Acquisition Sustainability in the Car

Manufacturing Industry

Master Thesis International Business and Manage ment - International Financial Management - Marcel Diender Apeldoorn, 4 May 2009

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

- II - 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.

Key words: Acquisition Success, Acquisition Sustainability, Car Manufacturing Industry, Cultural fit, Strategic fit, Integration

- III - 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.

The first case studied in this paper considers two companies, Daimler-Benz and Chrysler Corporation which are large players in the market. In this case Daimler-Benz is the acquiring company and Chrysler Corporation is the acquired company. Daimler-Benz had very little

- IV - 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. Like with the case of Daimler-Benz and Chrysler Corporation, the parent company strategy of Volkswagen had no influence on the relationship between the success and the sustainability of the acquisition. Also in this case the relationship is different. It is the success and the sustainability of the acquisition that influence the parent company strategy. Because Auto Union/Audi was so successful with its diversified strategy and Volkswagen single-model-strategy started to fail,

- V - 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. Secondly, and following to the previous conclusion, a direct positive relationship exists between the success and the sustainability of an acquisition. When an acquisition in the car manufacturing industry is successful, chances are great that it will also be sustainable. The third and most extensive conclusion is the way the success and sustainability are determined. It are not five independent factors, each with their own influence on the success and sustainability of an acquisition, but there are three sequential factors that determine success and sustainability. First, a company has to split up the acquired company in several parts. After that, these parts need to be compared with the same respective parts in the parent company. In this comparison the strategic and cultural fit are the most important issues. Finally, each part has to be integrated at the appropriate level. When all this is done properly, the chances of success and sustainability are much greater then when the acquired company is integrated as if it is one single unit.

- VI - 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.

Marcel Diender, 4 May 2009

- VII - Table of Contents

ABSTRACT III

EXECUTIVE SUMMARY IV

PREFACE VII

TABLE OF CONTENTS 1

1 INTRODUCTION 3

1.1 INTRODUCTION 3 1.2 INTRODUCTION IN THE CAR MANUFACTURING INDUSTRY 3 1.3 PROBLEM INDICATION 4 1.4 RESEARCH QUESTIONS 5 1.5 STRUCTURE OF THESIS 5

2 METHODOLOGY 7

2.1 INTRODUCTION 7 2.2 CONCEPTUAL MODEL 7 2.3 RESEARCH DESIGN 8 2.4 DATA COLLECTION 8 2.5 DATA ANALYSIS 8

3 THEORETICAL BACKGROUND: SUCCESS FACTORS 10

3.1 INTRODUCTION 10 3.2 DETERMINANTS OF SUCCESSFUL ACQUISITIONS 10 3.2.1 PREVIOUS ACQUISITION EXPERIENCE 10 3.2.2 STRATEGIC FIT 11 3.2.3 FOCUS ON CORE BUSINESS 12 3.2.4 CULTURAL FIT 12 3.2.5 INTEGRATION 13 3.3 CONCEPTUAL MODEL 14 3.4 SUMMARY 14

4 THEORETICAL BACKGROUND: PARENT COMPANY STRATEGY 16

4.1 INTRODUCTION 16 4.2 REASONS FOR INVESTMENT 16 4.2.1 INITIAL INVESTMENTS 16 4.2.2 FURTHER INVESTMENTS 16 4.3 REASONS FOR DIVESTMENT 18 4.4 CONCEPTUAL MODEL 18 4.5 SUMMARY 18

- 1 - 5. UNSUSTAINABLE ACQUISITION: THE DAIMLER CHRYSLER CASE 20

5.1 INTRODUCTION 20 5.2 GENERAL CASE DESCRIPTION 20 5.3 SUCCESS FACTORS 21 5.3.1 PREVIOUS ACQUISITION EXPERIENCE 21 5.3.2 STRATEGIC FIT 22 5.3.3 FOCUS ON CORE BUSINESS 22 5.3.4 CULTURAL FIT 23 5.3.5 INTEGRATION 24 5.4 PARENT COMPANY STRATEGY 25 5.5 SUMMARY 25

6 SUSTAINABLE ACQUISITION: THE VOLKSWAGEN AUDI CASE 27

6.1 INTRODUCTION 27 6.2 GENERAL CASE DESCRIPTION 27 6.3 SUCCESS FACTORS 28 6.3.1 PREVIOUS ACQUISITION EXPERIENCE 28 6.3.2 STRATEGIC FIT 29 6.3.3 FOCUS ON CORE BUSINESS 30 6.3.4 CULTURAL FIT 31 6.3.5 INTEGRATION 32 6.4 PARENT COMPANY STRATEGY 32 6.5 SUMMARY 33

7 CONCLUSIONS 34

7.1 THEORETICAL MODEL 34 7.2 RESEARCH QUESTIONS 36 7.2.1 MAIN QUESTION 36 7.2.2 SUB -QUESTIONS 36 7.3 MANAGERIAL IMPLICATIONS 37 7.4 LIMITATIONS AND FURTHER RESEARCH 39

REFERENCES 40

PERIODICLES 40 BOOKS 42 NEWSPAPERS 43 WEBSITES 44

- 2 - 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 player 3.

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.

1 http://www.ford- trucks.com/news/idx/7/082/2000/article/03172000__Ford_Motor_Company_To_Buy_Land_Rover_From_BMW_Expanding_Lin eup_Of_Premium_Brands.html 2 http://www.autoblog.com/2008/03/26/officially-official-tata-buys-jaguar-land-rover-for-2-3-billio/ 3 http://www.citroen.com/CWW/en-US/HISTORY/MasterPageHistory.htm 4 http://www.oligopolywatch.com/2003/05/17.html

- 3 - 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 future 5.

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 issues 6. 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.

5 http://www.sciencedaily.com/news/matter_energy/alternative_fuels/ 6 http://ec.europa.eu/enterprise/automotive/index_en.htm

- 4 - 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

After this introduction chapter, the second chapter will explain the methodology. In this methodology chapter a conceptual model will be introduced which will serve as the basis for this thesis.

- 5 - 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.

Introduction Theory Case Study Conclusion

Chapter 1 Chapter 3 Chapter 5 Chapter 7 Introduction Theoretical Case Study: Conclusions Background: The Success Factors Unsustainable Acquisition

Chapter 2 Chapter 4 Chapter 6 Methodology Theoretical Case Study: Background: The Parent Sustainable Company Acquisition Strategy

Figure 1.1: Structure of the thesis

- 6 - 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.

Success factors Parent company strategy

Previous acquisition experience: Reasons for acquisition/investment: - Similarity of target firms - Consolidation - Generalization / Discrimination - Global reach - Competencies acquisitions

Strategic fit: - Strategy of acquiring company Reasons for divestment: - Strategy of target firm - Discard unattractive units - Focus on core activities - Financial position of parent

Focus on core business: - Core business of acquiring company Changes in situation over time: - Core business of target firm - Stronger reasons for investment - Level of integration - Stronger reasons for divestment

Cultural fit: - Differences in national cultures - Differences in corporate cultures Sustai nability of acquisition:

Integration: - Appropriate level of integration - Speed of integration < 10 years > 30 years

Figure 2.1: Conceptual Model

- 7 - 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

The way data is analyzed is especially important in the case studies in this thesis. As been said in the previous section, data is collected on all factors from the model which is derived from

- 8 - 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. The analysis results in factors which are more important in the car manufacturing industry and in factors which are less important. In the discussion of the final model these results are visualized in the final model. Some factors might have been of no meaning at all. These are left out in the eventual model which only explains sustainability of acquisitions in this industry.

- 9 - 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. Many studies proved that previous experience has a positive influence on the performance of acquisitions. One of the arguments from the traditional resource-based view is that previous experience represents a way to develop competencies, which improves future performance in acquisitions (Barney, 1991; Wernerfelt, 1984). This is largely caused by the fact that a great part of the acquisition processes are the same. It must be stressed that this does not mean that acquisitions

- 10 - 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) Assessing strategic fit is especially important in the selection of acquisition targets. (Lassere, 2003) Laserre describes the analysis of strategic fit as an assessment of the degree of compatibility among

- 11 - 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) Brock (2005) researches the influence of mismatches in culture concerning the achievement of synergies. He found that companies from countries that differ on the individualism – collectivism dimension and on the power distance dimension have more difficulties with integration and the sharing of resources. In turn this leads to lower synergies. Brock’s research offers an excellent example on the importance of national cultures in international acquisitions.

- 12 - 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. This section shows that integration is a very important issue when it comes to the performance of mergers and acquisitions. It is especially important that the integration meets an appropriate level in an appropriate time span. The appropriate level of integration depends on the extent to which firms ‘fit’ with each other. The appropriate time span depends on the levels of internal and external relatedness.

- 13 - 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.

Success factors Parent compan y strategy

Previous acquisition experience: Reasons for acquisition/investment: - Similarity of target firms - Consolidation - Generalization / Discrimination - Global reach - Competencies acquisitions

Strategic fit: - Strategy of acquiring company Reasons for divestment: - Strategy of target firm - Discard unattractive units - Focus on core activities - Financial position of parent Focus on core business: - Core business of acquiring company Changes in situation over time: - Core business of target firm - Stronger reasons for investment - Level of integration - Stronger reasons for divestment

Cultural fit: - Differences in national cultures - Differences in corporate cultures Sustainability of acquisition:

Integration: - Appropriate level of integration - Speed of integration < 10 years > 30 years

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.

