Managing Social, Political and Legal Issues in Mergers and Acquisitions A Case of Volvo and Renault
Introduction: The Alliances, Mergers and Acquisitions play an important role in the development of a business which in turn supports the growth of the industry and hence the economy. It is not about capital or knowledge but the ability to form powerful partnerships which accrues all of the necessary requirements like the ones mentioned earlier in the statement. All over the world, record number of mergers and acquisitions take place. According to imaa-institute.org, the number of M&A in the year 1985 were nearly around 3000 and the value of which was approximately $300 billion whereas in 2006, the number of transactions reached 50,000 of $5000 billion in value. The facts show a spectacular increase in the number of transactions therefore gives us an impression of a successful collaboration but the ugly truth hides behind the veil. According to an article of Forbes.com, ‘Why Half of All M&A Deals Fail, and What You Can Do About It’, almost 50%
of the mergers fail to survive. Mergers and acquisitions may widens the options of a business but there is always lie a threat to the existence and the survival of the collaboration formed. We always read about the failed mergers and the reasons about it but we never have delved into the fact that what would have been the prerequisites that the two merging companies would have followed to avoid such
failure? We with the case of failed merger of two automakers, Volvo and Renault, have tried to understand those prerequisites. The report has taken the event of a hopeful merger between Volvo and Renault. Under the proposed deal, agreed to by the companies in September, Volvo would have merged its automotive operations with those of Renault, creating the world's sixth-largest car and truck maker. Both of these companies were in a Strategic alliance since 1990 and later in 1993 had plans to convert it into a merger. The objective was to help Volvo, which was small in car business in those days, by taking the help of a larger partner to survive in the long run, particularly given the deep downturn in the European auto business. Renault was weak where Volvo was strongest, in trucks, and strongest where Volvo was weakest, in small cars and in southern Europe. The deal was based on the belief that combining the companies would allow them to cut costs by $5 billion over the next six years by sharing production plants, engineering talents and distribution systems. But the merger did not come to positive conclusion because of the opposition from the shareholders in Volvo group, the aspect of cultural differences and the dissidents among the corporate heads. It took Volvo Chairman Pehr G. Gyllenhammar and Renault Director General Louis Schweitzer three years to perfect a plan merging the two auto companies into a $40 billion juggernaut. It took less than three months for their dream deal to collapse. The case has thrown lights on the facts which if taken care of would have resulted in a successful merger. What makes this case interesting is its complexity. Despite the fact that the two were in a successful strategic alliance for three years, yet they failed. The involvement of French government makes this case even more intriguing. The differences in perception and communications could also be attributed with the same intensity for the failure as has been other factors earlier.
Objective: The objective of this project was to investigate the impact of the factors which in any ways affected the decision of merger between firms. This particular case is an example of a situation in which the perfectly running alliance was tried to change in into a merger but failed to do so. The various factors that were in effect, which ultimately stopped the merging, has been thoroughly examined. The specific aim was to examine what actually happened during the integration and execution stages in firms where the strategic alliances were made to improve the competitive position of one or both firms. The objective can be summarized in following two points:
To study the factors for the failure of mergers and acquisitions
To understand its effect and possible causes.
Methodology: Well-structured mediums were used to collect data for the project. The research type is conceptual in nature. A case study of Volvo and Renault was considered to find out the desired objectives. For the project insights were taken from various news articles, research journals, magazine and web sites. About the Companies: Volvo: Volvo was established in 1915 as a subsidiary of SKF, the ball bearing manufacturer,
however the Volvo Group and Volvo Cars consider themselves to have been officially founded on 14 April 1927, when the first car, the Volvo ÖV 4 series, affectionately known as "Jakob", rolled out of the factory in Hisingen, Gothenburg. Volvo means "I roll" in Latin, conjugated from "volvere", in relation to ball bearings. It is a Swedish multinational manufacturing company headquartered in Gothenburg. Its principal activity is the production, distribution and sale of trucks, buses and construction equipment. Volvo also supplies marine and industrial drive systems and financial services. Renault : Renault is a French multinational vehicle manufacturer established in 1899. The
company produces a range of cars and vans, and in the past, trucks, tractors, tanks, buses/coaches and autorail vehicles. Headquartered in Boulogne-Billancourt, the Renault group is formed by the namesake Renault marque and subsidiaries Automobile Dacia from Romania and Renault Samsung Motors from South Korea.
