Acquisition Sustainability in the Car Manufacturing Industry

Acquisition Sustainability in the Car

Manufacturing Industry

Master Thesis International Business and Management

- International Financial Management -

Acquisition Sustainability in the Car Manufacturing

Industry

Report as result of a graduation project, conducted from June 2008 till May 2009.

Author:

Marcel Diender

Under supervision of:

University of Groningen

Faculty of Management and Organisation

Groningen, the Netherlands

University of Uppsala

Faculty of Business Studies

Uppsala, Sweden

First supervisor:

Dr. E.P. Jansen

University of Groningen

Department of Accounting

Second supervisor:

Mr. Drs. H.A. Ritsema

University of Groningen

Department of International Business and

Management

Abstract

This research performs a multiple case study about large acquisitions in the car manufacturing industry. It studies the determinants of the sustainability of an acquisition in this industry by researching two cases. One of these cases is unsustainable, the acquisition of Chrysler Corporation by Daimler-Benz, while the other case is sustainable, the acquisition of Audi by Volkswagen. The theoretical assumption, based on literature review, is that the sustainability of an acquisition in this industry is depending on the success of the acquisition with the parent company’s strategy as an intervening variable. The success, in turn, is depending on five success factors: ‘previous acquisition experience’, ‘strategic fit’, ‘focus on core business’, ‘cultural fit’ and ‘integration’. The results of this research show that the relationship between success and sustainability of an acquisition in the car manufacturing industry is directly and positively related. The parent company strategy is not acting as an intervening variable on this relationship when the target company is relatively large. The success of an acquisition, and in turn the sustainability of a large acquisition in this industry, is depending on three sequential steps in the integration process. Firstly, the acquired company should be treated as if it consists of several parts. Subsequently, these parts should be compared to the same respective parts in the acquiring company on strategic and cultural fit. Finally, the different parts should be integrated at the appropriate level based on the comparisons.

Executive summary

This research starts by explaining the main problem in the reality of the car manufacturing industry. In this industry many acquisitions take place, but only few are lasting for a longer period of time. One could wonder why one car manufacturer takes over the other without knowing how to be sure it will be a successful take-over, or at least how the chances for success can be improved. This research looks at the sustainability of an acquisition in the car manufacturing industry and is especially interested in the determinants for this sustainability. An acquisition is considered sustainable when it lasts longer than 30 years. It is considered unsustainable when it lasts shorter than 10 years. 10 years seems a long time, but is relatively short when compared to the existence of the entire industry, or other acquisitions which proved to be sustainable. The research consists of seven parts. Chapter one and two consider the structure and methodology of the research. The next two chapters contain an overview of the relevant existing literature. This literature provides the first five determinants on which the case studies in chapter five and six are based. Chapter seven contains the conclusions of this research.

The two cases that are studied in this research are the one of Daimler and Chrysler and the one of Volkswagen and Audi. The acquisition of Chrysler by Daimler was in 1998 and turned out to be unsustainable. The acquisition of Audi in 1965, at that time Auto Union, by Volkswagen is still successful and proved to be sustainable ever since.

The basic theoretical model in this research is based on the idea that a successful acquisition is sustainable, while an unsuccessful acquisition is unsustainable. This positive relationship might be intervened by the strategy of the acquiring company. The idea behind this line of reasoning is that a parent company might maintain an unsuccessful acquisition or sell a successful acquisition to serve its own strategy.

According to the literature the success of an acquisition is determined by the following success factors: ‘previous acquisition experience’, ‘strategic fit’, ‘focus on core business’, ‘cultural fit’ and ‘integration’. Previous acquisition experience can help a next acquisition to be successful by looking at the similarity between both acquisitions and the way those acquisitions are treated. It is quite logical that a new acquisition that is very different from a previous acquisition should not be treated in the same way in order to be successful. For the success of an acquisition it is also better when the strategic objectives and strategic agendas of the acquiring company and the target company are similar. In this way it is easier to gain synergy advantages. This same line of reasoning is used for the ‘focus on core business’. When the focus on core business is considered, however, the appropriate level of integration also plays an important role. Simply put, it is better to integrate companies more extensively when the core businesses are the same and less extensive when the core businesses are different. It is also quite obvious that the fit between the cultures of the target company and acquiring company can have a major influence on the success of an acquisition. According to different researchers, the national cultural differences have a larger impact on the success of an acquisition than the corporate cultural differences. Still the corporate cultural differences have a major impact on the success of an acquisition. The last success factor, integration, is related to al other success factors. The ‘score’ on the other success factors determine what the appropriate level of integration should be and what the appropriate speed of integration should be.

A parent company that has several business units can manage these by portfolio management. According to theory a company, for example, has to invest in a business unit with a medium or large market share in a growing market. When this business unit is an acquisition with substantial losses just after it was acquired one could say it is unsuccessful. However, because of the strategy of portfolio management, a parent company could still choose to invest more in the acquisition, in order to make it more sustainable. It is also possible that a successful acquisition is sold after a few years to serve the parent company’s strategy. An example of this is the intention of Ford to sell its successful acquisition Volvo. For this reason, the parent company strategy is chosen as an intervening variable in the positive relationship between the success and the sustainability of an acquisition.

experience with acquisitions prior to this take-over. But then again, this acquisition of Chrysler Corporation was of such a magnitude that it can barely be compared to any other acquisition. The previous acquisition by Daimler-Benz which was also quite large was the acquisition of the electronics company AEG. In the case of AEG, Daimler-Benz decided to treat the different units differently. Some were sold and some were integrated completely.

When it comes to the strategic fit between Daimler-Benz and Chrysler, the only similarity between their respective strategies were the strategic goals; both wanted to become major global players in the market. The means by which they wanted to reach their goals, however, were very different. Daimler-Benz was competing on quality and reliability of its products, while Chrysler Corporation was competing by lower prices and more creative products.

This also shows that both companies were specialized in very different core businesses. Although both companies are producing cars, the kind of cars they produce are very different. This resulted in much less synergy advantages than was predicted before the acquisition.

One of the greatest obstacles in the integration of the companies was the difference in both the corporate and the national cultures. The German culture of Daimler-Benz was very rigid and procedures were highly structured. The Americans at Chrysler however, were considered to be the ‘cowboys’ in the market. When they had to conform to the German rules and procedures, they lost their connection and commitment to the company.