- 14 - 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. In the case studies, all of these factors are taken into account. In combination with the factor discussed in the next chapter, it can be explained why some acquisitions in the car manufacturing industry are sustainable and why some are unsustainable.

- 15 - 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 The decision to invest more money in an acquisition, or to divest, depends largely on the management of a company’s portfolio. There is much literature available about portfolio management, which can explain the reasons for further investment.

- 16 - 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

In the GE / McKinsey matrix, the “business growth” is replaced by “market attractiveness” and “market share” is replaced by “business position” (often also called “competitive strength”). Furthermore, the four quadrants are replaced by a three-by-three grid in which a business unit can be placed.

- 17 - 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

This chapter considers the literature about the influence of the parent company strategy on the sustainability of an acquisition. It derived the main reasons for the investment and divestment within a parent company from the literature.

- 18 - 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.

Success factors Parent company strategy

Previous acquisition experience: Reasons for acquisition/investment:

- Similarity of target firms - Consolidation

- Generalization / Discrimination - Global reach

- Competencies acquisitions

Strategic fit:

- Strategy of acquiring company Reasons for divestment:

- Strategy of target firm - Discard unattractive units - Focus on core activities - Financial position of parent

Focus on core business: - Core business of acquiring Changes in situation over time: company - - Stronger reasons for investment Core business of target firm - Level of integration - Stronger reasons for divestment

Cultural fit:

- Differences in national cultures

- Differences in corporate cultures Sustainability of acquisition:

Integration: - Appropriate level of integration - Speed of integration < 10 years > 30 years

Figure 4.3: Conceptual model

- 19 - 5. Unsustainable Acquisition: the Daimler Chrysler case

5.1 Introduction

This chapter considers the unsustainable case of Daimler-Benz and Chrysler Corporation. Some say this is a merger of equals, but it actually was an acquisition of Chrysler Corporation by Daimler- Benz. The acquisition started in 1998 and Daimler-Benz sold Chrysler in 2007 to Cerberus Capital Management. The next sub-section provides a description of the facts of this case. After that, the conceptual model is applied to this case in the succeeding sub-sections, followed by a case specific summary.

5.2 General Case Description

It all started on January 12, 1998. Jürgen Schremp, Chairman of the Daimler-Benz Management board visited Robert Eaton, CEO of Chrysler Corporation to discuss the possibilities of a merger. Both were convinced that a merger could achieve significant synergy gains, and on May 6, 1998 the merger agreement was signed in London. Daimler-Benz acquired Chrysler Corporation for 38 billion Dollars in stock. The plan was to integrate both companies in two till three years time. The acquisition was presented as a “merger of equals”. The CEO’s from both companies stayed in charge of their own parts of the company and the name changed to DaimlerChrysler to enforce the idea of a merger of equals. This was necessary for the support of Chrysler employees. In reality the merger was never a merger, but it was an acquisition from the beginning. Daimler-Benz possessed the majority of the shares and although Chrysler CEO, Robert Eaton, stayed in charge of Chrysler, the rest of the Chrysler management was replaced by, or under supervision of, German representatives. (Finkelstein, 2002) In financial terms, the acquisition eventually performed well, but short after profit began to decline and never reached the levels of 1999. In 1999, revenues increased with 14% to 150 billion Euros and operating profits increased with 20% to 10.3 billion Euros. The company made 1.4 billion Euros in synergies by increasing efficiency and the planned integration program was already completed within this first year. In the year 2000 the chairman’s letter in the annual report started with an announcement of a decrease in operating profit. The operating profit in this year decreased to 9.8 billion Euros, but this was including one time effects of 4.5 billion Euros. The actual operating profit in this year was only 5.2 billion Euros. This was due to a dramatic fall in profits at the Chrysler Group 7. The Chrysler Group reported a small operating profit of 0.5 billion Euros. DaimlerChrysler announced a turnaround and promised a break-even at the Chrysler Group in 2002 and significant profits in 2003. After massive losses at the Chrysler Group in 2001 and small profits in 2002, the total operating profit of Daimler Chrysler was 5.1 billion Euros in 2003 still including losses at the Chrysler Group. In 2004 and 2005 the Chrysler Group failed to achieve profits higher then 1.5 billion Euros. In 2006 the Chrysler Group even presented a loss of 1.1 billion Euros. In 2007 Daimler sold its shares in Chrysler, changed its name back to just Daimler and presented a profit of 8.7 billion Euros. 8 The official explanation for the poor results of DaimlerChrysler was always the stagnation of the economy and fluctuating demand in North America. In reality, the relationship between Daimler and Chrysler employees was hardening and the Chrysler part of company was suffering from the domination by the Germans. More details of this case are discussed in the next sub-sections.

7 When Chrysler is referred to as the separate company Chrysler (before the acquisition), it is referred to as “Chrysler Corporation”. When Chrysler is mentioned as a part of DaimlerChrysler (after the acquisition) it is referred to as the “Chrysler Group”. 8 Annual Reports DaimlerChrysler 1999 – 2006 and Annual Report Daimler 2007

- 20 - 5.3 Success factors

In this case there are several very important success factors influencing the sustainability of the acquisition. The following sections discuss each success factor separately and highlight the important facts of this case.

5.3.1 Previous acquisition experience Usually previous experience with acquisitions can help the acquiring company to make the acquisition successful because of learning effects from previous acquisitions. But what the actual experience of Daimler Benz was with acquisitions is hard to say. Looking at its scope of brands, there are only a few mergers or acquisitions popping up. Most evident is the merger between Daimler Motoren Gesellschaft and Benz & Cie in 1926. 9 This was a major merger, but unfortunately it was far too early in the history of Daimler-Benz to learn from. Furthermore, both companies were much smaller at that time. This means this merger is hardly comparable to the acquisition of Chrysler Corporation. A more recent acquisition of Daimler-Benz is the takeover of the enormous German electronics company AEG. This acquisition is somewhat comparable to the Chrysler deal, since it also considers a large company, although it was still much smaller then Chrysler Corporation. The rationale for both deals was also the same: achieving synergies. The next paragraph digs deeper into this acquisition.

The takeover of AEG was done in several steps. Firstly Daimler-Benz acquired new issued shares in AEG, which desperately needed equity at the time. After this deal Daimler-Benz owned 24.9% of the shares in AEG. After approval of the German authorities, Daimler-Benz became a majority shareholder with 56% of the shares. (Financial Weekly, 1988) The way this takeover was done already shapes some major differences between both deals. Firstly, AEG was a company that was nearly bankrupt and needed the takeover by Daimler-Benz. Secondly, AEG was a German company and therefore much less difficulties existed in completing integration (which was necessary to reduce costs at both AEG and Daimler-Benz), especially since barely any cultural differences existed. After four years Daimler-Benz started to break up AEG and sell it in parts. For example, in 1993 the office equipment business was closed and a year later the household appliances business was sold to the Swedish AB Elektrolux. (The Financial Post, 1993) In 1996 two more parts of AEG, the energy systems technology division and automation technology division, were sold (Business Wire, 1996). The remaining smaller parts were to be integrated completely in Daimler-Benz. Daimler possessed 87,65 percent of AEG and the remaining shareholders were to swap their AEG shares for Daimler- Benz shares. (v.d. Heuvel, 1996) The way Daimler-Benz handled the acquisition of AEG, offered very little relevant experience for the upcoming Daimler–Chrysler-deal. AEG was much more diversified and therefore it was more obvious the smaller bits could be controlled separately. Also AEG needed Daimler-Benz for its survival, where this was not the case at Chrysler.

It may be clear that the acquisition of AEG differed greatly form the acquisition of Chrysler Corporation. However, this does not necessarily mean the Chrysler acquisition was doomed to fail. What is much more important is that Daimler did not learn from the acquisition of AEG. Like in the case of AEG Daimler treated Chrysler also as a completely separate company, even though the rational for the company were the synergy advantages. Maybe if Daimler focused more on the appropriate level of integration of certain activities, this acquisition could have been a success.

Besides the acquisition of AEG, Daimler-Benz had relatively little experience in major acquisitions. Even if it would have, the acquisition in the case of Chrysler Corporation is of such a magnitude that it can barely be compared to any previous acquisition. This makes the success factor ‘previous acquisition experience’ less important in the relationship between the success and the sustainability of an acquisition. The history with AEG and the magnitude of Chrysler, however, indicates that it is wise to split up the target company in smaller units which are easier to handle. With AEG this strategy was obvious, since it already consisted of smaller units. At Chrysler this seemed to be more

9 http://en.wikipedia.org/wiki/Daimler-Benz

- 21 - difficult, but as can be seen in the next case, the one of Volkswagen and Audi, it should have been feasible. The fact that this case is hard to compare to any other case requires the remark that the results of this research may not be applicable to every acquisition, but should merely be limited to acquisitions in which the target company is very large.