The Alliance, 1990: In 1990, Renault strengthened its collaboration with Volvo by signing an agreement which allowed both companies to reduce vehicle conception costs and purchasing expenses. Renault had access to Volvo expertise in upper market segments and in return Volvo could take advantage of Renault designs for low and medium segments. They had established a strategic alliance through a complex scheme of cross shareholdings, joint production and R&D agreements and supervisory brands. The allies knew each other well through 20 years of industrial cooperation. In 1971 they initiated a cross supply agreement involving the swapping of gasoline engines for gear boxes. Renault invested in 1980 and sold them in 1985, during Renault’s close-call with bankruptcy.
The strategic alliance formed in 1990 was motivated by two primary considerations:
First was the desire to exploit the synergies in joint product development, purchasing, quality and manufacturing.
The second was to combine the complementary firms in order to create a firm of sufficient size so as to be able to compete efficiently in the global industry.
Finally, the sharing of their key competencies would have led to many benefits.
The two companies had complimentary competencies in terms of market share, geographic regions, and core competencies, as illustrated in the following table:
Features of Alliance:
Cross shareholding : Both firms had held some portion of the shares in each other’s
parent company. It thus allowed the CEOs of the respective companies to sit in the board meetings of other’s.
Equality : This was evident in the equal division of management appointments to the
joint operating committees, the creation of two alliance headquarters (Paris and Gothenburg), and in the choice of neither company’s native language as the official
tongue of the alliance. This was remarkable in view of the fact that Renault was several times larger than Volvo in cars.
Operations : The alliance gave the advantage in operational activities such as purchasing,
manufacturing and components development. Both firms would gain from the upstream synergies of the alliance but would be free to pursue their downstream options separately.
Even after the alliance brought wisdom and benefits to both the firms, there were many compromises made in terms of decision making and renouncement of power in those years. Both the company had 50:50 control arrangement which gave them the right to veto any decision. This would take longer for a decision to roll out without a dominant partner affirming on one of the decisions. Three years after the alliance, the only solution that both the CEOs of the firm came across was the merger.
The Planned Merger: On September 6, 1993, the Chairman of Volvo and Renault announced the terms by which their auto and truck manufacturing business would merge. The reason to merge, says Louis Schweitzer, Renault's chairman, is that managing and coordinating the two firms' activities through a stifling bureaucracy of Franco-Swedish committees is now too cumbersome. To keep up with competitors, Mr Schweitzer says, it was vital to streamline decision-making. After the merger:
The French government would have held 47% of the new company and Volvo only 18%. Another 35% will be held by a special holding company called RVA, which will be 51% controlled by the French government and the rest by Volvo.
The firm would employ 200,000 persons, and be headquartered in Boulogne-Billancourt, a suburb of Paris and the location of Renault headquarters.
The RVA would be directed by a Management Board under the supervision of a supervisory board. Pehr Gyllenhammar would have been the nominated Chairman of the Supervisory Board. The French government would nominate Louis Schweitzer as the Chairman of the Management Board and CEO of RVA.
Gyllenhammar and Schweitzer pointed to three main reasons for merger. These were:
Competitive Advantage : The combined company would have ranked second in world
production of trucks after Daimler-Benz, and sixth in world production of passenger cars.
Operations : The CEOs sought to exploit operating efficiencies in procurement, research
and development, and production.
Financial Strength : Gyllenhammar and Schweitzer wanted to achieve substantial
financial strength to meet future capital requirements. Volvo was in much need of capital as it lost money mainly due to low sales volume in North America, since 1990.
During the Period:
Sweden was under recession.
The Swedish government was musing over being a part of European community.
In August, the press published surprising financial results for the two firms. Volvo’s second quarter earnings surged fourfold in the second quarter, and the firm reported a return to profitability for the first half. In contrast, Renault reported pretax profit in the first of 1993 down 87% from the previous year.
The French government announced that it would privatize the firm by the end of 1994.
Analysis and Results: The proposed plan of merging the two firms could not meet its fate by the end of November, 1993. Volvo backed out from the plan because of the underlying
conditions in its firm. The reasons that can be accounted for the failed attempt of the merger, are following:
Unconvinced Investors : The major investors in Volvo were not convinced entirely about
the future of RVA, the merged company. First of their fear was the control of French government over RVC. The French government, as owner of Renault, would be entitled to hold a "golden share," granting it the right to approve or veto any takeover or sale/purchase of a large block of shares. Though the government had announced that it would privatize Renault yet the investors said the French government was being too vague about plans to privatize Renault. Being the power still in the hands of the French government, the investors were not very confident on the way the government will handle the Brand Volvo and feared that it would ultimately affect the entire business of Volvo. The quarterly financial statement showed the firm was making profits after a long time. It prompted some investors to conclude that Volvo did not necessarily need a merger to survive. The creation of the holding company RVC would limit the influence of shareholders of Volvo AB over the operating company RVA.