The last and most important problem with the acquisition of Chrysler Corporation by Daimler-Benz was the inappropriate level of integration. Chrysler was treated as one large unit and was integrated only partly.

When Daimler sold its shares in Chrysler, it was paired with an immediate change in strategy. Instead of becoming a global player by mergers and acquisitions, Daimler radically changed its strategy to one of autonomous growth starting in the markets where it already had a strong presence.

The second case of Volkswagen and Audi was, opposite to the one described above, a sustainable one. At the time Audi was taken over by Volkswagen the company was known as Auto Union, and Audi was the brand name under which the cars of Auto Union were produced. Auto Union was a combination of four companies that merged before the Second World War and was therefore very experienced in mergers and acquisitions. Volkswagen on the other hand had no experience at all. In the case of Volkswagen this did not matter very much, because Volkswagen was mainly interested in the extra production capacity that Auto Union could provide. The rest of company was barely integrated and could maintain operations as they were.

The strategies of both companies were very different, but this was also no problem, because the appropriate level of integration was applied. Volkswagen depended on a one-model-strategy (the Volkswagen Beetle), while Auto Union had multiple models in different segments of the market and competed by producing innovative products. Because the production facilities of Auto Union were perfectly capable of producing Volkswagen Beetles, it was easy to integrate this part of the company. For example, the sales department and the R&D department of Auto Union remained intact.

Like in the case of Daimler-Benz and Chrysler Corporation, both Volkswagen and Audi were producing cars and in that sense they shared a common core business. When the kinds of cars are considered however, their core businesses were very different. Again this problem was solved by the appropriate level of integration.

Opposite to the case of Daimler-Benz and Chrysler Corporation, Volkswagen and Audi shared the same national culture. This reduced the cultural differences substantially. The corporate cultures however, were very different. These differences were closely related to the differences in strategic thinking. Where Volkswagen believed in one car that should be improved every year, Auto Union believed in producing a completely new and better car every few years. Auto Union remained stubborn and because of the lack of attention by Volkswagen, Auto Union held on to its corporate culture, without causing any problems. Most employees (besides the ones at the production facilities) of Auto Union had to report to the same manager as before the acquisition and only the CEO of Audi had to report to Volkswagen management. Again this was the appropriate level of integration.

Volkswagen adopted Audi’s strategy and also started to produce multiple models, which turned out to be a great success and helped Volkswagen to survive in the market.

In conclusion, there are three major issues that follow from this research. Firstly, the parent company turns out to have no influence on the relationship between the success of an acquisition and the sustainability of an acquisition. The success and the sustainability even influence the parent company strategy itself. This conclusion can only be generalized to acquisitions where the target company is relatively large, like in the cases studied by this research, since there are still examples of successful acquisitions being sold. An example of the latter is the case of Ford and Volvo, in which Volvo only represents a small part of Ford.

Preface

This master thesis is a result of my master studies in International Business and Management at the Rijksuniversiteit Groningen and my studies of International Economics and Business at the Uppsala Unversitet.

It was my uncle, Wilco Huisman, who first came with the idea to do research in the car manufacturing industry. Long before my thesis even was an issue, we already had discussions and shared information about everything that was taking place in the industry. It was my girlfriend, Sibrecht de Jong, who encouraged me to actually hold on to this subject and to write a proper research proposal for this thesis. The final confirmation for writing a thesis about the chosen subject came from my supervisor Pieter Jansen. His enthusiasm and the interest for the subject he shared with me helped me to continue writing this thesis with great dedication.

During my studies I was always supported by my parents in both a moral as well as in a financial way. They never doubted my capabilities and were proud with every milestone I surpassed, which helped me to stay motivated. Also in times I was not sure about how to continue my studies, they always gave me a free choice which they always supported. I want to use this preface to thank them for this support. Furthermore, I want to thank them for all the spare time they gave me during my working period at their company, to work on this thesis. They never complained about me not working for their company and always put my thesis first.

During the writing of this thesis I visited my supervisor, Pieter Jansen, mostly only for a short period of time, but every time he motivated me in writing my thesis. He thought me how to write a proper thesis, without limiting my possibilities and ideas. He even provided me with more freedom in the way I did my case studies and in the way I could draw my conclusions. This made it very satisfying to write my thesis and I like to thank my supervisor for this.

Last but not least I would like to thank my girlfriend for her constant support during the entire process of writing this thesis. She always listened to me, read every part I wrote and provided me with suggestions for improvements, which I thankfully integrated in this thesis. She helped me structuring the planning of writing my thesis and helped me in my quest for information about the cases. Finally, her enthusiasm about the content of the thesis kept me motivated and made me proud of my work.