5.3.2 Strategic fit The strategic fit of both companies seems to be one of the main reasons for this acquisition. Both companies were making large profits and wanted to become global players. Daimler-Benz was especially strong in Europe, while Chrysler Corporation was one of the three largest manufacturers in the North American markets. Especially the CEO’s of both companies were certain about the necessity of this deal. Chrysler CEO, Robert Eaton, was predicting heavy times for Chrysler in the Northern American market, due to overcapacity, fluctuating demands and environmental changes. He was convinced that Chrysler should not try to overcome this period alone. On the other hand, Daimler-Benz was looking for economies of scale and efficiency. Furthermore, Daimler’s luxury vehicles captured less than 1% of the Northern American market. At the time, Chrysler Corporation seemed to be the perfect partner, with its efficiency and its Northern American distribution system. Looking at the strategies of both companies separately, instead of their common goals and the way they might have been able to use each other, there is very little strategic fit. To back this up the following paragraphs discuss the strategies of both separate companies in more detail.

For Daimler, quality is the most important matter in their marketing strategy. Daimler vehicles are marketed as being from a luxury brand. The prices are on the same level as the high status of the brand. This is also reflected in the parts-sharing after the acquisition of Chrysler Corporation. Chrysler used many Mercedes parts, but Mercedes barely used Chrysler parts. The policy of Mercedes was only to use the same parts that the customer could never see, touch or feel. (Meiners, 2004; Halliday, 2005) Innovation and the development of the technology in the vehicles had, and still have, a very high priority at Daimler-Benz. Daimler-Benz, for example, spends much effort and money on the fuels cell, low pollution engines, fuelling systems and safety systems. Daimler-Benz was much more developed in this matter than Chrysler Corporation. (Brown, 1998; Puris, 1999)

Chrysler prefers low costs and risky creative products. At Chrysler, a model is created first and after that they decide which brand it is. An example of this is the PT Cruiser. According to rumours, this car would be badged as a Dodge, but later when it was officially introduced it was a Chrysler PT Cruiser. (Halliday, 2005) This perfectly describes the loose policies and rules at Chrysler Corporation. At Chrysler Cooperation costs are kept low by accepting a lower quality and number of sales are high by lower pricing to increase sales. This did not change after the acquisition by Daimler. The Chrysler Crossfire, for example, consists for 39% of Mercedes parts from the previous model of the Mercedes SLK. (Meiners, 2004) This example describes the priority for low costs at Chrysler perfectly. Otherwise, newer Mercedes parts would have been used. Chrysler did the same with the engine in the Chrysler 300C, which has an older Mercedes engine. (Wernle, 2006) The Chrysler 300C is indeed a car that is not very expensive compared to others in the same category.

Looking at the descriptions of the strategies of both companies, the strategic fit is not as strong as the CEO´s of both companies presented it to be at the start of the merger. The goal of both companies was to become global players, but their ways to reach this goal were very different. This could have been recognized prior to the acquisition by looking at the different strategic priorities. This is also confirmed by the behaviour of the company as a whole after the acquisition.

5.3.3 Focus on core business The ‘focus on core business’, the ‘cultural fit’ and ‘integration’ are all success factors which are closely related to the former success factor – ‘strategic fit’. This section focuses on the core businesses of both companies. According to Dieter Zetsche, CEO of Chrysler in the year 2000, the core business of Chrysler is the business in the “traditional segments that are most profitable and have the highest growth rates, as

- 22 - well as exploiting new market opportunities on a regional basis”. 10 This definition of the core business is further specified by a Chrysler spokesman, Todd Goyer, as ‘the markets of small cars, minivans, trucks, crossovers and sedans’. 11 The core business of Daimler-Benz is less broadly defined than the core-business of Chrysler Corporation. Daimler-Benz only considers its luxury cars division and its trucks division as core business. (Templeman, 1995)

When both company’s core businesses are compared to each other, there is very little, or even no overlap at all, between them. Looking at the success factor ‘focus on core business’ a very low level of integration would be appropriate to maintain competitiveness of both companies. Whether this is actually the case, is discussed in section 5.3.5 which concerns integration.

5.3.4 Cultural fit Right after the acquisition Robert Eaton, CEO of Chrysler Corporation stated the following about culture: “Our companies share a common culture and mission. We are both clearly focused on service for the customer by building world class cars and trucks, we both have a reputation for quality and we are both committed to increasing value for our shareholders.” (M2 Presswire, 1998) However, when considering this statement, it may be clear these are very general terms and may apply to any car manufacturer in the industry. Eaton does not say anything about things really describing a corporate culture. For example about the way business is done in both companies. Furthermore, he neglects the national cultural differences. As can be found in many articles in news papers and journals the cultural differences were very important in the failure of the merger. According to Weber and Camerer, the corporate culture of Daimler-Benz stressed a more formal and structured management style. The corporate culture at Chrysler favoured a “more relaxed, freewheeling style”. In addition, the two companies had entirely different views on important things like pay scale and travel expenses. As a result many Chrysler executives left the company after the merger. (Weber and Camerer, 2003; Finkelstein, 2002; Tetenbaum, 1999) Both Daimler employees and Chrysler employees were complaining about each other. Daimler workers earned much lower salaries then their American counterparts at Chrysler, while Chrysler employees were dissatisfied with the German authority. An anonymous letter from an employee at Chrysler provides a perfect example about the stress that was created among the employees. The writer of the letter complained about the changes in the Chrysler Employee Network (CEN). After the acquisition by Daimler, the network stopped to exist and was replaced by DaimlerChrysler TV (DCTV). According to the employee, the CEN told everything about the brand; “the good, the bad and the ugly”. DCTV, however, only showed how great the Mercedes history was en showed “pre- made video’s about the ‘glorious’ truck, bus, train and plain operations overseas, which were all money losers.” The Chrysler employee who wrote this letter, really felt that the “free communication at Chrysler was replaced by secrecy”.12 The example above perfectly describes the way Chrysler employees perceived the way things were done after the acquisition. But also in higher levels in the organization mutual irritations became increasingly important in the relationship between the two firms. Some Daimler executives were not pleased with the company “marrying down” with the, in their view, inferior Chrysler. Finkelstein (2000) gives a perfect example of this. Jürgen Hubbert, Mercedes-Benz division chief, commented in the German newspaper Suddeutsche Zeitung that he “would never drive a Chrysler” and that his “mother had a Plymouth, and it barely lasted two and a half years”. The other way around, Bob Lutz, the Chrysler vice chairman, publicly compared the Jeep Grand Cherokee and the Mercedes M- Class, to point out how much better the Jeep was. It may be clear that the cultural differences were large at the new formed company which had a major impact on the sustainability of the acquisition. During the integration period, things did not get better, but even started to escalate. Culture seems to be one of the most important success factors in this case. An appropriate level of integration could have saved this acquisition. For some parts of the company it could have been appropriate to integrate the two companies on a higher level, while other parts should not have been integrated at all. Take for example the replacement of CEN by DCTV. Maybe the intention was to help forming one corporate culture, but the opposite

10 http://www.indiacar.net/news/n57272.htm 11 http://car-reviews.automobile.com/news/chrysler-considers-selling-viper/6148/ 12 http://www.allpar.com/ed/old/merger.html

- 23 - occurred. Chrysler employees felt overwhelmed by the Daimler management. Instead, it would have been better to accept the Chrysler culture and facilitate the Chrysler employees in the production of better cars.

5.3.5 Integration The integration of both companies was planned to happen in two till three years time, but it happened much faster. In one year, the complete integration plans were finalized and DaimlerChrysler proudly presented 1.4 billion Euros in synergy gains. The most important issues in the integration were the joint production of some models, the integration of sales organizations, the exchange of components in the automotive business and projects in global procurement and supply. 13 These were the official statements about the integration. However, when one tries to consider the appropriate level of integration, and the practical implications of the integration, it is not just the synergy gains that are important for the sustainability of the acquisition. In this case the appropriate level of integration largely depends on the corporate and national culture differences and on the strategic fit between both companies. Since there was little strategic fit and there were large corporate as well as national cultural differences, the company should have been more tactful with the integration in order to sustain profitability of the acquisition. As appears in literature, Daimler did much more on integration than is implied by the simple statements in the annual report. In reality Daimler made some drastic changes at the top of the organization and tried to impose its corporate culture on Chrysler. (Weber, 2003; Finkelstein, 2002) An example of Daimler imposing its corporate culture on Chrysler this is given in the previous section: the replacement of Chrysler Employee Network by Daimler Chrysler TV.

Also the strategic fit did not allow for full integration. Joint production of many parts was impossible, because the “Mercedes-people” did not want any Chrysler parts in their cars. Besides this, the different strategies made it impossible to combine production of complete cars. An example of this can be found at the production of the Mercedes M-Class. It was produced in a plant in Alabama, and the production capacity needed to be raised. It was too expensive and time consuming to add another production line in the Alabama plant. DaimlerChrysler decided to produce the M-Class in a plant in Graz, Austria, where the Jeep Grand Cherokee was also produced. However, it was impossible to integrate the production of the two cars, because the way of production was very different. While the most important issue in the production of the Grand Cherokee was cost efficiency, the production of the M-Class was all about quality at all cost. As a result the production of the two models was completely separated. (Martin, 1999) Furthermore, both companies had different core competences, which also made it inappropriate to integrate Chrysler as much was done in reality. Considering the core competences, the ‘capabilities fit’ of both companies was very weak, meaning that the appropriate level of integration should have been low. As described in this section, Chrysler was so different from Daimler that it would have been best not to integrate the two companies too much.

