwide since 2000. Table
reflects that the largest M & A deal during last 6 year was between American
Online Inc and. Time Warner of worth $ 164,747 million during 2000, which
account 21.83% of total transaction value of top ten worldwide merger and
acquisition deals.  While second largest deal was between Glaxo Wellcome Plc. &
SmithKline Beecham Plc. Of US $ 75,961 million which was also occurred during
2000, which was 10.06 % of total transaction value of top ten worldwide M & a

39
deals  & third largest deal was between Royal Dutch Petroleum Co. Shell Transport
& Trading Co of worth US $ 74,559 million, it is 9.87 % of total transaction value of
top ten worldwide M & a deals.

CROSS-BORDER MERGER AND ACQUISITION: INDIA

Until upto a couple of year’s back, the news that Indian companies having acquired
American-European entities was very rare. However, this scenario has taken a
sudden U turn. Nowadays, news of Indian Companies acquiring foreign businesses
is more common than other way round.

Buoyant Indian Economy, extra cash with Indian corporates, Government policies
and newly found dynamism in Indian businessmen have all contributed to this
new acquisition trend. Indian companies are now aggressively looking at North
American and European markets to spread their wings and become the global
players.

The top 10 acquisitions made by Indian companies worldwide:

Acquirer Target Company Country targeted Deal value ($ ml) Industry
Tata Steel Corus Group plc UK 12,000 Steel
Hindalco Novelis Canada 5,982 Steel
Videocon Daewoo Electronics Corp. Korea 729 Electronics
Dr. Reddy's Betapharm Germany 597 Pharmaceutic
Labs al
Suzlon Hansen Group Belgium 565 Energy
Energy
HPCL Kenya Petroleum Refinery Ltd. Kenya 500 Oil and Gas
Ranbaxy Terapia SA Romania 324 Pharmaceutic
Labs al
Tata Steel Natsteel Singapore 293 Steel
Videocon Thomson SA France 290 Electronics
VSNL Teleglobe Canada 239 Telecom

AUTOMOBILE INDUSTRY INTRODUCTION

40
In the U.S., the 2006 market was approximately 16.5 million cars and light trucks
sold. Production in North America, including cars and trucks of all types, totaled
11.8 million produced in America, 2.6 million produced in Canada and 2 million
produced in Mexico. Globally, about 49 million new cars were sold in 2006. These
estimates are from Scotiabank Group.

For example, one result was the phenomenal demand for Toyota’s Prius hybrid car,
which was so great that many purchasers were put on waiting lists of six months or
longer. Toyota responded by raising the price of the 2005 model and planning
production increases. Meanwhile, Toyota made investments in its Georgetown,
Kentucky plant to enable it to manufacture 48,000 hybrid Camrys yearly there by
late 2006—Toyota will likely wish it had created even more hybrid capacity.
Meanwhile, there has been exceptional demand for Toyota’s Lexus RX400h hybrid
crossover. Ford launched its first hybrids, and other carmakers, including GM,
were greatly encouraged in their own efforts to bring more hybrids to the market.
However, response to hybrids from U.S. makers has been lukewarm at best.
Consumers generally aren’t as impressed with U.S. hybrid technology as they are
with that of Toyota models, and actual mileage results on the road have been
disappointing. Over the mid-term, many hybrids will be available from a wide
variety of makers, and technology will steadily improve.

While the Big Three struggle, Toyota is attacking mercilessly. It has the capacity to
manufacture over 1.5 million vehicles yearly in North America.
 
The parts manufacturing business in the U.S. is equally dismal. Delphi Corp, the
giant parts supplier that was part of GM until 1999, lost nearly $4.6 billion in 2004
alone and is operating in bankruptcy. In fact, many U.S. parts manufacturers are
experiencing dismal financial results.

Asian car manufacturers are generally enjoying booming success, with Toyota and
Honda at the forefront. South Korean makers Hyundai and Kia have established

41
themselves as true, high-quality manufacturers with a growing global customer
base.

TRENDS OF MERGERS & ACQUISITIONS IN AUTOMOBILES

THE INDUSTRY

Recent mergers and acquisitions in the automotive industry are largely driven by a
combination of excess capacity, the increasing costs of innovation and technical
development, and regulatory changes. 1998 turned out to be a record year for
M&As within the automotive industry. In fact, more than 600 deals were
undertaken, with disclosed values exceeding US$80 billion
PriceWaterhouseCoopers, 1999a). Of the total value, more than two-thirds arose
from cross-border M&As, dominated by the “mammoth merger” between Chrysler
and Daimler-Benz which alone accounted for US$39 billion. The rapid restructuring
of the automotive industry has attracted a great deal of attention. The merger
between the US company Chrysler and Daimler-Benz of Germany together with
other large-scale deals – Volkswagen’s take-over of Rolls Royce, Ford’s take-over of
Volvo’s car division, and the alliance between Renault and Nissan – is evidence of
an industry consolidating at an accelerating speed. The merger wave is also
affecting all parts of the automotive industry: vehicle companies, component
suppliers and retail sectors, and is to a large extent taking place across national
borders.

