Indego, automotive consultancy, automotive consulting, steve young

Automotive Mergers & Acquisitions - Dead or Dormant?

Thursday, 21 July 2011 15:44

Looking back at the twenty years or so that I have been working at the senior levels of the motor industry as a consultant and senior executive, some of the most challenging and enjoyable times have related to working on potential mergers and acquisitions.  Over the last two or three years of the financial crisis, everything has gone fairly quiet on the M&A front, globally and across the different parts of the industry - manufacturers, suppliers and dealers.  Does that reflect a permanent change in mindset, or simply the calm before the storm?

Most of the recent activity has been at manufacturer level, and mainly directly driven by the crisis.  The main headlines have been generated by the progressive absorption of Chrysler into FIAT Group, Porsche into VW, the unbundling of SAAB from GM and the former Premier Automotive Group from Ford.  There have been some much smaller, tactical deals like the acquisition of the UK regional dealer group Wayside by the much larger Jardine Motors Group, but it feels like it's all been fairly quiet by historical standards.  The investment by Volkswagen Group in Suzuki was seen as a potential precursor to a takeover, at least by outside observers and some within VW, but then we had the news this week that all is not well from a Suzuki perspective, and some suggestion that the deal will be reversed.  The acquisition of Jaguar Land Rover by Tata was initially seen by many as a huge mistake as the business plunged into huge losses, but commentators now ask whether Ford was wrong to sell the business for what amounted to not much more than the profits in the most recent full year results.

In my experience, successful mergers and acquisitions in the automotive industry - and probably elsewhere - are dependent on four things:

• A sound strategy which is based on a clear logic as to why the deal makes sense.  There is a history of "vanity" deals driven by a desire for scale and broader reach as ends in themselves, rather than with a clear determination to take cost out or drive revenue up on the basis of clearly identified synergies.
• The financial ability of the combined company to see through the post merger integration and start deriving the planned benefits.  For manufacturers and suppliers, this could be 4-5 years or more, as some synergies will be linked to new product programmes and related sourcing decisions.  Putting together two lame ponies does not make a racehorse, and changing the name over the door does not in itself result in cost savings or new business opportunities.
• Real engagement by the acquiring company in the management of the new addition.  I have seen a number of occasions where a "hands-off" approach is taken to the new acquisition, either out of relief that the deal closed, or due to an overly-sensitive concern about the reaction of the existing staff in the acquired company to an influx of new management.  What typically happens is that the acquiring company does not get the opportunity to really understand their new business until some crisis occurs, by which time it may be too late.
• A relentless pursuit of the synergies identified in the original business plan, and the search for new opportunities.  Partly as a consequence of failure in one or more of the previous points, the pursuit of the planned benefits on which the deal was justified, is often hesitant and half-hearted.  This can be down to internal resistance within the acquired company, but often extends back into the acquiring organisation as well.  It takes two (or more) parties to rationalise products, facilities, suppliers and organisation.  These decisions need to be made at the first available opportunity if shareholders are going to get value from the promises made.

If these actions are followed, there are still opportunities for further mergers and acquisitions in all parts of the automotive industry, delivering value in a sector where returns are generally not very attractive.  Whilst the current uncertainty around budget defecits, currencies and lending markets is a reason for caution, it may also be a good time to be making plans, to be ready for the upturn.