Also the speed of integration was too high, which affected employee morale, especially at the Chrysler part of the organization. According to a well-place senior executive at Chrysler, Jurgen Schremp (CEO of DaimlerChrysler) “looked at Chrysler’s past success and told himself there is no point in smashing these two companies together. Some stuff was pulled together but they said operationally let’s let the Chrysler guys continue to run it because they have done a great job in the past.” (Finkelstein, 2002) He adds to this that this was a big mistake, because shortly after the acquisition many of the key managers in the success of Chrysler left the company. This statement actually says that on the one hand the two companies were integrated, but later on Chrysler was left alone. Looking at this explanation DaimlerChrysler should have chosen not to integrate at all or to completely integrate some or all parts of the company. Considering the previous paragraph, no integration at all would have been the best decision for most parts of the companies. It might have been possible to integrate some parts of the two companies, but only those parts where cultural and strategic differences are less important. Possible areas for integration would have been procurement functions and the sharing of the distribution networks.

13 Annual report DaimlerChrysler 1999

- 24 - 5.4 Parent Company Strategy

In this paper an acquisition is considered successful when profits develop positively after the acquisition. In the case of Daimler-Benz and Chrysler Corporation, the acquisition was very unsuccessful, according to this definition of success. This subsection, analyzes if the parent company strategy intervenes in the relationship between success factors and the sustainability of an acquisition. The parent company in this case is Daimler-Benz, which means this sub-section only considers the strategic issues at Daimler-Benz. As been mentioned in the previous section, Daimler-Benz acquired Chrysler in order to become more global. The main reason for the acquisition was to increase its market share in North America. Furthermore, the goal was to increase efficiency, which was one of the competencies of Chrysler Corporation. The reason for divestment was clearly the discard of an unattractive unit. The Chrysler part of the new formed company was performing poorly and it seemed impossible to trigger a turnaround. In the first year after the acquisition Chrysler still performed well, but after this first year profits began to fall and even resulted in losses. Later on profits were made again, but only shortly after, in 2006, Chrysler presented losses again. For Daimler, Chrysler became increasingly unattractive, which eventually resulted in the sale of the shares in Chrysler Group to Cerberus Capital Management. Considering the changes in the situation, it seems that the urge for divestment became stronger and stronger. This was mainly caused by the lack of success of the acquired company – Chrysler Corporation. Considering this, the parent company strategy did not act as an intervening variable on the relationship between the success factors and the sustainability of this acquisition in this case. It was simply the lack of success of the acquired company, Chrysler, which caused the acquisition to be unsustainable. Looking at the changes at Daimler-Benz after Chrysler was sold, the unsustainability of the acquisition even influenced the parent company strategy. Because the acquisition of Chrysler was unsustainable, Daimler-Benz left its strategy of globalization and went back to the regional focus the company had before the acquisition. The statement that the parent company strategy is influenced by the sustainability of the acquisition can easily be defended. Chrysler was of such a magnitude compared to Daimler, that a failure of the acquisition must have had its consequence for the parent company. Many financial resources where deployed to back up Chrysler’s losses, which meant they could not be used elsewhere. If Chrysler would have been a small business unit of Daimler, the influence of a failing acquisition would have been much smaller and Daimler could, for example, try to buy another (smaller) car manufacturer. It would have been less likely that Daimler would change its own strategy. This line of reasoning has again an effect on the generalizability of this research. The conclusions with regard to the influence of the parent company strategy apply mainly to large acquisitions. This also means that the earlier given example of Ford and Volvo considers a smaller acquisition with less impact on the parent company’s strategy, which is actually true. The proportion of Volvo’s sales is only 5.95% of Fords total sales in 2007.

5.5 Summary

In the case of Daimler-Benz and Chrysler Corporation, there was clearly a lack of success at the acquired company. This lack of success resulted eventually in the divestment of the Chrysler Group. Three factors seem especially important in the failure of the acquisition; the lack of strategic fit, the lack of cultural fit and the inappropriate level of integration.

Chrysler’s strategy was mainly focused around cost efficiency, low prices and high sales figures. Daimler-Benz’s strategy, on the other hand, focused on quality at all costs. This difference in strategy made it very hard or even impossible to integrate both companies properly.

In this case the two corporate cultures were also very different. But besides the corporate cultures, also the different national cultures played an important role. The American part of the company was much looser organized and provided more room for creativity. The Germans from Daimler-Benz, however, tried to impose their culture of rigid policies and strict procedures on the American part of the company. This had a very negative impact on the results of the Chrysler Group, since its pre-

- 25 - acquisition success was largely thanks to the loose way business was organized. Chrysler employees could not get used to the way the Germans conducted business and started to underperform. Important managers at Chrysler who were responsible for the success of Chrysler before the acquisition left the company.

The problems that rose at the Chrysler Group could have been prevented if the integration would have been at an appropriate level. Daimler integrated Chrysler in some functions which resulted in synergies in the short run, but also integrated further, which caused negative results in the long run. This excessive integration consisted mainly of the replacement of management at Chrysler and enforcement of the Daimler culture. Other functions, however, were not integrated further. This was partly impossible because the companies were so different and partly because of the ignorance at Daimler-Benz on the executive level. In general, this case provides strong arguments for the relationship between the success factors and the sustainability of an acquisition. From the success factors it seems that the strategic and cultural fit along with an appropriate level of integration are most important for the sustainability of an acquisition. This should be done firstly by dividing the companies into separate units. Secondly, the strategic and cultural fit should be compared for each respective unit. Thirdly and finally, the appropriate level of integration should be determined.

Another conclusion that can be drawn in this chapter is that the parent company strategy did not influence the relationship between the success factors and the sustainability of a large acquisition. It is rather the other way around. The sustainability of an acquisition influences the parent company strategy.

- 26 - 6 Sustainable Acquisition: The Volkswagen Audi Case

6.1 Introduction

The case study of the sustainable acquisition in this paper is the one of Audi and Volkswagen which started around 1965. At that time Audi was a brand name from Auto Union, which does not exist anymore. In 1964, Volkswagen acquired 50% of the shares of Auto Union from Daimler-Benz as part of a strategic cooperation alliance. In 1966 Volkswagen acquired the remaining shares.

6.2 General Case Description

Volkswagen has it foundations in the interbellum. After World War II it grew on one single car model, which was the Volkswagen Type 1, better known as the Volkswagen Beetle. In the sixties, Volkswagen was still depending on the Beetle and demand for this bestseller was at its peek. To expand the production capacity, Volkswagen acquired Auto Union, which had a state of the art factory in Ingolstadt, Germany. After the acquisition this factory was used for the production of the Volkswagen Beetle. 14

Auto Union was acquired from Daimler, which bought it six years earlier in 1958. The reason for Daimler to sell the first 50% of the shares of Auto Union to Volkswagen was the competition from the large car manufacturers from the USA. Opel, owned by General Motors, launched four new models amongst which the Opel Kadett. Because of the cooperation of Volkwagen, specialist in small cars, and Daimler, specialist in large luxury vehicles, both companies were better equipped in the competition with Opel in the medium sized cars market. (Leeuwarder Courant, 24-10-1964) At that time, Auto Union was producing two stroke engines for its cars and motorcycles. Daimler wanted Auto Union to stop working with the two stroke engines and start working with four stroke engines. However, there was so much unwillingness among the management of Auto Union that Daimler decided to sell the remaining part of the shares of Auto Union to Volkswagen. (Freyssenet et al., 1998)

Volkswagen CEO Heinrich Nordhoff still believed that Volkswagen should keep on focusing on small cars. In an interview with the Times (21-4-1967) he says: “I am pushed from the sales people every day. I am told that we need a big, six-cylinder automobile. There might be a need for it, but not for us…”

In 1968, Auto Union, owner of the brand name Audi, presented the first post war Audi: the Audi 100. This car was developed in secrecy, without the consent of the Volkswagen management, but under approval of Auto Union CEO Leiding. (Freyessenet et al., 1998) Eventually, Auto Union presented the model to the board of Volkswagen. They changed their mind and production of the model was approved. Later on this turned out to be one of the most important decisions in the history of Volkswagen. 15

In the late nineteen sixties the market started to change and Volkswagen was still mainly depending on the Beetle. The new CEO of Volkswagen, Kurt Lotz, realized this and Volkswagen acquired another car manufacturer, NSU in 1969 (The Times, 31-3-1967). This car manufacturer merged with auto union and together they formed Audi NSU Motorwerke AG. With these two companies, Volkswagen acquired many innovative technologies: the automatic clutch, the liquid cooled engine, front wheel drive, the rotary engine and the techniques to place an engine in front of the car. This was also the moment when the slogan of Audi was launched: “Vorsprung durch technik”. (Coneybeare, 2003; Leeuwarder Courant, 6-3-1969)

14 http://www.audiworld.com/news/09/100-years-of-audi/ 15 http://www.uniquecarsandparts.com.au/car_info_audi_100.htm

- 27 - The acquired technologies and the Audi 100 were the start of Volkswagen as a competing brand in all segments of the markets. The Audi 100 formed the basis of the Volkswagen Golf, and later the Audi 50 formed the basis of the Volkswagen Polo and the Audi 80 of the Volkswagen Passat.