Table of Contents

ABSTRACT

III

EXECUTIVE SUMMARY

IV

PREFACE

VII

TABLE OF CONTENTS

1

1

INTRODUCTION

3

1.1

I

NTRODUCTION

3

1.2

I

NTRODUCTION IN THE

C

AR

M

ANUFACTURING

I

NDUSTRY

3

1.3

P

ROBLEM

I

NDICATION

4

1.4

R

ESEARCH

Q

UESTIONS

5

1.5

S

TRUCTURE OF

T

HESIS

5

2

METHODOLOGY

7

2.1

I

NTRODUCTION

7

2.2

C

ONCEPTUAL

M

ODEL

7

2.3

R

ESEARCH

D

ESIGN

8

2.4

D

ATA

C

OLLECTION

8

2.5

D

ATA

A

NALYSIS

8

3

THEORETICAL BACKGROUND: SUCCESS FACTORS

10

3.1

I

NTRODUCTION

10

3.2

D

ETERMINANTS OF

S

UCCESSFUL

A

CQUISITIONS

10

3.2.1

P

REVIOUS ACQUISITION EXPERIENCE

10

3.2.2

S

TRATEGIC FIT

11

3.2.3

F

OCUS ON CORE BUSINESS

12

3.2.4

C

ULTURAL FIT

12

3.2.5

I

NTEGRATION

13

3.3

C

ONCEPTUAL

M

ODEL

14

3.4

S

UMMARY

14

4

THEORETICAL BACKGROUND: PARENT COMPANY STRATEGY

16

4.1

I

NTRODUCTION

16

4.2

R

EASONS FOR INVESTMENT

16

4.2.1

I

NITIAL INVESTMENTS

16

4.2.2

F

URTHER INVESTMENTS

16

4.3

R

EASONS FOR DIVESTMENT

18

4.4

C

ONCEPTUAL MODEL

18

5. UNSUSTAINABLE ACQUISITION: THE DAIMLER CHRYSLER CASE

20

5.1

I

NTRODUCTION

20

5.2

G

ENERAL

C

ASE

D

ESCRIPTION

20

5.3

S

UCCESS FACTORS

21

5.3.1

P

REVIOUS ACQUISITION EXPERIENCE

21

5.3.2

S

TRATEGIC FIT

22

5.3.3

F

OCUS ON CORE BUSINESS

22

5.3.4

C

ULTURAL FIT

23

5.3.5

I

NTEGRATION

24

5.4

P

ARENT

C

OMPANY

S

TRATEGY

25

5.5

S

UMMARY

25

6

SUSTAINABLE ACQUISITION: THE VOLKSWAGEN AUDI CASE

27

6.1

I

NTRODUCTION

27

6.2

G

ENERAL

C

ASE

D

ESCRIPTION

27

6.3

S

UCCESS FACTORS

28

6.3.1

P

REVIOUS ACQUISITION EXPERIENCE

28

6.3.2

S

TRATEGIC FIT

29

6.3.3

F

OCUS ON CORE BUSINESS

30

6.3.4

C

ULTURAL FIT

31

6.3.5

I

NTEGRATION

32

6.4

P

ARENT

C

OMPANY

S

TRATEGY

32

6.5

S

UMMARY

33

7

CONCLUSIONS

34

7.1

T

HEORETICAL

M

ODEL

34

7.2

R

ESEARCH

Q

UESTIONS

36

7.2.1

M

AIN QUESTION

36

7.2.2

S

UB

-

QUESTIONS

36

7.3

M

ANAGERIAL

I

MPLICATIONS

37

7.4

L

IMITATIONS AND

F

URTHER

R

ESEARCH

39

REFERENCES

40

P

ERIODICLES

40

B

OOKS

42

N

EWSPAPERS

43

1

Introduction

1.1

Introduction

March 17 the year 2000; Ford Motor Company announces it buys Land Rover from BMW. March 26, 2008; Ford Motor Company announces it sells Land Rover to Tata Motors. Within eight years time Ford changed its mind about weather or not to maintain its brand portfolio. The argument in the year 2000 was that Land Rover would “fit perfectly into Ford’s growing family of world-class brands”.1 _{In 2008 however, Ford’s strategy is focusing around its main brand “Ford” and other}

brands are to be sold.2

This example perfectly illustrates that only very little is certain in the car manufacturing industry. The large companies in the industry maintain brand portfolios. Some brands are kept forever, while others are sold just a few years after they have been acquired.

This paper explores the determinants of the sustainability of acquisitions in the car manufacturing industry. Two main factors are considered; the success factors of the acquisition and the strategy of the parent company.

There is much literature about the success of acquisitions and there is much literature about the reasons why acquisitions are sold. However, there is no literature that discusses the combination, which explains something about the sustainability of acquisition. No article can be found about the question ‘why do some acquisitions last only short, while other last longer?’ It seems that the current literature assumes that this is a direct result of the successfulness of an acquisition. But then the next question arises; Are successful acquisitions sold? It is possible in the car manufacturing industry that acquisitions which perform well are not sustainable. An example of this is Ford trying to sell Volvo, which is a very successful acquisition. Furthermore, it is useful for car manufacturers to know how an acquisition can become a sustainable one. This research therefore adds to the existing literature.

1.2

Introduction in the Car Manufacturing Industry

Before explaining the problem more thoroughly, this section will introduce some features of the car-manufacturing industry. This short discussion will introduce some special features which differentiate this industry form other industries.

The first and most obvious feature of the car manufacturing industry is the fact that it can be characterized (almost) as an oligopoly. This means that there are only a few large players in the industry. It might be argued that there are many other smaller independent car manufacturers, but then again, history has proven that they will not last long. Some companies cannot be profitable and run out of business while others are taken over by one of the larger players. Furthermore, it seems that even the larger companies in the market are merging, or acquiring each other. One of the earliest examples of this is the acquisition of Citroen by Peugeot in the seventies. Both were large players on the French and European market and are now a large global player3_.

This example leads to the next characteristic of the car manufacturing industry; the industry is moving from multiple national oligopolies to one global oligopoly.4 This is one of the most probable reasons for the fast and unpredictable changes in the market. Companies seem to recognize the importance of “being big” for their survival in the future.

Another issue which is especially important in the car manufacturing industry is the oil price. The industry is more and more influenced by the increasing oil prices. Consumers increasingly prefer compact and efficient cars instead of, for example, large SUV’s. Furthermore the car manufacturing companies need to invest in innovative solutions for the upcoming oil shortage. One solution is the hybrid car, which uses both petrol and electricity, but this is still not sufficient to conquer the rising energy problems. Other alternatives are biomass, alcohol fuels, hydrogen and the air engine. Even the old fashioned steam engine is on its return. There is still no consensus on which alternative energy source will become common in the future5.

Last but not least, the car manufacturing is highly influenced by regulation. Everywhere in the world, there are different rules en regulations, which have their influence on the car manufacturing industry. These regulations are often about environmental and safety issues6_{. The increasing}

environmental concerns greatly influence the car manufacturing industry since the millions of cars in the world cause many of the environmental problems. Besides this, most governments are constantly trying to decrease the number of car accidents in their country. Sometimes it results in rules which require technical demands on the cars sold in that country. A simple example of such rules is the obligation to wear a seatbelt in the back of a car. Not that long ago many cars only had seatbelts in the front of the car. Nowadays, this is unthinkable because every car manufacturer installs seatbelts in the back of a car.

All issues mentioned in this section show that it is not easy to run a car manufacturing company. One can imagine that when developments are not made quick enough a car manufacturer is forced to sell its company, or to expand the company by acquiring another.

1.3

Problem Indication

As explained in the background, many takeovers do not last very long. Also in literature it is often stated that the greater part of mergers and acquisitions are unsuccessful (Hunt, 1989). This paper will focus on acquisitions in the car manufacturing industry only. The car manufacturing is an industry where many takeovers take place, and many of them are unsustainable. It provides examples of acquisitions which perform successfully, but are not sustainable. Also the opposite happens in the car manufacturing industry, where unsuccessful acquisitions seem to be sustainable. This research explains what the independent variables, which explain the sustainability of an acquisition, are and how they influence the sustainability. It is already argued that these are different than the success factors of an acquisition.