42
Figure shows the increase in deals in the motor vehicle and parts manufacturing
industry.

Consolidation and internationalisation are far from new to the automotive

industry, and especially to vehicle producer companies. The vehicle market is
already highly concentrated, with some ten leading companies accounting for more
than 50% of the total market. However, the current restructuring trend is taking
place in a somewhat new context: markets have been liberalised and new and
different countries have entered both on the consumer and producer sides.

43
Case Study No.1
Daimler-Benz and Chrysler

NATIONALITY: - Germany (Daimler-Benz), U.S.A. (Chrysler)

DATE :- November 17, 1998

AFFECTED : - Daimler-Benz AG, Germany, founded 1882

Chrysler Corp., USA, founded 1924

FINANCIALS :- DAIMLER BENZ

Revenue (1998) :- $ 154.61 Billion

Employees (1998) :- 4,41,500

CHRYSLER CORP

Revenue (1998) :- $ 91.9 Billion

Employees (1998) :- 104,000

THE OFFICERS: - DAIMLER CHRYSLER

Co-Chairman and Co-CEO :- Robert Eaton
Co-Chairman and Co-CEO :- Juergen E. Schrempp
Chief Financial Officer :- Manfred Gentz
Sr. VP. Engg. And Tech :- Bernard Robertson
Exec VP Prod Dev and Design :- Thomas C. Gale

44
Overview of the Merger

The $37 billion merger of Chrysler corp., the third largest car maker in the U.S., and
Germany’s Daimler – Benz AG in November of 1998 rocked the global automotive
industry. In one fell swoop, Daimler – Benz doubled its size to become the fifth-
largest automaker in the world based on unit sales and the third-largest based on
annual revenue. Employees totalled 434,000. Anticipating $ 1.4 billion in cost
savings in 1999, as well as profits of $ 7.06 billion on sales of $ 155.3 billion, the new
Daimler–Chrysler manufactured its cars in 34 countries and sold them in more than
200 countries.

History of Daimler – Benz AG

In 1882, Gottlieb Daimler, a gunsmith who studied engineering in several European

countries, joined with researcher Wilhelm Maybach to set up an experimental
workshop. They tested their first engines on a wooden bicycle, a four- wheeled
vehicle, and a boat. The French rights to Daimler’s engines were sold to Panhard –
Levassor.

In 1906, Ferdinand Porsche replaced Daimler’s oldest son, Paul Daimler, as chief
engineer at the company’s Austrian factory after Paul returned to the main plant in
Stuttgart, Germany.

The Daimler and Benz companies began coordinating designs and production in
1924, but they maintained their own brand names. Two years later, Daimler and
Benz merged to become Daimler – Benz AG, which began producing cars under the
name Mercedes – Benz. The merger allowed the two firms to avoid bankruptcy in
the midst of poverty and inflation in Germany after World War 1. In 1939, the
German government took over that nation’s auto industry, appropriating its
factories to manufacture trucks, tanks, and aircraft engines for the Luftwaffe during
World War 2.

45
In 1957, convicted war criminal Friedrich Flick raised his personal stake in Daimler-
Benz to over 37%, gaining controlling interest as an individual stockholder. Within
two years, Flick’s $20 million investment had grown in worth $200 million, making
him Germany’s second ranking industrialist. His holdings allowed him to push the
firm to buy 80% of its competitor, Auto Union, in order to gain a smaller car for the
product line; the acquisition made Daimler-Benz the fifth-largest auto-mobile
manufacturer in the world and the largest outside the U.S.

Daimler-Benz purchased Freightliner, a manufacturer of heavy trucks, just as sales

dropped with the onset of the U.S. recession in the early 1980’s.
Daimler-Benz acquired a stake in Metallgesellschaft AG, a Frankfurt-based
international supplier of raw materials and technological services, in 1991. Several
major stock acquisitions and working agreements with international corporations –
such as Fokker of Netherlands, Germany’s Siemens AG, and Sweden’s Electrolux –
were completed in 1992. That year, Daimler-Benz announced 7,500 layoffs in
addition to 20,000 previous job losses. By 1995, 70,000 jobs had been eliminated.

With competitor BMW closing on the leadership of German luxury car sales,
Daimler-Benz relied heavily on revision of its popular Mercedes 190 compact in
1993. Instead, a $1.05 billion loss was reported, one of the company’s worst ever. In
1994, the largest rights issued in German history was completed as Daimler-Benz’s
one-for-ten offer left U.S. shareholders with over an 8% stake in the company. The
entire transaction totalled $1.9 billion.

History of Chrysler Corporation

In 1924, the Maxwell Motor Corporation, headed by Walter Chrysler, produced the
first Chrysler automobile. Over 32,000 models were sold for a profit in excess of $4
million. On June 6, 1925, Chrysler was incorporated when Walter Chrysler took
over Maxwell Motor Car. On accomplishments included the introduction of the
Chrysler Four Series 58 with a top speed of 58 mph.

46
By 1927, Chrysler had sold 192,000 cars to become fifth in the industry. The
company acquired Dodge Brothers, Inc., quintupling its size. In 1933, Chrysler
surpassed Ford, its major competitor, in annual sales for the first time.