6.3 Success factors

This acquisition was clearly sustainable, since Audi (former Auto Union) is still an important part of the Volkswagen Group. This section explains why this acquisition was able to be sustainable, by discussing each success factor.

6.3.1 Previous acquisition experience Volkswagen had to start all over again after World War II, because the production facility was bombed during the war. Production was impossible, and there was no intention to rebuild the factory and to restart the production of Volkswagen cars. However, after the war the British army was in need of cars and placed an order of 20,000 Volkswagen Beetles. This order resulted in the restart of Volkswagen. (Freyessenet et al., 1998) After World War II Volkswagen was still only relying on the Volkswagen Beetle. It was also clearly the choice of strategy by Heinrich Nordhoff that this was not going to change. However, when the demand for the Beetle began to rise, Volkswagen needed to expand its production capacity. The acquisition of Auto Union was the first time Volkswagen used a takeover of another company for the expansion of capacity. Volkswagen was also not the result of a merger of two other companies, but has always been an autonomous company. Hence, Volkswagen had no previous acquisition experience at all. However, for Auto Union the takeover by Volkswagen was nothing new. Auto Union was the result of several different mergers and acquisitions. Even under the control of Volkswagen Auto Union changed its form once (the merger with NSU), before it became known as Audi. The following paragraphs shed some more light on these changes and on how these experiences influenced the success of Audi as an acquisition by Volkswagen.

Before Auto Union was acquired by Volkswagen, it was formed by four different companies. The first company of the four is A. Hörch & Cie. This company was founded by August Hörch in 1899 and produced its first car in 1901. In 1904 this company was altered into an ‘Aktiengeselschaft’ with the name Zwickau A. Hörch & Cie Motorwagen-Werke AG. Around the same time Jörgan Skafte Rasmussen started the second company of the later Auto Union; DKW (DampKraftWagen). In 1909, August Hörch had a conflict with his business partners, because he spent too much money on racing cars and his partners found it too costly 16 . Hörch left his own company and started a new one. He could not name his company Hörch again, because his former business partners owned the rights to that name. Therefore, he called his new company ‘Audi’, the Latin translation of his name. Audi became the third company of the later Auto Union. The fourth and last company was the in 1896 founded Wanderer. This company started with the production of bicycles, went on with the production of motorcycles and produced its first car in 1913. (Erik, 1999) 17 Figure 6.1 shows how Auto Union was formed out of the four other companies, through which it gained experience with mergers and acquisitions.

The first important takeover was the acquisition of Audi by DKW. Around 1927 Audi was aiming for the production of larger, luxury vehicles, but the timing was wrong, because the demand for these kinds of cars fell rapidly with the struggling economy at the time. The company went nearly bankrupt. DKW on the other hand focused on the production of cars with small engines and could use the production capacity of Audi. DKW took over Audi in 1928. Audi could still further develop its technologies, but its production capacity, however, was devoted mostly to DKW. (Autoservice Praxis, 05-06-2007)

16 http://www.auto55.be/retro/11588-audi-vier-ringen-is-er-n-te-weinig 17 http://auto-en-vervoer.infonu.nl/auto/15072-de-historie-van-audi.html

- 28 - The second important change was the formation of Auto Union in 1932. This merger of the four companies was forced upon them by the economic circumstances. (Juchem, 2009) In the late twenties, all four brands faced growing demand for their products and invested in expansion of the production capacity. However, when demand suddenly fell around 1929 the companies had to deal with an enormous overcapacity, causing pressure on their profitability. 18

Hörch & Cie Hö rch & Cie Auto Union Founded in 1901

DKW DKW

Founded in 190 9 (Owner of Audi)

Au di Formed in 1928 Founded in 191 0

Wanderer Wanderer Founded in 1896 Formed in 1932

Figure 6.1: The formation of Auto Union

After the formation, all four companies together owned an enormous knowledge base. They shared this knowledge, but they kept on working as separate companies. Audi further developed its front- wheel driven car and DKW stayed focused on the production of motorcycles and small engine cars. Hörch continued to be specialized in luxury vehicles and Wanderer produced an aluminium motorcycle engine. The information sharing and more efficient usage of the production capacity worked well for Auto Union and the company flourished between 1933 and 1939. After that successful period, World War II commenced. At the end of the war, the Auto Union factories were dismantled by the Russians and almost nothing was left from its former glory. (De Telegraaf, 27-12- 2005)

After the war a few of the Auto Union executives reunited and brought Auto Union back to life, by starting Auto Union GmbH. They started the production of some pre-war car and motorcycle models of DKW. Production was facilitated in some former army building in Ingoldstad and the logo for the company consisted of the four rings representing the four companies that merged into Auto Union, which today is still the logo of Audi. Auto Union GmbH made its first profits in 1954. 19

In 1958, Auto Union was acquired by Daimler-Benz. The Auto Union products remained in a separate business structure. In the early sixties the demand for two stroke engines suddenly fell and Auto Union as a Daimler-Benz division was making heavy losses. Because of this, combined with the unwillingness of Auto Union to produce four stroke engine cars, made Daimler decide to sell Auto Union to Volkswagen. (Freyssenet, 1998)

This long and turbulent history of Auto Union makes perfectly clear that Auto Union was very experienced with mergers and acquisitions in kind of cases. Parts of the company experienced to be an equal partner in an alliance, others experienced to be the acquiring party and all experienced to be the acquired party. The striking part in all alliances is that none of the companies ever lost its identity completely. At the time Auto Union was acquired by Volkswagen, there were still elements present of all four original companies.

6.3.2 Strategic fit The strategies of Volkswagen and Audi were very different from each other, but this did not seem to be a problem for the success of the acquisition. Where Daimler failed to maintain Auto Union as a profitable company, Volkswagen succeeded. The question remains whether this was thanks to the

18 http://www.audiworld.com/news/09/100-years-of-audi/ 19 http://www.seriouswheels.com/art-four-rings-3.htm

- 29 - leadership of Volkswagen or to Auto Unions stubborn behaviour. More about this is explained in section 6.3.4. This section first explains some more about the strategy of both Volkswagen and Auto Union.

When the strategy of Volkswagen is compared to the strategy of Auto Union, the important thing to remember is that Volkswagen’s strategy was changing during the early years after the acquisition of Auto Union. From the end of the war until the late nineteen sixties Volkswagen’s strategy was quite simple. It only produced one small, and for many people affordable, car. Its innovations were not in new models, but only in improvements of the existing model. The idea of Heinrich Nordhoff behind this strategy is that the car manufacturer knows what is best for the consumer. In an interview he says “The tendency in the USA is to offer the public an endless variety of types and combinations of a car. I’m not convinced this is the best way to sell cars, because you leave the decision that the automobile men should take to Mr. and Mrs. Smith. If the engineer doesn’t know what is best, how can the poor man in the street hope to know” (The Times, 21-04-1967). During the sixties, however, this kind of thinking began to change. Opel introduced the Kadett, which became a fierce competitor for Volkswagen, and demand for the Beetle began to drop. The one car strategy needed to change. The idea was to form an alliance with Daimler-Benz, who produced large cars, in which Auto Union, producing medium sized cars, could function as the missing link (Leeuwarder Courant, 18-03-1966; The Timer, 30-06-1966). Later on the wide variety of technological innovations of Auto Union could very well be used in the development of new models which Volkswagen desperately needed in the early seventies.

The strategy of Auto Union was largely driven by one investor: Friedrich Flick. He was one of the richest people in Germany before, during and after the war 20 . His idea was to find a partner in the medium term and he found it in Daimler-Benz in 1958. At that time Auto Union was still producing cars with two stroked engines, for which demand was falling. Once completely in Daimlers hands, Daimler placed a team of engineers at Auto Union and tried to force a four stroked engine through. When this finally happened Daimler already sold a majority of the shares to Volkswagen. Daimler also invested in the production facility of Auto Union in Ingolstad 21 .

Strategically, the two companies, Auto Union and Volkswagen, did not really fit together. However, although unintended in the first place, the acquisition of Auto Union was a crucial strategic move in the Volkswagen history. To summarize, Auto Union fitted with the first strategy of Volkswagen, because it provided extra production capacity (Leeuwarder Courant, 20-04-1965). Later on it was the technological innovation capacity of Auto Union which ‘saved’ Volkswagen. Not only did it save Volkswagen, but because of the strategy change of Volkswagen, suddenly a perfect strategic fit existed. This success, which influenced the sustainability of the acquisition, was largely thanks to the appropriate level of integration, which is discussed in sub-section 6.3.5. It were mainly the production facilities of Auto Union that were integrated, while the rest of Auto Union was left alone. This made it possible for Auto Union to continue the development of its products. Later, Volkswagen could benefit from these developments.

6.3.3 Focus on core business The success factor ‘focus on core business’ is quite simple to assess considering the previous sections of this chapter. Especially the core business of Volkswagen is easy to describe at the time of the acquisition. The core business of Volkswagen was focused around the production of small and affordable cars with a high quality. The core business of Auto Union is harder to describe, because of its turbulent history. To determine the core business of Auto Union at the time of the acquisition by Volkswagen, one has to look at the post-war Auto Union. Before the war, Auto Union clearly consisted of four parts based on the four original companies. After the war, however, Auto Union had to start all over again and did this with only a few models. These were originally from DKW and had two-stroke engines placed in front of the car and driving the front wheels. Also at the time of the acquisition by Volkswagen the production of this kind of cars was still Auto Unions core business.