In many published articles authors have high expectations from acquisitions in the car manufacturing industry. The most evident arguments for this optimism are synergy advantages and economies of scale (Harbour, 2000; Kranz, 2004; Osegowitsch, 2001). Also for the car manufacturers themselves these are the most common reasons for acquisitions.

However, the car manufacturers seem to be unable to benefit as much from these advantages as expected. When Daimler-Chrysler bought a controlling stake in Mitsubishi, the result was that Daimler-Chrysler was only financing Mitsubishi to back up its losses. The same happened with the Chrysler part of the company, which was financing its losses with Daimler money. This are only two of many examples in which the acquisition turned out to be not as sustainable as one might have expected.

But, how can it be judged properly if an acquisition in the car manufacturing industry is sustainable or not? What are the determinants for this sustainability? How is this sustainability influenced? These are all questions yet to be answered in this paper.

1.4

Research Questions

The foregoing problem indication leads to the following main question to be researched:

What are the determinants of the sustainability of an acquisition in the car manufacturing industry and how do they influence this sustainability?

This question contains a number of things which need to be made operational, before it can be answered properly. Firstly, it considers ‘acquisition’. By acquisition is meant that the acquiring party adds the acquired party in its portfolio by owning a controlling stake in the acquired company. Furthermore, the question is about the ‘sustainability’ of an acquisition. With this sustainability is meant that the acquiring company holds the controlling stake in the acquired company for a longer period of time. In the car manufacturing industry, ‘a longer period of time’ does not mean 5 or 10 years, but about 30 to 50 years. In this paper an acquisition is considered unsustainable when it lasts shorter then 10 years. It is considered sustainable when it lasts longer then 30 years. The second part of this main research question focuses on ‘how’ the determinants influence the sustainability. By answering this part of the main question, this research adds more value to the existing body of literature.

To be able to answer the main research question, several sub-questions need to be answered first. These are the following:

1. How does previous acquisition experience influence the success of an acquisition in the car manufacturing industry?

2. How does strategic fit influence the success of an acquisition in the car manufacturing industry?

3. How important is focus on core business for the success of an acquisition in the car manufacturing industry?

4. How important is cultural fit for the success of an acquisition in the car manufacturing industry?

5. How does integration influence the success of an acquisition in the car manufacturing industry?

6. Which role plays the parent company’s strategy in the decision to invest or divest in an acquisition?

The first five sub-questions are based on an article by Duncan and Mtar (2006), which considers a model which explains the success of an acquisition. Duncan and Mtar only conclude there is an actual relationship between the success factors and the success of an acquisition. They do not explain how this relationship works in reality. This research, however, does consider this ‘how’ question. Furthermore, in the article by Duncan and Mtar, it is argued that the existing literature assumes that sustainability of an acquisition is depending on the success of the acquisition. This thesis accepts this assumption partly, but considers it incomplete. There are also successful acquisitions which are not sustainable. One example in the car manufacturing industry, mentioned before in the introduction, is Volvo, which is a very successful acquisition by Ford, but is to be sold anyway, because Ford is changing its strategy.

Existing literature also discusses the parent company’s strategy thoroughly, trying to explain why business units are sold. The sixth sub-question is based on this literature. By combining the answers on all sub-questions, the main question can be answered. The determinants of, and their influence on, sustainability can be derived from the answers on each sub-question.

1.5

Structure of Thesis

In the following chapter the literature research starts by exploring the literature about success factors. This chapter explains the first part of the conceptual model. The second part of the literature research in chapter four completes the explanation of the conceptual model.

Since this paper focuses on the car manufacturing industry, the theoretical model must be applied on acquisitions in this industry. Therefore, chapter five applies the theoretical model on a case which can be considered unsustainable: the DaimlerChrysler case. The model should not only explain why acquisitions are not sustainable, but also should be able to explain why acquisitions are indeed sustainable. Chapter six, therefore, applies the model to another case in which the acquisition can be considered sustainable. One striking example of such an acquisition is the case of the acquisition of Audi by Volkswagen in 1965, which is covered in chapter six.

Finally the conclusions are discussed which results in a modified model which applies to the car manufacturing industry. This model is different from the conceptual model since the cases provide some interesting changes. Furthermore, the conclusion chapter contains a section with managerial implications in order to increase the value of this thesis in the practical business world. Figure 1.1 illustrates the structure of this thesis schematically.

Figure 1.1: Structure of the thesis Introduction

Chapter 1 Introduction

Theory Case Study Conclusion

2

Methodology

2.1

Introduction

As explained in the last section of the previous chapter, the research is roughly built up in three parts. The first part considers the theory about success factors, the second part discusses the theory about the parent company’s strategy and the third part applies the theory on two cases in the car manufacturing industry. In this chapter, the methodology is explained more thoroughly. The conceptual model visualized in the next section is the starting point in the research. In the first two parts this model is further explained. In the third part it is applied on several cases in order to explain the sustainability of acquisitions in the car manufacturing industry.

2.2

Conceptual Model

As is explained in the previous sections, the dependent variable in this research is the sustainability of acquisitions. This is determined by a number of independent variables. The independent variables are derived from the literature on succesfactors of acquisitions. There is one intervening variable – the parent company strategy – which has its influence on the relationsship between the determinants of succes and the sustainability of an acquisition. An acquisition can be very unsuccesfull, but the parent company could still decide to keep it because it fits, one way of another, in the parent company’s strategy. Figure 2.1 shows the conceptual model containing all the variables and relationships.

Figure 2.1: Conceptual Model

Sustainability of acquisition:

< 10 years > 30 years

Success factors

Previous acquisition experience: - Similarity of target firms - Generalization / Discrimination

Strategic fit:

- Strategy of acquiring company - Strategy of target firm

Focus on core business:

- Core business of acquiring company

- Core business of target firm - Level of integration

Cultural fit:

- Differences in national cultures - Differences in corporate cultures

Integration:

- Appropriate level of integration - Speed of integration

Parent company strategy

Reasons for acquisition/investment: - Consolidation

- Global reach

- Competencies acquisitions

Reasons for divestment:

- Discard unattractive units - Focus on core activities - Financial position of parent Changes in situation over time:

Figure 2.1 shows the conceptual model as the starting point in this thesis. As the first square on the left already implies, the success factors consist of five parts. Chapter 3 discusses each of these separately and will explain why these factors are relevant for the success of an acquisition. After that, in chapter four, the influence of the parent company strategy is explained by an exploration in literature.