The company continued to thrive, and in 1934, Chrysler developed its first
automatic overdrive transmission, as well as the industry’s first one-piece, curved
glass windshield. In 1938, Chrysler established and became minority owner in
Chrysler de Mexico.

In 1946, Chrysler began production of the first hardtop convertible. Four years
later, the company expanded outside North America by purchasing a majority of
Chrysler Australia, Ltd. Electric powered windows were developed as well.

The Hemi, a hemispheric combustion chamber V-8 engine, and the Oriflow shock
absorbers were designed in 1951. By 1955, drivers of Chrysler products were the
first to enjoy all-transistor car radios and the convenience of power steering. The
company ended the decade by developing electronic fuel injection as an alternative
to carburettors.

In 1960, production of the De Soto ceased. Chrysler introduced its first 5/50
warranty – five years or 50,000 miles on drive train components – in 1963. Safety
innovations such as front seat shoulder harness and a self-contained rear
heater/defroster system were developed in 1966, as well as the Air Package, a
system for controlling exhaust emissions.
Continual management changes were blamed for a $4 million loss in 1969; the firm
was operating at only 68% of its capacity. Chrysler fared no better during the 1970s.
After losing $52 million in 1974 and $250 million in 1975, the board tapped former
Ford president Lee Iacocca to take over as president and CEO.

In January of 1980, President Jimmy Carter signed the Chrysler Corp. Loan
Guarantee Act, which provided the company with $1.5 billion in federal loan
guarantees and stipulated that Chrysler sell its corporate jets. In July of that year,

47
Iacocca began appearing in Chrysler’s television advertisements in an effort to
boost sales. The next year, however, Chrysler reported a record loss of $1.7 billion,
cut inventories by $1 billion, and reduce the white collar staff by 50%.

In 1982, Iacocca released his autobiography, which became the best-selling non-
fiction hardcover book in the U.S. Hoping that interest in the company would
increase as well, Chrysler paid off its government loan seven years early.

Turnaround efforts paid off with the record 1984 net profit of $2.4 billion. That
year, Chrysler acquired 15.6% in Officine Alfieri Maserati SpA. In 1985, it brought
Gulfstream Aerospace for $367 million and began a joint venture, Diamond Star
Motors, with Mitsubishi Motors Corp. to build small cars in the U.S. Later in 1987,
Chrysler was divided up as a holding company with four divisions: Chrysler
Motors, Chrysler Financial, Chrysler Technologies, and Gulfstream Aerospace. The
holding company’s headquarters moved from Highland Park, Michigan, to
Manhattan, New York.

Shareholders approved the acquisition of Renault’s 46% stake in American Motors

Corp., maker of Jeep and Eagle vehicles, for $800 million.

Market forces driving the Merger

The deal between Chrysler and Daimler-Benz was pit into motion in the early
1990’s, when executives at Daimler Benz realized that the luxury car market they
targeted with the Mercedes line was approaching saturation. Because traditional
markets had matured and consumers in emerging markets were typically unable to
afford higher prices autos, Mercedes began to look for a partner that would both
broaden its appeal and give it the scale it needed to survive industry consolidation.
Eventually, Daimler-Benz settled on Chrysler because it’s broad range of less costly
vehicles and its third place status in the US.

The trend of globalisation had forced Chrysler to take look at foreign market in mid
1990s. With the majority of sales coming from North America, the company was

48
looking for a way to break into overseas markets. After plans in 1995 to jointly
make and market automobiles in Asia and South America with Daimler-Benz fell
apart, Chrysler devised lone star, a growth plan that called for exporting cars built
in North America instead of spending money on building plants overseas. The plan
faltered because the firm did not have enough managers placed in international
locations to boost sales as quickly as Chrysler wanted.

Daimler-Benz also pursued growth of its own after attempts at an alliance with
Chrysler failed in 1995.the German automaker built a plant in Alabama to
manufacture its M-Class Sports Utility Vehicle and a small A-Class model. Quality
control problems with both autos plagues he factory in 1996 and 1997. To make his
firm more attractive to suitors, Daimler-Benz CEO Jurgen Schrempp listed it on the
New York Stock Exchange, began using US GAAP guidelines, and reduced the
independence of the Mercedes by removing its separate board of directors. A
merger seemed the company’s only option.

Approach and Engagement

Daimler-Benz CEO Jurgen Schrempp called Chrysler CEO Eaton in January of 1998.
They met briefly at Chrysler’s headquarters during North American International
Auto Show in Detroit. A deal between Daimler-Benz and Chrysler seemed
inevitable until Ford’s Alex Trotman contacted Schrempp about a possible alliance.
Trotman and Schrempp met in London in March to discuss terms. Prior to the
second meeting, however the deal fizzled after Trotman admitted to Schrempp that
the Ford family was unwilling to consider a deal that would reduce its 40% stake of
Ford’s voting stock.