20 http://nl.wikipedia.org/wiki/Friedrich_Flick 21 http://www.audiworld.com/news/09/100-years-of-audi/

- 30 - The cars from Auto Union were both small and medium sized. Looking at the core businesses of both companies there might be an opportunity for synergy here. However, the smaller Volkswagen was very different from the smaller DKW in many aspects. Firstly, as opposed to the DKW, the Volkswagen had an engine in the tail. Secondly, the Volkswagen engine drove the rear wheels. Thirdly, the biggest difference was the four stroke engine opposed to the two stroke engine of the DKW’s. The aim of Volkswagen, however, was not to gain synergy advantages. It was to expand its production capacity. And while doing this, Volkswagen also terminated competition on its own market of small cars. In 1965 it already ordered Auto Union to stop the production of the smaller DKW’s. (Leeuwarder Courant, 29-04-1965) It also forbid Auto Union to develop any new models (Freyssenet, 1998).

To summarize, one can say that the core businesses of the companies were only partly overlapping. This was not enough to gain synergy advantages, but Volkswagen applied the appropriate level of integration, ensuring this did not become a large problem. The integration of Auto Union and Volkswagen is discussed in section 6.3.5.

6.3.4 Cultural fit In this case about Auto Union and Volkswagen there were no effects of the influence of national culture, simply because both companies were German. The corporate culture of both companies, however, was very different. This was mainly caused by the different schools of thought in car layout and the different strategic thinking. The following paragraph clarifies these differences. The last paragraph of this section explains how the cultural differences influenced the success of the acquisition.

The different schools of thought in car layout are already explained in the previous section. Volkswagen believed in the superiority of the four stroke engine driving the rear wheels, placed in the tail of the car. Auto Union was one of the few manufacturers who worked with a two stroke engine. Auto Union also preferred to put the engine in the front of the car and to drive the front wheels. (The Times, 27-09-1960) When Auto Union was under the shared control of Daimler-Benz and Volkswagen in 1965 and the new Audi was going to be developed, Auto Union already developed a brand new two stroke engine. However, the parent companies did not want to bring the new Audi into production with this new engine, but decided that the new car had to use a Mercedes engine which Daimler still had on the shelves. Of course, this was a four stroke engine. Since DKW had always been associated with two stroke engines and the pre-war Audi used four stroke engines, the parent companies chose to use the brand Audi for this new car. (Leeuwarder Courant, 09-09-1966)

Both companies were clearly very different from each other, when it comes to strategic thinking. This also has already been discussed in earlier paragraphs. To summarize, Volkswagen preferred to produce one model, or at least a small range of models, and keep on improving that model. Auto Union, on the other hand, was always trying to innovate and to develop new models. The result was that Volkswagen was able to rationalize its production very much and Auto Union developed many technological innovations.

Volkswagen tried to overwhelm the corporate culture of Auto Union, by ordering the factories to produce Volkswagen, and by stopping the production of the smaller DKW. Auto Union was certainly not happy with these developments. Especially since Volkswagen CEO Nordhoff had promised a year before that nothing would change in the production of DKW models. (Leeuwarder Courant, 19-04- 1965) But although Auto Union did not like these decisions, it could not do anything else then conform, since Volkswagen was the shareholder. On the other hand, Auto Union also kept its culture alive, which eventually worked out quite well for both Auto Union and Volkswagen. Auto Union had to leave the concept of the two stroke engine, and quit the production of cars under the DKW brand quite soon after the takeover by Volkswagen. Nevertheless, Auto Union also won some battles. It could continue with the development of innovation, and the sales systems remained intact. Auto Union was even able to develop a model in secrecy. The Volkswagen CEO found out about this model when the prototype already existed. (Freyssenet, 1998; The Times 15-09-1969) This is a good example of what is meant with the “stubbornness” mentioned in section 6.3.2.

- 31 - 6.3.5 Integration The previous sections already revealed much information on the integration of Auto Union into Volkswagen. This section shortly summarizes the most important efforts in integrating the two companies and adds some more information about the merger of Auto Union with NSU in 1969. This final merger can be seen as the completion of the integration process of Auto Union within Volkswagen.

When in 1964 Volkswagen bought the first part of the shares of Auto Union from Daimler, this was only the beginning. It soon became clear that Volkswagen was taking over the entire company. The integration of Auto Union started immediately and was quite radical. The production of a large part of the DKW models was seized, and workers were being retrained for the production of Volkswagen. (Leeuwarder Courant, 29-04-1965) With these moves, most of the company was already integrated until the desired level before it even was completely owned by Volkswagen. According to Colombo (2007), as mentioned in chapter 3.2.5 this fast integration reduced the risk of the acquisition to fail. In general, the integration of the lower levels in the organization of Auto Union, caused very little problems. The part of Auto Union that was left, the innovation department and the sales department, remained separated from Volkswagen. These parts were not integrated at all, which gave them some sort of autonomy. The employees in these departments did not report to Volkswagen management, but only to the Auto Union CEO. As mentioned earlier in this chapter, Auto Union used this autonomy in ways that Volkswagen did not want, but which eventually turned out very well.

In 1969, Auto Union merged with NSU Motorenwerke. Like Auto Union, NSU was technologically very advanced and invented the water cooled engine. The design departments and the sales departments of Auto Union and NSU were integrated and together the two firms formed Audi NSU Auto Union. (Hornsby, 1969; Leeuwarder Courant, 06-03-1969) Behind the backs of the Volkswagen executives, the design team started to work on a new model. This model became known as the Audi 100 and served later on as the basis for the Volkswagen Golf. Ever since these years, Audi continued to be the independent company it had become and one could speak about a very sustainable acquisition.

The integration issues of this case were most important for the sustainability of the acquisition. Because Volkswagen integrated the production part of Auto Union very fast and radical, the Auto Union part could not do anything else than conform. It also was a very good decision to keep the sales and innovation departments of both Auto Union and NSU separated, because this formed the groundwork for the finally completely independent company which we now know as Audi. In essence, it were the different levels of integration at different units of Auto Union, which guaranteed the success of this acquisition.

6.4 Parent Company Strategy

This section discusses the influence of the parent company strategy on the relationship between the success of an acquisition and the sustainability of a company. Like in the case of Daimler Chrysler, the parent company’s strategy in this case does not have any influence on the relationship between success and sustainability, even the opposite seems to be the case. The following paragraph clarifies this statement.

Before Volkswagen acquired Auto Union, it was deliberately depending on one single car model; the Volkswagen Beetle. Volkswagen had a few reasons for this. Firstly, the idea was that an engineer knew best what was good for a car driver. Secondly, Volkswagen believed that new improvements are always possible and it is a waste of energy to produce a poorer new model instead of an improved old model. After the acquisition of Auto Union, Volkswagen started to think increasingly about changing its strategy. Auto Union, later combined with NSU, was already working on several innovations. Right when the demand for the Volkswagen Beetle started to fall, Auto Union presented its secretly developed model; the Audi 100. From that moment on, Volkswagen changed its single-model-strategy into a diversified model strategy. Volkswagen became specialized in the production small and medium sized cars, while Audi

- 32 - produced the medium sized and larger luxury vehicles, which could compete with brands like Mercedes and BMW.

Summarizing, the parent company strategy is not an intervening variable on the relationship between the success and the sustainability of an acquisition, but rather a dependent variable of the success of an acquisition as the independent variable. Like the previous case, the target company was relatively large and was therefore able to have such an influence on the parent company strategy. This case also supports the statement that the results of this research should only be generalized towards acquisitions of large target companies.

6.5 Summary

This chapter discussed the success factors in the acquisition of Audi by Volkswagen around 1965. At that time, Audi was still Auto Union and it produced DKW cars. The acquisition turned out to be very successful. This section summarizes the success factors and the role of parent company strategy leading to the sustainability of the acquisition.

The first success factor, previous acquisition experience, turned out to give very surprising results. It was not the experience of the acquiring company, but the experience with mergers and acquisitions of the acquired company, which largely determined the success of this acquisition. The strategic fit between both companies, the second success factor, was in the beginning very weak. However, Volkswagen was mainly interested in Auto Union’s production facilities, since it was in desperate need of production capacity for its Volkswagen Beetle. In the late sixties and early seventies, the strategy of Volkswagen started to change and the strategic fit with the Auto Union strategy became much better. The core business of both companies was very different, but Volkswagen used the appropriate level of integration to overcome this problem. Auto Union produced mainly Volkswagens, but maintained the separated sales and innovation departments, which made it possible for Auto Union to evolve into Audi as we know it now. One enormous advantage when it comes to culture, the fourth success factor, was that Auto Union and Volkswagen were both German. They share the same history and have similar norms and values. The corporate cultures, however, were very different. Volkswagen favoured the rationalized production model which focused very much on one brand, while Auto Union preferred the constant development of new models. This was again solved by Volkswagen by applying the appropriate level of integration. The production department was ‘forced’ into the Volkswagen culture, while the innovation and sales departments were left alone. The last and most important success factor in this case was integration. It was the ‘quick and painless’ pace by which the production facilities were integrated that prevented large problems. In addition to this, the other departments of Auto Union were left alone on a certain level. This made it possible for Auto Union to keep on evolving on the background.

Like in the Daimler Chrysler case, this case also rejects the parent company strategy to be an intervening variable on the relationship between the success of an acquisition and the sustainability of an acquisition. Because Auto Union, and later Audi, was so successful with its multiple car strategy and Volkswagens single car strategy started to become insufficient, Volkswagen changed its strategy. It was a large advantage it acquired Auto Union a few years earlier, because this acquisition provided Volkswagen with the required knowledge and the appropriate technologies.

- 33 - 7 Conclusions

In order to answer the main research question of this study, the theoretical model presented in chapter three and four is altered by integrating the findings of the case studies into the model. After that the main research question and the sub-questions are answered in a separate section of this chapter. Since this research is of a qualitative kind and many lessons can be learned from the cases studied in this thesis, a section with managerial implications is added. Finally, the limitations and suggestions for further research are discussed.

7.1 Theoretical Model

The theoretical model presented earlier (and recalled in Figure 7.1) tries to explain the relationship between the success of an acquisition and the sustainability of an acquisition.

Success factors Parent company strategy

Previous acquisition experience: Reasons for acquisition/investment: - Similarity of target firms - Consolidation - Generalization / Discrimination - Global reach - Competencies acquisitions

Strategic fit: - Strategy of acquiring company Reasons for divestment: - Strategy of target firm - Discard unattractive units - Focus on core activities - Financial position of parent

Focus on core business: - Core business of acquiring Changes in situation over time: company - Core business of target firm - Stronger reasons for investment - Level of integration - Stronger reasons for divestment

Cultural fit: - Differences in national cultures - Differences in corporate cultures Sustainability of acquisition:

Integration: < 10 years - Appropriate level of integration > 30 years - Speed of integration

Figure 7.1: Theoretical model

Figure 7.1 recalls the theoretical model for an easier comparison with the altered model of acquisition sustainability in the car manufacturing industry which is presented and discussed below (Figure 7.2). In the theoretical model the success of an acquisition is depending on several success factors. The sustainability is depending on the success of an acquisition, but the ‘parent company strategy’ can intervene in this relationship. These are the relationships as they are derived from the existing theory on mergers and acquisitions. The case studies, however, show some major differences when it comes to these relationships in takeovers in the car manufacturing industry. Figure 7.2 presents the model as it should be according to the case studies.

- 34 -

Success factors

Identification of different units in target company

Comparison with respective Success of Sustainability Parent units in acquiring company: acquisition of acquisition company - Cultural fit strategy - Strategic fit

Integration of different units at the appropriate level and with appropriate speed

Figure 7.2: Model of Acquisition Sustainability

The model above has some major differences with the preceding theoretical model. The first major difference is the position of the ‘parent company strategy’. In the theoretical model it is positioned as an intervening variable, while in the cases of this study, it does not play a role in the relationship between the success and the sustainability of an acquisition. In both cases the success and the sustainability of an acquisition is even influencing the parent company strategy. Therefore, this element of the model is not a determinant of the sustainability in these cases. In the model this is visualized by the lighter grey colour. The next change compared to the previous model is the direct relationship between the success of an acquisition and the sustainability of an acquisition. The sustainable acquisition of Audi by Volkswagen was very successful when the turnover and the operating profit in the long term are considered, while the acquisition of Chrysler by Daimler was unsuccessful and unsustainable. Both cases do not provide an indication of intervening variables on the positive relationship between success and sustainability. As been mentioned before, this is due to the fact that the acquisition targets in these cases are relatively large. The last and most interesting change in the model is the distribution of the success factors. In the theoretical model, each separate success factor was implied to have an influence on the sustainability of an acquisition. The new model however, considers the success factors to be sequential. Furthermore, another matter of interest is introduced in the model; ‘The identification of different units in the target company’. In the case of DaimlerChrysler both companies were integrated as if each company consisted of one unit. This turned out to be very unsuccessful. In the case of Volkswagen and Audi/Auto Union, the target company was only partly integrated on a high level. Therefore these cases lead to the conclusion that within the target company different units need to be identified. As the model shows, the next step should then be to compare the units of the target company with the same respective units in the acquiring company. This comparison should focus on strategic- and cultural fit. The fit of the companies in the DaimlerChrysler case was much weaker then was expected and the acquisition turned out to be unsustainable. In the case of Volkswagen and Audi however, the fit was much better and the acquisition was very successful and therefore sustainable. The national cultures in both companies were the same, which already had a positive influence on the cultural fit. And although the corporate culture and the strategies of both companies did not quite fit, Volkswagen solved this by integrating these parts at the appropriate level. This immediately highlights the last step in the integration process; ‘Integration of different units on the appropriate level and with appropriate speed’. The production facilities of Auto Union were integrated very quickly and very strong, while the sales department and the R&D department were not integrated at all. This model shows that the steps in the box of the ‘success factors’ should be followed correctly in order to come to a sustainable acquisition. The model enables the main research question of this study to be answered. This is done in the next sub-section.

- 35 - 7.2 Research Questions

7.2.1 Main question The previous sub-section provides a new model based on the case studies which makes it possible to answer the main question of this research. The main research question of this study is:

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

As the model in the previous sub-section explains the sustainability of an acquisition is depending on the success factors mentioned in the first box of this model (see Figure 7.2). The three determinants are: 1. Identification of different units in the target company; 2. Comparison with respective units in the acquiring company; 3. Integration of different units at the appropriate level and with the appropriate speed. These determinants should be followed in this same sequence in order to realize a sustainable acquisition. The correct identification of different units within the target company and the acquiring company and a comparison between these units should lead to the appropriate level of integration. If the different units are integrated at the appropriate level, this should lead to a sustainable acquisition. This appropriate level of integration depends on the existing strategic and cultural fit. The model described in the previous section applies to the car manufacturing industry for several reasons. The car manufacturing industry is quite complex in the sense that companies are very large, mostly consist of a large number of units (production facilities, R&D centres, distribution networks, et cetera) and can be very sensitive for market circumstances depending on their strategy. Since companies are large and complex, it is wise to split them up into several units before deciding what the appropriate level of integration should be. Both cases proof this. The acquisition of Chrysler by Daimler was integrated as one unit and was unsuccessful and unsustainable, while Volkswagen only integrated parts of Auto Union/Audi which resulted in a successful and sustainable acquisition. It were the different strategies and the sensitivity for environmental changes, which proved the level of integration to be correct. Before the demand for the Volkswagen Beetle dropped, Volkswagen could use the extra production capacity, while the separate R&D and sales departments helped Volkswagen survive when the market changed.

7.2.2 Sub-questions Since this research is qualitative, the answers on the separate sub-questions can provide much more practical information than just a simple answer to the main question. The first sub-question was about the influence of previous acquisition experience. In both cases the acquiring companies had very little relevant acquisition experience. One acquisition, of Audi by Volkswagen, was an enormous success, while the other, of Chrysler by Daimler, was not. Therefore, the conclusion with respect to this success factor is that its influence is absent in these cases. Considering the theoretical basis for the assumption that it would be influential, it is likely that there is something special with the two cases that are studied in this research. The specialty of these cases is the fact that they consider large target companies. Auto Union was a major competitor of Volkswagen and the size of Chrysler was almost equal to the size of Daimler. Therefore, the results of this research should only be generalized for acquisitions of large target companies. In the Audi-Volkswagen case, previous acquisition experience was completely absent and the question of how it influenced the success of the acquisition is impossible to answer. In the case of DaimlerChrysler, however, Daimler did have previous acquisition experience. The most comparable acquisition by Daimler was the one of AEG. AEG was also a large company and was in that sense comparable to the acquisition of Chrysler. Opposite to the acquisition of Chrysler, Daimler treated each separate part of AEG differently after the takeover. With AEG, however, this was more obvious, since it already consisted of many different separate business units. In the case of Chrysler, however, Daimler treated the target company as just one business unit. This made that, also with the case of Chrysler, previous acquisition experience had little influence.