2.3

Research Design

This thesis considers six sub-questions based on the conceptual model. The first five questions are explained thoroughly in chapter three. In order to answer the first five sub-questions, each of the determinants of acquisition success are discussed in the case studies.

For the sixth sub-question, literature about portfolio management is very important. This explains in general the reasons for keeping or selling a business unit. Since there is also a large body of literature on portfolio management, it is very likely many reasons for sustainability can be found. The parent company’s strategies are discussed for every case in order to answer sub-question six. In order to answer the sub-questions, two case studies are conducted. One of these represents a sustainable acquisition and one considers an unsustainable acquisition. The following cases are studied in this phase of the research:

1. Daimler-Benz and Chrysler (1998 – 2007; unsustainable) 2. Volkswagen and Audi (since 1965; sustainable)

As explained above, each variable from the conceptual model is tested in both cases. The conceptual model implies an interpretative case study, because the model shows strict relationships between the dependent and the independent variables (Lukka and Kasanen, 1995). Therefore, each single relationship in each specific case needs to be backed by thorough investigation. For some relationships as suggested by the conceptual model, this can be very difficult. Consider for example the independent variable ‘previous acquisition experience’, which may be absent in a certain case. Therefore, it is wise to discuss both a sustainable and an unsustainable case.

2.4

Data Collection

The thesis consists of two parts; the literature research and the case studies. For the first part it is quite evident how data is collected. This is simply done by searching through books, journals and online databases. The content which is searched for is widely available. There is a large body of literature about the success factors in acquisitions. Examples are Kim and Olsen (1999), Duncan and Mtar (2006), and Chatterjee and Bourgeois (2002). For content about strategy can be thought of literature about portfolio management and entry modes (more specifically the acquisition as an entry mode). Some authors in this field are Anderson and Gatignon (1986), Hennart and Park (1993), Buckley and Casson (1998), Harzing (2000), Gupta and Govindarajan (1984), Armstrong and Brodie (1992), and of course the Boston Consulting Group (Henderson, 1979). Even a simple online search can result in a large number of articles which can be used in the literature research.

The data collection for the second part of this thesis is a little more complex. Information about all factors in the theoretical model resulting from the literature must be gathered. This information can be found in annual reports, press releases and newspapers. Furthermore, there are articles in journals and books available which discuss some features about the specific cases.

2.5

Data Analysis

literature. This implies that both collection and analysis of the data happens simultaneously in practice.

In each case data is searched for each factor. For each factor it is discussed whether it played a role in the sustainability of the acquisition and how the success factors play a role. This is only done qualitatively. It is impossible to do this in a quantifiable way, because the independent variables of the theoretical model are very broadly defined, and different factors might be interrelated. Furthermore, qualitative research provides more insight in the question ‘how’ the success factors influence the sustainability rather than just answer the question ‘if’ the success factors influence the sustainability.

Besides the success factors, also the parent company strategy and its influence on the sustainability is discussed thoroughly. This is done by examining how the parent company strategy and the sustainability relate to each other in the cases.

3

Theoretical Background: Success Factors

3.1

Introduction

When the term “success factors” is considered, one can distinguish between the actual factors facilitating the success of an acquisition and the factors that imply the success of an acquisition. In other words, success factors can be determinants and measures of success. For example, the profit of the acquired firm after a few years can be a measure of success, while the extent to which the acquired firm is integrated in the acquiring company is a determinant for success.

Throughout the paper only the second type of success factor is used, because this research focuses on the determinants for success and sustainability. They can be used in the analysis of the cases to explain the sustainability of acquisitions. This chapter only focuses on the determinants of success. The measures of success are discussed shortly in the next chapter, since they can be used in the investment or divestment decision by the parent company, depending on the parent company’s strategy.

3.2

Determinants of Successful Acquisitions

As been discussed in the introduction chapters of this thesis, much literature exists on the success factors of acquisitions. Two of these authors are Duncan and Mtar (2006). They offer an excellent starting point for the literature discussion. In their article they discuss determinants of international acquisition success. They name five main determinants, which are based on extensive literature research. These are:

1. Acquiring previous acquisition experience 2. Strategic fit

3. Focus on core business 4. Cultural fit

5. Integration process

Duncan and Mtar test the validity of this model by applying it to a successful acquisition in the USA by a public transportation company from the UK. These five determinants can be interpreted quite broadly, which can be considered both as an advantage or disadvantage of the model. On the one hand, it can be a disadvantage, since it is hard to judge the possible success of an acquisition on these determinants. On the other hand it has the advantage that every other determinant can be categorized under one of these. Since this is a qualitative research, this way of grouping success factors offers a perfect structure for this research and it becomes irrelevant that the success factors are broadly defined.

Duncan and Mtar define success in financial terms; an acquisition is successful when turnover and operating profit from the acquired company are rising after the acquisition. This same definition will be used in this paper.

3.2.1 Previous acquisition experience

It sounds quite evident that the experience of a company in acquisitions has its influence on the future performance of the new combination of companies. However, it is less obvious in what way the experience is influential. This is especially difficult when one considers that experience can also have a negative impact on the success of an acquisition.

are the same, but that only the processes are. In many acquisition processes the same steps reoccur every time. (Duncan and Mtar, 2006)

Another reason why previous experience matters, which is closely related with the knowledge about processes, lies in the fact that knowledge about issues after the acquisition is already available in the company. One can think about ways of integration or about cultural issues. (Moatti, 2008) Arguments for the positive influence of experience can be understood easily. However, they are not always applicable. In a research from Haleblian and Finkelstein (1999) the influence of acquisition experience is researched more thoroughly which resulted in some very interesting findings. Haleblian and Finkelstein found that companies with experience in acquisitions initially perform worse. This is caused by inappropriate generalization. In companies with more then average experience with previous acquisitions the poor performance is followed by an improvement in performance. This happens because inappropriate generalization is recognized and expertise is available.