Political factors : Renault was heavily owned by French Government. The participation
of government in the daily operations of Renault was substantial. Many political factors were entwined with the working of the company. Analysts believe that political conditions in Sweden was not stable because of the raising issue of its membership in EC was at its peak.
Cultural Issues : The Volvo to a larger extent was considered as the national symbol of
Sweden and it was the time when the government of Sweden was thinking over its admission in the European Community. According to survey conducted, only 30% of the
Swedish population supported the Swedish membership in EC. The company The Swedish newspapers Expressen, Dagens Industri, and Svenska Dagbladet, all opposed the merger. Since Renault was a government controlled, the employees as well as the Swedish population were not in the favour of selling its gem to another foreign government and then follow their instructions. The proposal touched the nationalistic nerve. On October 26, a committee representing 5000 workers announced that its members would vote their shares against the merger proposal. Also, 900 civil engineers within the company called for the merger to be postponed. It also suggested that the alliance till now had not gone smoothly.
Poor Communication : According to a Wall Street journal article ‘Volvo Marriage with
Renault may be stalled’, The investors had asked for vital information from Volvo regarding the merger but the company simply failed to give what they asked for. In an interview, Bjoern Wolrath, chief executive of Skandia Insurance Co., Sweden's biggest insurer and a major Volvo shareholder, described how he "got fed up when Mr. Gyllenhammar began complaining in his usual style about investors' meddling in Volvo affairs."
There was a persistent issue in the strategic alliance between the firms. The information started coming out when the protest against the merger reached its peak. Many midlevel executives started to leak out information about the numerous point of friction especially in Research and Development. According to a news article, the executives in the truck division said, "it was an impenetrable mess,” "We gave the French all our ideas, all our plans, and we got nothing in return." Things were just as serious on the car side, where engineers have been working on a common platform that both Volvo and Renault will
use for their next-generation executive car. A source says the two sides couldn't even agree on which way the engine would face: Renault designers would speak French to one another when they wanted to shut out Volvo workers, around whom they normally spoke English.
Complex Structure : The structure of the ownership of the merged company was too
complex. It made difficult for the stakeholders in Volvo to understand their ownership.
After the merger, the major decision balance which was earlier used to be 50:50 would tilt to 65:35 in favor of French government. Given France’s recent handling of air strikes in 1993, made investors wary about the France’s possible lack of concern for Volvo and
its Swedish workforce.
Conclusion: We came to the conclusion that, there were various reasons that led to the failed merger attempt. These factors could have been taken care of before it went out of control. The situation would have taken a U turn, if the details which were ignored, were taken seriously. Following are some suggestions we believe could prove helpful before deciding to venture into a merger:
Executives pursing a strategic alliance should allay stakeholder questions by providing timely, accurate, grounded, and factual information.
An emphasis on trust and confidence creates a buy-in atmosphere for all parties; strongarm tactics and limited timelines create questions and divisions.
Executives involved in strategic alliances should frequently seek third party analysis looking at the rational for the agreement.
Gain pre-approval from employees, senior, and middle management prior to corporate changing actions. As basic business practices, executives must communicate benefits from corporate decisions to internal and external stakeholders.
Strategic alliances looking toward an eventual merger require continuous monitoring to ensure the decision is the company’s best interest.
Environmental and economic factors change and strategic alliance should be analyzed within that context.
Communication between companies should remain open, and any attempts to renegotiate must be viewed amicably.
References:
‘The Dark Side of Alliances’ by Robert Bruman and Robert Spekman.
http://www.univie.ac.at/aicher/dateien/M&A%20Int%2020132014%20%20documents/Mergers_and_Acquisitions_Basics__All_You_Need_To_Know %20%20Donald%20DePamphilis.pdf
http://www.businessweek.com/stories/1993-12-19/why-volvo-kissed-renault-goodbye
http://www.nytimes.com/1993/12/03/business/volvo-abandons-renault-merger.html
http://www.csmonitor.com/1993/1206/06092.html
http://www.independent.co.uk/news/business/volvorenault-alliance-ends-car-makers-goseparate-ways-after-revolt-by-shareholders-1394932.html
http://www.winsletts.com/2009/05/renault-volvo-strategic-alliance.html
‘Who’s driving Renault-Volvo?’ published in The Economist.
‘AB Volvo: Big Swedish insurer to vote against the Renault merger’ published in Wall
Street Journal