Schrempp and Eaton rekindled their merger negotiations and their merger
negotiations and the $37 billion deal was officially announced on May 7 in London.
According to the terms of the agreement the new firm – named DaimlerChrysler-
would be incorporated in Germany 58% owned by former Daimler-Benz
shareholders, and managed mainly by former Daimler-Benz Executives. Schrempp
would gain full control. After more than 98% of Daimler-Benz shares were

49
converted into DaimlerChrysler shares, the new firm was officially listed on
worldwide stock exchanges on November 17, 1998.

Products and Services

After the merger, DaimlerChrysler manufactured the following makes of
automobiles: Chrysler, Dodge, Eagle, Jeep, Mercedes-Benz, Plymouth and Smart, a
compact car. Chrysler passenger car made up 41% of total sales; Daimler passenger
accounted for 24%. Other automotive operations, which secured 17% of sales,
included four wheel drive vehicle, commercial vehicles, tucks and busses. Services
accounted for 9%of sales and encompassed financial, insurance brokerage,
information technology, telecommunications and real estate management.
Aerospace operations made up another 6% of total revenues.

Changes in the Industry

The new DaimlerChrysler moved into the fifth place spot among global
automakers based on the four million vehicles it was estimated to produce in 1999.
Anticipated sales of $155.3 billion positioned the firm as third in the world in terms
of revenue. Analysts heralded the deal as the first in a wave of intense global
consolidation among the industry’s leading players. Accordingly, DC stock
continued to outperform Ford Motor company co., General Motors Corp., Dow
Jones Industrial average in May of 1999. 1 year after the deals formal
announcements

Review of Outcome
The new firm faced its first hurdle immediately. Standard & Poors chose not to list
DC in the Standard & Poor’s 500 stock index because the firm had become the
German entity Standard & Poors fund managers were forced to sell their Chrysler
shares, and because they were unable to exchange them for DC shares the new firm
lost a wide shareholder base. On a more positive note DC did not face the expense
of spending 5-10 years integrating its Computer Aided Design Systems or its
financial applications because the 2 firms already used the same system.

50
The success of the merger depends upon how well the 2 disparate teams mesh. For
instance Daimler will handle Fuel-Cell and diesel technology and Chrysler will
keep it for electric-vehicle project. Other decisions are tougher Chrysler invented
the minivan but Daimler was far along in developing its own. So the two are
debating whether to ditch Daimler’s version or offer a separate a luxury model.

To achieve the promised $1.4 billion in savings- the anticipated outcome of the
geographic reach and the product lines, but not of the lay-offs that typify mergers
of this scope-integration efforts began immediately with the financing departments
of both firms first on the list. Most analysts consider purchasing likely to be the
second candidate for cost cutting efforts as DC works to leverage its size to garner
discounts for such commodities as steel and services like transportation.

In both Europe and North America Chrysler and Mercedes showroom will remain
separate, although warehousing, logistics, service and technical training will be
combined. Complete integration of purchasing operations is scheduled to take 3-5
years; merging manufacturing functions will take even longer, as might ironing out
anticipated cultural clash between the Germans and the Americans

Case Study No. 2

Renault AND VOLVO

NATIONALITY: - France (Renault), Sweden (Volvo)

DATE :- March 31, 1999

51
AFFECTED :- Renault S.A., France, Founded 1989
AB Volvo, Sweden, Founded 1915

FINANCIALS :- RENAULT

Revenue (1998) :- FFr 195 Billion

Employees (1998) :- 1,38,321

AB VOLVO

Revenue (1998) :- SEK 212.9 Billion

Employees (1998) :- 79,820

THE OFFICERS: - RENAULT S.A.

Co-Chairman and Co-CEO :- Louis Schweitzer
Exec. V.P., Worldwide Sales & Marktg :- Patrick Faure
Exec. V.P. :- Carlos Ghosn
Chief Financial Officer :- Christian Dor

AB VOLVO
Chairman :- Hakan Frisinger
President and CEO :- Leif Johansson
Deputy CEO and Exec. V.P. :- Lennart Jeansson
Executive V.P. :- Arne Wittlov
Overview of the Acquisition

The collapse of the between Renault and Volvo brought an end to their three year
engagement. The two companies had formed an alliance in 1990, and in 1993 set
their official merger date as January 1994. Before they could complete the union,
however Volvo’s managers and shareholders voiced their objections to the terms of
the agreement, pressuring Volvo’s president, Soren Gyll, to terminate the deal.

52
History of Regie Nationale des Usines-Renault S.A.

After persuading his brothers, Fernand and Marcel, to invest FFr. 30,000 in his
automobile company, Louis Renault formed Renault Frères in 1989 and produced
the world’s first sedan. Only two years later, the company had become competitive
race car drivers to promote their company’s products. Consequently, Marcel
Renault was killed in 1903 while competing in the Paris-Madrid car race.

The de Gaulle provisional government nationalized Renault’s company, which it

renamed Regie Nationale des Usines Renault S.A. it operated the company along
commercial lines, building up its international production of machine tools and
making it the first in Europe to use automation.

In 1948 Renault manufactured a miniature car called Qautre Chevaux (4 C.V. or

hp), which had been secretly developed during the war by Renault technicians.
Two years later it released the Dauphine, manufactured to fit into the market
opening between inexpensive economy models and the higher priced models. For
five years, the Dauphine outsold all other models.

By 1959 it ranked as the worlds sixth largest automobile manufacturer in the world.
As the American market began to shrink in 1970s, however, sales of the Dauphine
dropped 33%. Renault adjusted its products to meet specific requirements of the
American motorist, and began production of the cylinder R-16.
In 1976 Renault merged its Peugeot-Citroen truck subsidiary with its own Saviem
truck company, thereby creating the alrget producer in France, Renault Vehicle
Industries.

In 1980 Renault purchased 46.4% of AMC. In the years that followed, both AMC
and Renault suffered from an industry slump and increased competition from
Japanese automakers. Renault recorded a loss of $1.5 billion in 1984. George Besse
took the company’s helm in 1985, and set about instituting a cost reduction

53
program that staff and encouraged the concept of profit to the state owned
company.

In 1987 Renault withdrew from the U.S. market by selling its stake in AMC to
Chrysler Corp. for $200 million. It formed a partnership with AB Volvo in 1990 to
cooperate in international auto and truck operations.

Renault edged toward privatization as the French government reduced its stake in
the company from 80% to 52% in 1995, and then to 46% in 1996. The firm forged a
relationship with Italian car manufacturer Fiat SpA in 1998, when it arranged to
acquire part of Fiat’s Teksid subsidiary. The two companies also joined their bus
making business the following year. In May 1999 Renault acquired 36.8% stake in
Nissan for $5.4 billion.

History of AB Volvo

AB Volvo was formed in 1915 as a subsidiary of AB Svenska Kullagerfabriken, a

Swedish ball bearing manufacturer. It began the assembly of cars in 1927 and of
trucks in 1928. Two years later it acquired the means to safeguard the delivery of
engines by purchasing a majority interest in AB Pentaverken. In 1934 Volvo began
the production bus chassis and marine engines. The following year the company
gained a listing on the Stockholm Stock Exchange.

Volvo entered the 1950s by acquiring AB Bolinder-Munktell, a Swedish

manufacturer of farm machinery. By 1951 the company concentrated on tractor
production and soon accounted for one out of every five tractors sold in Sweden.
Passenger car volume also surpassed that of trucks and buses, partly due to heavy
demand for Volvo PV 444 model, which had been introduced in 1944.

In 1981 Volvo diversified in oil industry with the acquisition of Beijerinvest Group.
In 1991 Volvo spent $2 billion to update its plant and develop the 800 series of
performance-oriented family sedans.

54
In 1999 Volvo sold its automobile operations to Ford Motor in 1999, leaving the
company with operations in only heavy duty vehicles.

Market forces driving the merger

By 1990 Sweden’s export sales had began to slow. As a result, many of the nation’s
automotive companies were squeezed financially. One such firm, SAAB, reacted by
entering into an alliance with General Motors whereby GM gained an effective
control of the company. Volvo, too looked, for foreign assistance. That year it
entered into a complex arrangement with France-based Renault to share
increasingly high cost of research and product development. The market declined
continued, however and Volvo recorded a loss of $649 million in 1992.

Moreover, the industry showed no signs of rebounding in the immediate future.

West European car sales dropped 16.5% in the first eight months of 1993 and
increased competition would soon arise from Japanese automakers, as the
limitations on European imports were scheduled to be lifted by the European
Union in 1999.

Hoping to strengthen its position Volvo entered into a merger agreement with
Renault in September 1993. The combined company would be sixth largest car
manufacturer, after General Motors, Ford, Toyota, Volkswagen and Nissan. It
hoped to achieve gains in the sector by reaping the rewards from cross-marketing
in luxury cars, Volvo’s strength, as well as compact cars, Renault’s speciality. Yet
the merged company’s biggest impact would be in commercial vehicles, as the
separate companies had substantial operations in Europe and the U.S. they would
rank the combined firm second in that industry, behind Mercedes-Benz.

Approach to the Engagement

55
On September 6, 1993, Renault and Volvo announced their merger accord. Renault
was a state owned company that meant that the French government would hold
stake in the combined enterprise. This brought a patriotic tremble to those vested in
Volvo, a Swedish company. And that tremble developed into an outright shudder
when the details of the merger deal were revealed.

On October 6 the Swedish Shareholders Association, an alliance of individual

investors who combined to own 10% of Volvo, voiced its objections to the deal.

Three points in particular that disturbed the association was, first, that deal gave
French government a “Golden Share”, which enabled it to restrict the voting rights
of any investor, including Volvo, to 20%. Secondly, the companies failed to produce
compelling benefits arising form the merger that could not be achieved from a
continuation of their partnership. Finally French government was elusive about the
date it planned to privatize Renault, until that time merger’s benefits to the
Swedish Shareholders would be limited.

The companies tried to quell to growing number of oppositionists. Volvo issued

revised statement of the merger’s projected savings, reporting that they would be
$7.4billion, up from the $4.8billion that had been earlier reported. But they dint
explain the source of extra savings. The French government expressed its assurance
that it would not abuse its golden share rights.

The efforts to charm investors and managers proved ineffective, and in November
30 the last straw broke. A leaked financial report indicated that while Volvo’s
monthly earnings increased markedly, Renault’s dropped sharply. Soren Gyll,
Volvo’s CEO, quickly conducted an informal poll of the company’s 25 senior
managers, who overwhelmingly declared that the mergers would not work. Gyll
telephoned Volvo’s chairman, Pehr Gyllenhammer who was in the U.S. at the time,
and informed him of the developments; Gyllenhammer terminated the deal and
resigned the following day.

56
Products and Services

Renault was divided into two main segments passenger cars included such brands
such as Clio II, Espace, Kangoo, Laguna, Megane, Scenic, Nevada , Safrane, Twingo
and Spider. Commercial Vehicles were comprised of vehicles for long haul goods
transport, distribution transport and passenger transport as well as construction
trucks, public service vehicles and military vehicles.

Volvo operated in five segments Volvo Buses, Volvo Trucks, Volvo Construction
Equipment Group, Volvo Penta Corp. (marine and industrial engines) and Volvo
Aero.

Review of the outcome

The breakup dint just bring about an end to the merger deal, it also terminated
their previous partnership. Volvo and Renault dissolved their joint purchasing and
quality control accords. They also surrendered most of the seats held on the other’s
board; Renault’s chairman Louis Schweitzer, however, retained his seat on Volvo’s
board. Renault reduced its stake in Volvo to 3.45% on February 3, 1994 and Volvo
sold its 11.38% in Renault to the Union Bank of Switzerland on July 31, 1997.

Case Study No. 3

FORD AND VOLVO

NATIONALITY: - U.S.A. (Ford), Sweden (Volvo)

DATE :- March 31, 1999

AFFECTED : - Ford Motor Co., U.S.A., Founded 1903

AB Volvo, Sweden, Founded 1915

57
FINANCIALS :- FORD MOTOR CO.

Revenue (1998) :- $144.4 Billion

Employees (1998) :- 345,175

AB VOLVO

Revenue (1998) :- SEK 212.9 Billion

Employees (1998) :- 79,820

THE OFFICERS: - FORD MOTOR CO.

Chairman :- William C. Ford, Jr.

President and CEO :- J. A. Nasser
Vice Chairman :- W. Wayne Booker
Vice Chairman and Chief of Staff :- Peter J. Pestillo
Exec. V.C. and C.F.O. :- John M. Devine

AB VOLVO
Chairman :- Hakan Frisinger
President and CEO :- Leif Johansson
Deputy CEO and Exec. V.P. :- Lennart Jeansson
Executive V.P. :- Arne Wittlov

Overview of the Acquisition

Ford motor company secures its rank as the world’s number-two automaker with
its purchase of Volvo car corp., the automotive business of AB Volvo. This $6.45
billion deal followed the previous years DaimlerChrysler formation and
perpetuated the trend of mega mergers within the global auto industry. It also
brought the industry in step closer to consolidation of players into the last
remaining Global six.

58
History of Ford Motor Co.

Henry ford built his first steam engine in 1978 and five years later completed his
first gasoline fed, one cylinder, and internal combustion engine. In 1896 he built his
first car, called the Quadricycle, which he sold to finance the construction of a
lighter weight race car. In 1899, he resigned from Edison lighting company to form
the Detroit Automobile Co. Two years later, however, the company faces
bankruptcy due a production rate that was lower anticipated.

Meanwhile, Ford built two four-cylinder, 80 horsepower racecars in his shed, the
999 and the arrow. When one of Ford’s racecars prevailed against Alexander
Winston’s champion car, the bullet, his investors agreed to establish a car
production company for him to run. Ford’s tenure there was short-lived, However,
as he spent more time in the development of new racecars than in the type of car
that the investors planned to produce and sell. He was asked to resign.

In 1902 Ford formed a partnership with Alex Malcolmson to design and built a
prototype for a new car. Twelve investors raised $28000 to finance the company
which was capitalized at $150000. The next year, the Ford Motor Co. sold more
than 17000 cars. It soon introduced three new models: the model B, the model C
and the model F, ranging in price from $800 to $2000. After that there was no
looking back.

The Model T was the product of Ford’s assembly-line concept that revolutionized
the manufacturing of all types including car making, unveiled in 1908, The Model T
sold more than 10,000 units in its first year. Its success was attributed to its
reliability and low price, $825. For the first time, automobile ownership was no
longer a luxury of the urban rich. The production of the model T was stopped at its
15 millionth product in 1927.

59
The Ford Mustang was introduced in 1964, and sold more than 100,000 units within
the first 100 days of its availability. Targeted to American youth, the car’s concept
was credited to the general manager Lee Iacocca.

In 1980 Ford experienced a loss of $1.54 billion first of a string of losses during the
decade. Attributed to the oil crises of the 1970s, these results called for the closure
of 15 plants and the reduction of 33% of the workforce in 1983. The company
emerged from the crisis by 1984, when its sales and profits reached record levels.