Another result from the research of Haleblian and Finkelstein is that the performance of an acquisition largely depends on the similarity with the former acquisition. If an acquisition target differs significantly from the former target, performance is usually poor, while with a similar acquisition target, performance is high.

One last, less obvious but far more disastrous, negative effect of previous experience is the exact the opposite; inappropriate discrimination. Companies do not see the similarities between two target firms and fail to learn from their mistakes in the past. Haleblian and Finkelstein (1999) mention a perfect example of AT&T which acquires NCR at first and is heavily criticized for it by analysts. They argue that there is no fit in corporate cultures and that AT&T overpaid. The acquisition resulted in massive losses. (Vijayan and Jacobs, 1997) With the next acquisition AT&T was again overpaying and again the corporate cultures differed significantly (Kufner, 1994). (Haleblian and Finkelstein, 1999)

This section argued that previous acquisition experience usually has a highly positive influence on the performance after the acquisition. However, acquisition experience alone is not enough to make an acquisition successful. An acquiring company has to recognize if the target company is similar to the last target company and has to act alike. If the company is similar, inappropriate discrimination must be avoided. If a company is dissimilar, inappropriate generalization must be avoided.

3.2.2 Strategic fit

“Mergers and acquisitions are among the most strategic decisions companies ever make” (Child et al., 2001). “They can bring the company into new markets, deepen its presence in an existing domain and broaden that domain in terms of products, markets or capabilities. Maintaining consistency with the company’s strategy is one of the major challenges in managing an acquisition” (Haspeslagh and Jemison, 1991). With these two citations Duncan and Mtar (2006) justify ‘strategic fit’ as a determinant of acquisition success. Strategic fit is quite shortly discussed, but there is much literature available on this subject. This section looks deeper into this literature and describes this issue more thoroughly.

The sources of value of an acquisition are described in many books and articles. (Scherer, 1988; Chatterjee, 1992; Markides, 1995) Two main sources of value that are described are economies of scale and economies of scope. These are directly related to the strategic fit of a target firm in a company’s strategy. Companies that are looking for economies of scale typically acquire firms that market the same or similar products and are in the same or similar markets. This way they can increase their efficiency and become more competitive with a low cost strategy. (Porter, 1985) In such a case a company has to share knowledge, combine function and increase production capacity. A company with a diversification strategy would not do this so easily. If it would, it would encounter a lack of knowledge and experience with the acquiring company’s products and processes in the target company’s production facilities. An acquisition of another diversifying company which stays autonomous would be more likely, because it fits better in the overall strategy. In the first case the acquiring company would much faster implement an industry-wide restructuring. In the second case it is more likely that only the acquired firm will be restructured. If, for example, an acquiring company is looking for economies of scale, it is unwise to acquire a company with dissimilar products operating in dissimilar markets. It works the same way when the opposite is the case. (Chatterjee, 1992; Capron et al., 2001)

the partners, given their respective explicit or implicit strategic objectives. The analysis consists of three main assessments: criticality of the alliance for partners; the relative competitive position of partner; and the compatibility of strategic agenda’s. This is more specifically defined then Duncan and Mtar do in their reasoning behind the model. Therefore, Laserre adds useful definitions to strategic fit as a success factor for the case analysis.

In this section it is argued that strategic fit is an important determinant of the success of an acquisition. It is even quite simply reasoned and backed up by an extensive body of literature. The next section shows that this issue is closely related to ‘focus on core business’.

3.2.3 Focus on core business

In literature the majority of authors on the subject agree on the statement that a company should focus on its core business (Capron et al., 2001). It is the core business that formed the company in the first place, and most knowledge about the core business is available in the company. This section starts with explaining the connection to the “strategic fit” as a success factor, followed by some arguments concerning the importance of focus on core business and ends with a critical review of this success factor.

“Focus is the differentiation and selection of market segments, and the adjustment of the process and infrastructure to meet the needs of those markets.” This is how McLaughlin et al. (1995) define the term “focus”. The second part of this definition immediately implies the connection to the previous success factor. The target company’s strategy should fit to the strategy of the acquiring company in order to be able to maintain the process and infrastructure that meet the needs of the market.

Companies which are too diversified run the risk of destroying value because assets are deployed for minimal functions. In a certain company in which this is the case it would be more profitable to sell the assets than to exploit them, since there is too little use for them. (Berger and Ofek, 1996) If a company acquires a target company which is not in the acquiring company’s focus, chances are great that a combination of the firms leads to useless assets. If this is not recognized and there is not divested in the assets, this results in inefficiencies. (Berger and Ofek, 1996; Capron et al., 2001) The importance of focus on core business seems very logical, but can be argued too. This must be done in combination again with the former success factor ‘strategic fit’. Some authors have argued that the importance of focus differs per case. Acquiring companies in pursuit of related diversification perform best through internal development because they leverage internal strength and avoid transaction costs (Williamson, 1985). Firms engaged in unrelated diversification succeed best through acquisition because it offers the opportunity of acquiring the necessary skills and knowledge to compete in the unrelated market. (Dundas and Richardson, 1982; Busija et al., 1997). This last combination of ‘preferred’ entry mode and strategy implies that focus on core business might not be necessary at all. It depends highly on the strategy the acquiring company pursuits. This can be explained quite simple by imagining a very profitable car manufacturer acquiring a very profitable bicycle manufacturer. This can be classified as unrelated diversification and not necessarily implies poor performance, because focus is missing. The companies can run entirely separately as they did before the acquisition and make profits which are beneficial to the car manufacturer.

3.2.4 Cultural fit

In discussions about international acquisitions, culture is very frequently mentioned as a possible obstacle for the acquisition. Two types of cultural fit can be important determinants for the success of an acquisition; the corporate culture and the involved national country cultures. (Duncan and Mtar, 2006)

Duncan and Mtar state that culture is a very difficult concept to evaluate, because it is intangible. There is however much literature available about the subject. Especially, national cultures are documented thoroughly. (Hofstede, 1991; Trompenaars, 1993; Fedor en Werther, 1996; Warner and Joynt, 2002)

The distinction between national and corporate culture is often neglected and most researches only focuses on national cultures. A reason for this is the type of definition that is used for the concept. For example, Hofstede (1980) defined it as “the collective programming of the human mind”. The ‘collective’ in this definition could be seen as all the citizens of a country, but also as all the employees of a company. Researchers studying just corporate culture have defined it as “the beliefs and values shared by senior managers regarding appropriate business practices”. (Schein, 1985; Weber 1998) It is obvious that this definition can only be used for corporate culture.