- 36 - When it comes to strategic fit, the acquired company and the acquiring company should be compared on volumes and prices. Auto Union and Daimler were typically companies that produced lower volumes at higher prices, while Volkswagen and Chrysler, produced higher volumes at lower prices. Therefore, in both cases the strategic fit was low. In the case of Auto Union/Audi and Volkswagen, however, this was not a problem because the appropriate level of integration was applied. This means that a judgement of strategic fit should help the acquiring company to decide what the appropriate level of integration should be. The strategic fit has no direct influence on the success of an acquisition. The focus on core business depends largely on the strategy of the companies. One might say that all companies in these cases have the same core business: cars. When more precisely defined, however, the core businesses differed very much. And since the core businesses of the companies in the cases were very different, the decisions and priorities in those companies also differed very much. If the core businesses are more similar, a higher level of integration is possible, simply because both companies have the same priorities. If Daimler, for example, would be specialized in creative cheap vehicles in large volumes at lower costs, it could cooperate with Chrysler in developing cheaper solutions for their cars, and both R&D departments could be integrated on a high level. Similar to strategic fit, the focus on core business has an indirect influence on the success and sustainability of an acquisition via the appropriate level of integration. Cultural fit has its influence on the success of an acquisition in the same way as ‘strategic fit’ and ‘focus on core business’. The level of cultural fit has its influence on the level of integration, which in turn influences the success and sustainability of the acquisition. The differences in national cultures have a much higher influence on the level of integration than the differences in corporate culture. At Auto Union and Volkswagen, the national cultures were the same, but the corporate cultures differed very much. Despite these differences the integration of production facilities of Audi was very rapid and successful. There were very little strategic decisions to be made at the production facilities and employees had the same national background. This made it easier to integrate that part of the company on a higher level. The (national and corporate) cultural differences between Daimler and Chrysler were much larger and made it much more difficult to integrate (parts of) the companies. Despite these differences, Daimler tried to integrate the companies anyway. As been mentioned before, this was not a success. Integration is the only variable in the initial theoretical model that does have a direct influence on the success and sustainability of an acquisition. As mentioned in the previous paragraphs, the appropriate level of integration depends on the strategic fit, the focus on core business and the cultural fit. These factors also decide which parts or functions of the acquisition target can be integrated. When the appropriate level of integration is applied at the different parts of the companies, this should have a very positive influence on the success and the sustainability of the acquisition. The position of ‘the parent company strategy’ in the theoretical model changes drastically when these two cases are considered. In these two cases, the parent companies’ strategies had no influence on the sustainability of the acquisitions. It was rather the sustainability of the acquisitions which influenced the parent company strategy. This is a very different conclusion than was assumed in the initial theoretical model, despite the example of Volvo and Ford. This conclusion, however, has a consequence for the generalizability of the conclusions in this research. Like is concluded with the ‘previous acquisition experience’, the conclusions of this research should only be generalized to the larger takeovers in the car manufacturing industry. Volvo is a large company, but its sales only accounted for 5.95% of the total sales of the Ford Group in 2007 (annual report Ford 2007).

7.3 Managerial Implications

Since many lessons could be learned from this research and it discusses the cases in a qualitative way, this section of managerial implications is added. The research provides a guideline for making an acquisition of a large magnitude successful for a long period of time. The altered theoretical model presented in section 7.1 forms the basis of this guideline. It starts with the process of making the acquisition successful, which in turn should lead to sustainability of the acquisition. This can also result in an improved parent company strategy that assures the continuity of the company as a whole.

- 37 - The theoretical model starts with the separation of different business units in both the target company and the acquiring company. This could be done in a functional way, where for example R&D, production, distribution, and finance are considered as different units. It could also be done by separating both the target company and the acquiring company by products. In the case of a car manufacturer, it might for example be possible to consider engines as one product (with a separate production facility) and the chassis as another. The main idea of separating the companies in smaller comparable units is that the appropriate level of integration can differ per part of the company. When the companies are split up into different units, each unit should be compared on strategic fit and cultural fit. Each of these comparisons is discussed in the following paragraphs.

For each unit the strategic fit needs to be determined thoroughly. This can differ significantly per unit. When the companies are analysed by separating them on a functional level, for example, it is likely that the financial departments can be integrated even if the strategies differ very much. Financial departments are mostly similar because they work mainly with objective data. On the other hand, the priorities of R&D departments can differ very much, because they simply focus on different developments. The same reasoning can be used for, for example, marketing departments. Consider in this sense for example Ferrari in comparison to Fiat. In that case, Fiat is the mass marketer which focuses on smaller and cheaper cars by, among others, commercials on television. Ferrari, on the other hand, does not show commercials on television, but runs a Formula One team instead. This is a totally different marketing strategy, which compares perfectly to both companies overall strategy. There is no use in integrating both marketing departments. Chances are even greater that a high level of integration would have a negative impact on the results of both marketing departments. Imagine that both marketing departments would be integrated by running them physically at one location and under the control of one management team. It could well be that the dominant manager of this department comes from Fiat and starts cutting budgets on (parts of) the Formula One team, because he is used to focussing on low costs. Or he thinks television commercials will help to sell more Ferrari’s. Maybe this is an extreme example and the organizations of Ferrari and Fiat are totally different, but the example perfectly illustrates to what extend the appropriate level of integration can differ per unit of the company, based on the strategic fit.

The DaimlerChrysler case is a perfect example of a case where the national cultural differences have a major impact on the sustainability of the acquisition via the (in)appropriate level of integration. The lesson learned here is that even if strategic fit exists, the companies can still be better off to integrate on a lower level because the cultural differences are considerably large. Even if Daimler and Chrysler would have had the same strategic priorities in each unit, the national and corporate cultural differences were still too large to overcome. The German culture was very strict and bound by rules whereas the Americans at Chrysler enjoyed more freedom in their way of conducting their business. The corporate culture at Daimler was a perfect stereotype of the German culture and the corporate culture of Chrysler was the perfect stereotype of the American culture. Because of these cultural differences combined with quite a high level of integration, employees became dissatisfied and could not work together in an effective way. The managerial implication of the existence of large cultural differences therefore is that the contact on a daily basis between the management or employees of the acquiring company and the employees of the target company should be limited to a minimum. The blue-collar employees at the target company, with a different national culture, should be under the command of managers from that same company with the same national culture. If national cultures are the same, and strategic fit is high (or less important) those parts of the companies can be integrated on a higher level more easily. An example of this is the successful integration of the R&D departments of Peugeot PSA and Citroën, which are both French and have quite similar strategies. The case of Auto Union/Audi and Volkswagen perfectly illustrates that also the corporate cultural differences can influence the appropriate level of integration. The differences in morale (corporate culture) were one of the reasons to maintain separate R&D, sales and distribution departments. This lower level of integration eventually resulted in the success of the acquisition. Because the corporate culture at Auto Union/Audi was accepted by Volkswagen, Auto Union/Audi was able to develop the Audi 100 which formed the basis for the success of this acquisition (and for the survival of Volkswagen). In this case, the blue-collar employees at the production facilities were integrated rapidly and the cultural differences on that level in the organization were ignored. On the medium level of the organization of the target company, the level of integration was very low. This part of the company was still managed by one of the directors from the target company and only he was

- 38 - controlled by the acquiring company. This case implies that in the case of low strategic fit, the same national culture and dissimilar corporate cultures, only the parts that have a limited influence on the success of the target company should be integrated. The other interesting lesson learned from this case is the speed by which the production part of the company was integrated. Volkswagen already started with retraining employees, even before it owned all the shares in Auto Union. This way the changes are already implemented before everybody involved can resist against it.

To summarize, the managerial implications of this research are that it provides guidelines in making an acquisition successful and an acquisition of a large magnitude sustainable. The most important lessons learned from this study are to separate the companies in different units for analysis, compare these units on strategic and cultural fit and in turn apply the appropriate level of integration. The higher the strategic and cultural fit, the higher the level of integration can be. The integration of units on a lower level in the organization can be higher than the integration of units on a higher level in the organization, because they have more influence on the performance of the acquisition.

7.4 Limitations and Further Research

Despite a solid theoretical background and extensive study of the cases, two limitations of this research need to be mentioned. A first limitation of this research is the fact that the cases that are studied, both consider relatively large acquisition targets. This results in the conclusion that the parent company strategy has no influence on the positive relationship between the success and the sustainability of an acquisition in the car manufacturing industry. This affects the generalizability of the conclusion in this study, but can be explained very well by simple logics (common sense?). Also there are, and in the future will remain to be, still enough cases for which this research is useful. At the time of writing this thesis, for example, Fiat is negotiating the acquisition of Chrysler. Chrysler is a relatively large acquisition target and the sustainability of this acquisition will definitely influence Fiat’s future strategy. Furthermore, car manufacturers are experiencing very difficult times at the moment and it is very likely that more acquisitions of such a magnitude will occur. Another limitation of this research is the availability of the data for the sustainable case. Since the pre-acquisition phase of a sustainable acquisition are at least 30 years ago, less information is available. There was no Internet at that time and today much information is lost or stored in archives all over the world. However, the information that can be found consists mostly of facts and has not been subject to interpretations of other researchers. For the DaimlerChrysler case, for example, there were many scientific articles available explaining the failure of the acquisition. This information is already interpreted and might be biased. In this research this kind of information is treated with care and only the facts are used for interpretation. In the case of Volkswagen and Audi, information comes mainly from books which describe the facts in the history of these companies and from newspapers.

An important suggestion for further research that can be derived from the conclusions of the research is the relationship between the parent company strategy and the success or sustainability of an acquisition. It might be possible that in some cases the success and sustainability of an acquisition influence the parent company strategy, while in other cases there is no relationship at all. As already in mentioned in this section, the most obvious suggestion for further research is to study different cases according to the same structure of this research. There are many other representative cases available in the history of the car manufacturing industry.

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Websites

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Ford Truck Enthusiasts http://www.ford-trucks.com/news/idx/7/082/2000/article/03172000__Ford_Motor_Company_ To_Buy_Land_Rover_From_BMW_Expanding_Lineup_Of_Premium_Brands.html Accessed on 2009-04-17

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Infonu: Auto en Vervoer http://auto-en-vervoer.infonu.nl/auto/15072-de-historie-van-audi.html Accessed on 2009-04-17

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Wikipedia http://en.wikipedia.org/wiki/Daimler-Benz Accessed on 2009-04-17 http://nl.wikipedia.org/wiki/Friedrich_Flick Accessed on 2009-04-17

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