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Master's Thesis Financial Management

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Master's Thesis Financial Management Master’s Thesis Financial Management - 0 - The Failure of an International Transaction The Curious Case of Opel/Vauxhall J.LIU/Jiying, Liu ANR: S401289 18-07-2011 MSc. Financial Management Supervised by Mr. O.G.Spalt / Spalt FEB / Faculty of Economics and Business Administration Abstract On November 3rd, 2009, General Motors—one of the biggest automobile manufactures, announced its final decision of going back on its Opel/Vauxhall selling agreement with Magna—Canadian auto-parts suppliers, and its financial partner Sberbank. After eight months negotiation, the merger of Opel/Vauxhall failed. Using the Opel/Vauxhall merger as a case study, this paper focuses on value and event analysis in this international transaction. This Thesis ties to answer the question: why General Motors chose to keep Opel/Vauxhall in the end? - 1 - Contents Section 1 - Introduction ....................................................................................................................... - 3 - Section 2 - Time Line ........................................................................................................................... - 4 - Section 3 - Industry Overview and Background of General Motors ............................................... - 7 - 3.1 Industry Overview ........................................................................................................................... - 7 - 3.2 Background of General Motors and Opel........................................................................................ - 9 - Section 4 - Valuations ......................................................................................................................... - 12 - 4.1 Discounted Cash Flow Valuation Analysis ................................................................................... - 12 - 4.2 Multiples ........................................................................................................................................ - 21 - Section 5 - Event Study Analysis ....................................................................................................... - 22 - 5.1 Methodology ................................................................................................................................. - 22 - 5.2 Data ............................................................................................................................................... - 24 - 5.3 Results ........................................................................................................................................... - 24 - Section 6 - Why did GM choose to keep Opel in the end? .............................................................. - 27 - Section 7 - Conclusion ........................................................................................................................ - 30 - References .............................................................................................................................................. - 32 - - 2 - Section 1- Introduction General Motors, as the biggest automobile manufacture in North America and second largest producer in the global market, was under great stress in recent years. They had suffered from increasing costs and stronger foreign competitors like they had not seen in years. In addition, because of the raising gasoline price and economic recession led to a dramatically reduced decline in demand of its most profitable pick-up trucks and sport utility vehicles since mid-2008. Nevertheless, the unbreakable labour contract with UAW (the United Auto Workers) ensured GM had to pay its workers high wages, healthcare and pension benefits, which increased its financial pressure (Park, 2009). These trends might lead to the end of GM, and it would need to consider narrowing down its subsidiaries to deal with the cash flow and overcapacity problems. On March 4th 2009, GM announced its willingness to sell Opel and its British sister brand Vauxhall. Due to the involvement of the German government, Magna, the Canadian-Austrian auto parts maker was picked as the best bidder. After nearly 8 months of negotiation, Magna almost succeeded in this deal. However, a few days after, on November 3rd 2009, GM in a surprise decision decided to back out from its agreement with Magna and its financial partner Sberbank to sell its European unit Opel. This international transaction failed in the end. This thesis investigates why GM decided to reconsider selling Opel at the moment the final agreement was almost reached. I proceed in three steps. First of all, we need to reach a clear understanding of the automobile industry, using a top-down approach to analyze the specific industry characteristics. GM as part of this industry, it must consider its sensitivity with the business cycle (Sandler, 2008). SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis, the strategic planning method, can be used to examine GM‘s current objectives. These analyses provide us general insight into GM‘s original idea of selling Opel. Secondly, I make use of standard valuation technique to evaluate GM‘s decision and the value of Opel. The Discounted Cash Flow Model is wildly used to evaluate a company or project‘s value. The estimated value can make further clarification if Opel was worth keeping. Using Multiples as second evaluation, combined with DCF as a comprehensive valuation. According to GM‘s behavior, I made a hypnosis that the value of Opel under GM‘s estimation was higher than then the price offered by Magna, which is 500 million euro for a combined 55 percent stake in Opel with Russian Sberbank, but they were forced by the financial distress to sell it. With the improvement of general economic environment during the negotiation period, and better financial situation within GM, GM reconsidered its Opel sale project, and made final decision of keeping Opel. Thirdly, the stock market reaction can be also a consideration of GM in their decision to keep Opel. If the stock market is satisfied with selling, it can be seen by a positive abnormal return alongside its announcement date. So, event studies can be used to test the market satisfaction of this Opel case. As a hypothesis, due to GM‘s final decision, the shareholders of GM did not want to sell the European division. - 3 - Because of many of the reasons described above, from the industry overview to the valuation of Opel, even with the stock market reaction, GM made its final decision to keep Opel. In order to make clear explanation to my fundamental question – ‗why GM kept Opel in the end?‘, this paper is structured as follows. Section 2 represents the detail of the deal‘s timeline and indicates the major players in this M&A case. Section 3 explains the automobile industry and the background of GM and Opel. Section 4 makes a valuation on Opel‘s value. Section 5 uses the event studies to measure the stock market reaction to the involved three companies – GM, Opel, and Magna, in this Opel merger. Section 6 examines other potential reasons and the problems GM needed to face after its pull back. Section 7 concludes and shows the limitation of our analysis. Section 2 - Time Line On March 4th, 2009, General Motors made an announcement that they were willing to sell their European division Opel. Later, on May 22th, 2009, Canadian auto-parts supplier Magna International emerged and expressed its interest in a deal to acquire Opel. On May 30th, the German government chose Magna as its favorite bidder for Opel, and offered to provide Magna €1.5 billion euro in bridge financing, giving it a say in what happens to the European Unit. After several months‘ negotiation, Magna made an agreement with GM that Magna would invest $726 million within the operation, while the German government announced their financial plan to help fund Opel with €4.5 billion of loans. On August 24th, GM considered whether it should remain its Opel and Vauxhall operations. But the day after, the German government put their pressure onto GM, and forced GM to reach final agreement with Magna. On Sep 10th, 2009, General Motors' lead negotiator in Opel-Magna talks discussed the new sale of its Opel and Vauxhall units to a consortium led by Canadian-Austrian auto-parts maker Magna International. But on Nov 4th, GM announced they had backed out of a deal to sell its European operation to Magna International and planed to restructure the business itself. The deal failed. All of events that happened during 2009, and the details of the timeline follow (Reuters, 2009): March 4 – General Motors made the announcement that they were willing to sell their European division- Opel, and Europe‘s head Carl-Peter Forster said Opel could slash 3,500 jobs and re-launch as an independent company. Apr 28 - Canadian-Austrian auto parts maker Magna showed their interest and presented outlines of an offer for Opel. May 12 - Russian carmaker GAZ confirmed its interest in a joint venture with Opel and Magna. - 4 - May 13 - Germany ruled out temporary Opel nationalization. May 20 - GM Europe announced that three bids had been made: Fiat, private equity investor RHJ International, and Magna International. May 22 - Magna was chose as favorite after German officials said it presented a better plan than rival bidders. May 27 - The stock price of General Motors reached the highest value on March 27th, 2009, U.S. president Obama said he would help GM under pretty drastic changes; this gave the hope of the market make the stock price reached the peak of 3.62 dollars
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