In a research by Weber et al. (1996), it is investigated which of the two types of cultural difference have a greater influence on the success of a merger or acquisition. Their findings suggest quite clearly that the existence of national cultural differences is a better predictor of acquisition success than the existence of corporate cultural differences. This implies that especially national cultures should not differ too much in order to make the acquisition successful. This can be explained by the suggestion that while national culture forms one’s values through early socialization, corporate culture involves the subsequent acquisition of organizational practices and symbols in the firm. (Hofstede et al., 1990)

3.2.5 Integration

Integration is one of the most extensively discussed features in mergers and acquisitions. It is generally believed that integration is necessary to achieve synergies (Haspeslagh and Jemison, 1991; Shirastave, 1986). However, it is not the issue how well integration is, but that integration is at the appropriate level (Child et al., 2001). It is even argued that it is not what is bought that is important, but more what is done with it (Singh and Zollo, 1998). This is quite a bold statement but it perfectly illustrates how important the issue of integration is believed to be.

Integration can attain different levels and it is important to recognize how far an acquisition needs to be integrated. Hubbard (2001) identified four different levels of integration:

1. Total autonomy

2. Restructuring followed by financial controls 3. Integration of key functions

4. Full integration

As mentioned before, it is important that integration is at the appropriate level. It has to be determined what the appropriate level of integration would be in a specific case. As came forward from the discussion of the previous success factors, the appropriate levels of integration depends on strategic fit and cultural fit. Laserre (2003) adds to these two ‘fits’ the capabilities fit and the organizational fit.

Another issue frequently discussed is the appropriate speed of integration. Colombo et al. (2007) research the importance of the speed integration for the creation of a favourable organizational climate and for the acquisition performance. The conclusion is that the longer a firm waits with the integration the more likely the acquisition is to fail. Due to the uncertainty about the company’s future, an unfavourable organizational climate exists, which in turn results in poor performance. Also time demanding explorations of possible decisions have a negative impact on the performance of a merger or acquisition.

The research by Colombo et al. suggests that the speed of integration should be maximized. However, Homburg and Bucerius (2006) suggest in their research that a fast integration might be beneficial in some situations, but it can be harmful in others. According to these authors, the effect of the speed of integration depends on the internal and external relatedness between the merging firms prior to the merger or acquisition. Their results show beneficial effects of rapid integration when external relatedness is low and internal relatedness is high.

3.3

Conceptual Model

The discussions concerning the success factors in this chapter explain the first box of the conceptual model (Success factors of an acquisition). The five factors introduced by Duncan and Mtar are further specified by the literature research in this chapter. This further specification was already incorporated in the conceptual model. For the completeness of this chapter Figure 3.1 shows the conceptual model again. The issues addressed in this chapter are highlighted in yellow.

In the case studies, each case is assessed on all the success factors in the model. If the assessment shows that the acquisition is doomed to be unsuccessful, the expectation is that the sustainability of the acquisition will be affected, because the acquiring company will divest. The parent company’s strategy is an intervening variable, because there might be strategic reasons for the parent company not to divest even though the acquisition is unsuccessful. The next chapter looks into the strategic reasons in order to come to a complete theoretical model of acquisition sustainability.

Figure 3.1: Conceptual model

3.4

Summary

This chapter discusses five factors of acquisition success. These five factors can influence the sustainability of an acquisition because they affect the decision to maintain the acquisition or to divest.

The first factor concerns the previous experience an acquiring company has with acquisitions. Literature shows that it is important to assess if the previous acquired companies are similar or dissimilar to the current target company. After that, it has to be assessed how the target firm is treated compared to the former acquisition. If there is similarity between the acquisitions generalization is appropriate. If the previous and the current acquisition are different in many aspects discrimination is appropriate. Inappropriate generalization or discrimination will harm the success of an acquisition. Sustainability of acquisition: < 10 years > 30 years

Success factors

Previous acquisition experience: - Similarity of target firms - Generalization / Discrimination

Strategic fit:

- Strategy of acquiring company - Strategy of target firm

Focus on core business:

- Core business of acquiring company

- Core business of target firm - Level of integration

Cultural fit:

- Differences in national cultures - Differences in corporate cultures

Integration:

- Appropriate level of integration - Speed of integration

Parent company strategy

Reasons for acquisition/investment: - Consolidation

- Global reach

- Competencies acquisitions

Reasons for divestment:

- Discard unattractive units - Focus on core activities - Financial position of parent Changes in situation over time:

Strategic fit has much overlap with the success factors ‘focus on core business’ and ‘integration’. If the acquired company fits into the acquiring company’s core business, strategic fit is high and integration levels can also be high in order to profit from synergies. This implies that strategic fit alone is not really a success factor and it would be enough to assess focus and integration, but this would be a wrong conclusion. Also firms with the same core business can have very different strategies, withholding them from integration resulting in less synergy. Furthermore, the strategic fit by itself influences the required level and speed of integration.

Another factor affecting the level of integration is the cultural fit. There can be differences in national cultures, but also in corporate cultures. As found in the literature, the differences (or similarities) in national cultures have a greater influence, than the differences in corporate cultures.

4

Theoretical Background: Parent Company Strategy

4.1

Introduction

The previous chapter discussed the determinants of the success of an acquisition. This chapter will focus on the parent company’s strategy. This chapter starts by discussing the reasons for acquiring another company in the first place. After that, the reasons divestments are discussed.

In order to come to an explanation of the sustainability of an acquisition, the determinants for success and the strategic considerations of the parent company need to be combined. One moment in time a certain acquisition was considered as strategically attractive, while at another moment in time, the acquisition is sold again. Somewhere in between there must have been some changes in the situation, which makes the acquisition unsustainable. This chapter completes the explanation of the conceptual model, which is used in the assessment of the different cases. Especially important in this section is that the changes in the situation over time are an important factor of sustainability of an acquisition, but they are not discussed separately in this chapter. In the case studies which are described in the next chapter the changes follow automatically from an analysis of the status quo of two different moments in time.

