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.