It exited from the heavy duty truck business by selling those operations to
Freightliner, a unit of Daimler-Benz. The next year it spun off Associated First
Capital and sold its interest in Kia Motors. Ford purchased the automaking
business of Volvo for $6.45 billion in 1999.

History of AB Volvo

AB Volvo was formed in 1915 as a subsidiary of AB Svenska Kullagerfabriken, a

Swedish ball bearing manufacturer. It began the assembly of cars in 1927 and of
trucks in 1928. Two years later it acquired the means to safeguard the delivery of
engines by purchasing a majority interest in AB Pentaverken. In 1934 Volvo began
the production bus chassis and marine engines. The following year the company
gained a listing on the Stockholm Stock Exchange.

Volvo entered the 1950s by acquiring AB Bolinder-Munktell, a Swedish

manufacturer of farm machinery. By 1951 the company concentrated on tractor
production and soon accounted for one out of every five tractors sold in Sweden.
Passenger car volume also surpassed that of trucks and buses, partly due to heavy
demand for Volvo PV 444 model, which had been introduced in 1944.

In 1981 Volvo diversified in oil industry with the acquisition of Beijerinvest Group.
In 1991 Volvo spent $2 billion to update its plant and develop the 800 series of
performance-oriented family sedans.

60
In 1999 Volvo sold its automobile operations to Ford Motor in 1999, leaving the
company with operations in only heavy duty vehicles.

Market Forces Driving the Acquisitions

Global automobile industry in the late 1990s was showing signs of a consolidation
trend. Manufacturers throughout the world were feeling the pinch of flat sales,
pricing competition and international overcapacity. In 1998 DaimlerChrysler was
formed by the merger of two automotive giants, and erased all doubt that small
independent companies would survive on their own for much longer.

Analyst and industry players were predicting a shakeout of the industry into the
global six General Motors, Ford, DaimlerChrysler, Toyota, Honda and Volkswagen.
These super giants were expected to achieve their entry in this elite group by
securing the acquisitions of their smaller brethren.

As one of the relatively smaller companies AB Volvo was actively seeking partner
even though it was far from hurting. It had built a valuable reputation as one of the
safest brands available and had a socially and environmentally responsible
corporate image. Yet in the automotive sector, this Swedish concern was slow to
institute innovations, and lacked the financial resources to enable to pick up the
pace. Part of its reticence to invest heavily in its auto operations, known as Volvo
Car Corp., was that the company’s commercial vehicle business accounted for a
greater share, 60%, of overall revenues. By divesting its auto business, which would
never survive independently anyway, Volvo could focus on increasing its
commercial business.

The addition of the Volvo brand to Ford Motor’s line-up would increase its luxury
car offerings, which at that time consisted of Jaguar, Lincoln and Aston Martin. It
would attract new classes of luxury car customers – females and consumers under
the age of 55. Volvo would also provide Ford with European manufacturing plants,

61
as well as the potential for the exchange of vehicle platforms, or chassis, between
the combined company’s models.

In the months prior to the announcement of a definite deal, rumours were flying
about potential partners for Volvo. Ford and Volkswagen had been named as
possible suitors, but it was the Italian automaker Fiat SpA that particularly wanted
to acquire Volvo. According to reports, Fiat had offered $7 Billion for the entire
concern, including the commercial vehicles business. Volvo rejected that offer, since
it wanted to maintain and develop those operations itself.

Instead, Volvo formed a [act with Ford. announced on January 28, 1999, the deal
called for the purchase of Volvo brand name on passenger vehicles, including car,
minivans, sports-utility vehicles, including cars, minivans , sports utility vehicles
and light trucks, while Volvo retained the right to use the Volvo name on all
commercial vehicles and non auto products.

Volvo shareholders approved the deal on March 8, 1999, and the regulatory bodies
did likewise on March 29, 1999. On March 31, 1999, Volvo Car Corp. was
transferred to Ford Motor, Which paid the Swedish corporations $700 million and
SEK 10.2 billion was scheduled to be paid within two years.

Products and Services

Ford Motor created the Premier Automotive Group to hold its luxury brands:
Volvo, Aston Martin, Lincoln and Jaguar. Before the addition of Volvo, Ford’s
luxury operations sold 250,000 vehicles by mid 1999. With the newly acquired
brand, the company expected its global sales to reach 750,000 in the year 2000.
Ford’s other automotive brands were Ford and Mercury, as well 33% interest in
Mazda. Additionally, the company operated in Financial Services Sector, consisting
of Ford Credit, Hertz and USL Capital.

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After divesting itself to its automotive business AB Volvo in five segments: Volvo
Buses, Volvo Construction Equipment Group, Volvo Penta Corp. (marine and
industrial engines), and Volvo Aero.

Changes to the Industry

Ford secured its second-place position, behind General Motors, among the world’s
automotive companies, acquiring a 16% global market share. Its 11.7% share of the
European market just edged out GM’s 11.5% share, although they trailed far behind
the 18.4% share held by the leader of that market Volkswagen AG.

A June 1999 issue of the Detroit Free Press reported results of a study predicting
that ford would soon overtake GM as the world’s leader in terms of both revenue
and production. According to Autofacts Group, a unit of the
PricewaterhouseCoopers, Ford’s global production was expected to reach 9.15
million cars and light trucks by 2005, while GM would trail slightly behind with 9.1
million.

Review of the Outcome

Ford vowed to have minimal impact on the operations and the culture of Volvo Car
Corp. Still, employees of the newly acquired company were somewhat anxious
about being the subordinates of an aggressive American boss, particularly Jacques
Nasser, who worked so hard that he shunned vacations. Swedish companies were
traditionally run by compromise rather than direct order and their bosses
encouraged a healthy balance of work and play.

No layoffs or closures were announced immediately after the deal, but they were
expected to be forthcoming. Additionally Swedish suppliers admitted that they
dint have the large scale capabilities to service Ford, and neither could they ever
hope to compete against Ford’s established suppliers

63
Conclusion
“We’ve achieved our target”
You can almost hear the sigh of relief from everyone seated in the boardroom.
Months of sleepless nights and hours of work have boiled down to this one-day
and yes they have been victorious.

This line, this scene is the dream of every company that goes in for a merger or an
acquisition. To achieve the set target is a remarkable feat considering the fact that
most mergers don’t succeed.

Over the years there have been millions of mergers, the value of which keeps
increasing as the years go by, but yet no one has been able to come up with a sure
shot formula for success and no one probably ever will.

One of the main reasons for this is that every organization is different from the
other; no two firms have the same work cultures and philosophies, just like no two
people in the world are exactly similar. The requirements for success for each firm
would differ.
This does not mean that the organization does not strive to achieve success or that
it is out of reach. It is not. The company should work towards their set goals. The
issues that I have discussed in the report should be looked at closely, because if
they’ve done everything right and it still does not work means that they were a
misfit form the beginning.

Before making a final deal they must do a due diligence. This will help them in
uncovering any facts that might not be blatantly visible but can cause a hindrance
to the merger.

The people who have a stake in the firm, be it employees or customers should be
informed about the going-ons in the company. This would assure their full support
to the firm.

64
The price structure should be studied in detail. The company should be on their
toes all the time making sure that the competitor is not taking advantage of their
vulnerable position when they are in the process of a merger or an acquisition.

The scope of mergers is tremendous because there are so many fragmented players
especially in India, they would not be able to withstand competition from the
multinationals. Today in a lot of sectors there is fierce competition like telecom, this
excessive competition at some point of time will lead to consolidation in the
industry because they cannot keep playing price games, at some point they will
have to stop. Fixed costs are rising, consumers are becoming global, their demands
have to be serviced and mergers are considered to be the simplest way to expand
since you don’t incur the start-up costs.
To conclude I would like to say that this is just the beginning... The best is yet
to come the marriages are going to get bigger and bigger…

LATEST NEWS
Mergers And Acquisitions In First Half Of 2009 Worst In
Five Years

Mergers and acquisitions (M&A) in the country slumped to their worst since 2004
in the first half of 2009 as a liquidity crunch and mismatched valuations marred
buying plans of Indian companies.
Analysts, however, say the worst may be over.
In the first six months of 2009, Indian companies were involved in 136 M&A deals,
down nearly 54% from the same period last year, according to a study by Venture
Intelligence, a research firm focused on private equity and M&A deals in India.

65
In the second half of 2008, when the global slowdown started, the number of deals
declined 28% but the average deal value has recovered from the $60 million seen
then.
“The biggest reason for the fall was the lack of liquidity,” said Arun Natarajan,
chief executive, Venture Intelligence. “This particularly affected cross-border deals
as no leverage or buying finance was available. It was only companies with cash in
hand that went hunting for targets.”
Mismatch in valuations further dampened spirits as expectations of many
promoters had not come down as much as the markets.
At least 50% of the deals in the first half of 2009 were domestic acquisitions, against
40% last year, according to the Venture Intelligence study.
Information technology (IT), IT-enabled services (ITeS) and manufacturing
industries accounted for the most acquisitions in the first half, with an 18% share
each.
However, M&A activity in IT and ITeS had fallen from 27% in the first half of 2008,
and manufacturing deals from 20%.

BIBLIOGRAPHY

Books
1) Global Alliances in the Motor Vehicle Industry
- Leslie S. Hiraoka

2) Mergers and Acquisitions – A Guide to creating value for Stakeholder

-Micheal A. Hilt
-Jefferey S. Harrison
-R. Duane Ireland

3) Independent Project on Mergers and Acquisitions in India –A Case Study

-Kaushik Roy Choudry

66
 -K. Vinay Kuma

4) Cases in corporate Acquisitions, Mergers and Takeovers

-Edited by Kelly Hill

5) SUCESSFUL MERGERS getting the people issues right

– Marion Devin

Websites

1) www.investopedia.com

2) www.wallstreetjournal.com

3) www.ny-times.com

4) www.economictimes.com

5) www.google.com

6) www.wikipedia.com

News Papers

1) The Economic Times

2) Mint

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