4.2

Reasons for investment

‘Investment’ can be used in two ways. The first considers the initial investment in an acquisition. The second concerns the further investments in an already acquired company. This section discusses these two different forms of investment in the next two subsections.

4.2.1 Initial investments

Because successful companies are profitable, they have extra money to spend. This extra money can be given to the shareholders of those companies in the form of dividend, but it can also be used for the companies’ growth. This last choice is in general more attractive, since this also increases shareholder wealth. When a company chooses to invest the profits in the company again, they can either grow organically, or they can grow by acquiring other companies. Very often organic growth is considered more difficult than growth by acquisitions.

Besides this basic reason, there are more basic sub reasons why companies choose to invest in the acquisition of other companies:

• Consolidation • Global reach

• Competencies acquisitions or options in related or new technologies

The first reason – consolidation - means that a company is in search for scale economies. It wants to acquire a company that provides similar products or services. This way the company acquires extra capacity including a whole new customer base, thereby increasing sales. Furthermore the company might be able to integrate the acquisition in order to reduce costs.

The second reason – global reach - is for the acquiring company to expand to other national or regional markets. An acquisition is a much faster opportunity to penetrate a foreign market than a Greenfield investment, or an export strategy.

The third reason needs no further explanation. It is evident that a company with profitable competencies or technologies is an attractive acquisition target. (Lasserre, 2003)

4.2.2 Further investments

One of the most well-known models used in the investment decision-making-process is the so called ‘BCG (Boston Consulting Group) Matrix’ or ‘growth – share matrix’ (see Figure 4.1).

Figure 4.1: The BCG Matrix

This last term already implies how this model works. The model considers both the market share of a business unit and the growth of the business. A business unit within a fast growing market with a large market share is considered to be a ‘star’. Investing in this business unit will result in a consolidation of the market and because the market is growing, it will increase sales. When growth of the market eventually declines, the business unit is an important player in that market, the need for further investment is declined and sales are at a high level. This business unit is now a ‘cash cow’. If this same business unit, still in a fast growing market, has a small market share, the company can either choose to divest and sell the business unit, or it can choose to invest in it and try to transform the business unit into a ‘star’. If a business unit is in a mature market, and has a low market share, it is considered impossible to turn it eventually into a ‘cash cow’. The market is not growing anymore, so the business unit should make it sales by competing with the other parties in the market. Since the market share is so small, it can barely do this, because it does not have the scale economies that its competitors have. (De Wit and Meyer, 2004)

Nowadays, the matrix described above is frequently considered outdated and is criticized on many points. However, it is still used as a basis for other models. One of these models is created by McKinsey for General Electric. (Fleisher and Bensoussan, 2002) Figure 4.2 provides an overview of this renewed matrix.

Figure 4.2: GE / McKinsey Matrix

Market attractiveness and business position are influenced by a number of factors that should be considered. These are mentioned in the Table 4.1.

(External) factors affecting market attractiveness (Internal) factors affecting business position

Market size Strength of assets and competencies

Market growth rate Relative brand strength (marketing)

Market profitability Market share

Pricing trends Market share growth

Competitive intensity/rivalry Customer loyalty

Overall risks of returns in the industry Relative cost position

Entry barriers Relative profit margins

Opportunity to differentiate products and services Distribution strength and production capacity

Demand variability Record of technological or other innovation

Segmentation Quality

Distribution structure Access to financial and other investment resources

Technology development Management strength

Table 4.1: Factors affecting market attractiveness and business position

The GE / McKinsey matrix can be used in this thesis to analyze the investment and divestment decisions of the companies which are considered in the cases. This model can also be used to examine whether the acquisitions would be attractive in the first place.

4.3

Reasons for divestment

In general the most important objectives motivating a divestment of an acquisition are to “discard unattractive units”, “to focus on core activities” and “to meet corporate liquidity requirements”. (Duhaime and Grant, 1984; Hamilton and Chow, 1993) This supports the assumption that success of the acquisition (attractiveness of units) is not the only reason for a company to sell an acquisition again.

Besides the success of the acquisition the strategy of the parent company (focus on core activities) is also an important reason to divest. The GE / McKinsey matrix is especially useful for the assessment of the parent company’s strategy. As shown in the previous section, the GE / McKinsey matrix provides many arguments which can be used in the assessment of the sustainability of an acquisition.

The last reason for divestment, which considers the financial position of the parent company, is quite evident. If a company has problems financing it operations, selling an unprofitable business unit is a means of acquiring immediate liquidity and increasing profitability. (Haynes et al., 2002)

4.4

Conceptual model

Like in the previous chapter, this chapter will also recall the conceptual model (Figure 4.3) to complete the theoretical background of the model. From the explored literature in this chapter different reasons for investment and divestment can be derived. These are summed up in the conceptual model in the box titled “Parent company strategy”. Besides the factors discussed in this chapter, there is a related box included; “Changes in situations over time”. These changes are not discussed but, as explained in the introduction of this chapter, they follow simply from the assessment of situations in two different points in time. Figure 4.3 again presents the conceptual model in which the issues addressed in this chapter are highlighted.

4.5

Summary

The most important reasons for investing in a company are consolidation, global reach and competencies acquisitions. The most important reasons for divestments are to discard unattractive units, focus on core activities and the financial position of the parent.

Furthermore, this chapter discussed the BCG matrix as well as the GE / McKinsey matrix which is a revised version of the BCG matrix. For the assessment of these reasons within the cases, the GE / McKinsey Matrix is a valuable tool. It can explain why a certain (unattractive) business unit is sold or why there an additional investment is made in a business unit. It also provides many factors, which are taken into consideration in the case studies, which are discussed in the following chapters.

Figure 4.3: Conceptual model

Sustainability of acquisition:

< 10 years > 30 years

Success factors

Previous acquisition experience: - Similarity of target firms - Generalization / Discrimination

Strategic fit:

- Strategy of acquiring company - Strategy of target firm

Focus on core business:

- Core business of acquiring company

- Core business of target firm - Level of integration

Cultural fit:

- Differences in national cultures - Differences in corporate cultures

Integration:

- Appropriate level of integration - Speed of integration

Parent company strategy

Reasons for acquisition/investment: - Consolidation

- Global reach

- Competencies acquisitions

Reasons for divestment:

- Discard unattractive units - Focus on core activities - Financial position of parent Changes in situation over time: