Study On Risks and Risk Management After Transnational M&A: The Acquisition of Volvo by Geely

Study on risks and risk management after transnational M&A: the acquisition of Volvo by Geely
Study on the risks and risk management after transnational merger and
acquisition:
the acquisition of Volvo by Geely
Supervisor: Michael Guo
<September 2014>
Dissertation submitted in part fulfilment of the degree of MSc in
Management with Business Finance
The York Management School
University of York
1
Acknowledgments
Firstly, I want to express my sincere appreciation to my supervisor Dr Michael Guo,

who gives me the useful advises during the dissertation. He also revised my
dissertation with many patients and changed the structure clear than before.
Secondly, Mr Li was helped me proof-reading in this dissertation, which I would like

to send my deepest gratitude to him..
Furthermore, I would like to thank to those people who fill the questionnaires for me.
They help me to accomplish the dissertation.
Last but not least, I would like to thank my family for their consistent support,
thoughtfulness and encouragement from the very beginning of my study.
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Abstract
The main objective of this research is to investigate the risks after the acquisition of
Geely and discuss how to manage the risks. Both quantitative and qualitative research
method will be used to do the case study. The SWOT analysis, questionnaire analysis
and secondary source analysis will be used to examine the operational performance in
the recent years and risks of Geely after acquisition. Afterwards, in the findings part,
the author analyze the risks after the Geely’s transnational merger and acquisition in
term of financial, cultural and human resource on the basis of the analysis. Besides,
some suggested strategies in the risk management will be mentioned.
Then, it will be great importance to conclude and explore this topic, and give some
suggestions.
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Contents
Acknowledgments............................................................................................................................... I
Abstract.............................................................................................................................................. II
Chapter 1 Introduction........................................................................................................................1
1.1 Background...........................................................................................................................1
1.2 Objectives and key research questions.................................................................................2
1.3 Summary and plan of presentation....................................................................................... 3
Chapter 2 Literature Review...............................................................................................................4
2.1 M&A definition and classification....................................................................................... 4
2.2 Motivations of transnational merger and acquisition...........................................................5
2.3 The reasons of failure in transnational M&A.......................................................................8
2.4 Theories in risks and risk management of transnational M&A........................................... 9
2.4.1 The financial risks and risk management..................................................................9
2.4.2 The culture risk and risk management.....................................................................11
2.4.3 The human resource risk and risk management...................................................... 14
Chapter 3 Methodology.................................................................................................................... 17
3.1 Research design.................................................................................................................. 17
3.2 Data collection.................................................................................................................... 18
3.3 Data analysis....................................................................................................................... 19
3.3.1 Secondary data analysis...........................................................................................19
3.3.2 SWOT analysis........................................................................................................ 20
3.3.3 Questionnaire analysis.............................................................................................21
3.4 Limitations.......................................................................................................................... 21
Chapter 4 Case analysis and discussion........................................................................................... 23
4.1 The acquisition of Geely acquire Volvo............................................................................. 23
4.1.1 Background of the acquisition.................................................................................23
4.1.2 The intentions for Geely to acquire Volvo.............................................................. 25
4.2 SWOT analysis of Geely after acquisition......................................................................... 25
Strengths........................................................................................................................... 26
Weakness.......................................................................................................................... 27
Opportunities.................................................................................................................... 28
Threats.............................................................................................................................. 28
4.3 Financial performance analysis.......................................................................................... 29
4.3.1 Ratio analysis...........................................................................................................29
4.3.2 Market performance analysis.................................................................................. 33
4.4 Questionnaire analysis........................................................................................................34
Chapter 5 Findings............................................................................................................................37
5.1 Financial risks and risk management................................................................................. 37
5.1.1 Financial risk........................................................................................................... 37
5.1.2 The risk management of financial risk.................................................................... 39
5.2 Culture risk and risk management......................................................................................40
5.2.1 Culture risk.............................................................................................................. 40
5.2.2 Culture risk management.........................................................................................43
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5.3 Human resource risk and risk management....................................................................... 44

5.3.1 Human resource risk................................................................................................ 44
5.3.2 The risk management of human resource risk........................................................ 45
Chapter 6 Conclusion....................................................................................................................... 47
6.1 Summary and conclusion................................................................................................... 47
6.2 Research limitations........................................................................................................... 49
Bibliography..................................................................................................................................... 51
Appendices........................................................................................................................................60
Appendix 1 Questionnaire........................................................................................................ 60
Appendix 2. The financial ratios.............................................................................................. 64
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Chapter 1 Introduction
1.1 Background
Transnational merger and acquisition (M&A) is becoming an important entry mode

for entering into the foreign markets, the activities tend to be larger in size, horizontal
and cross-border in the sixth merger wave from 2003 until now, and mergers tend to
be considerably centralized in telecommunications, banking, utilities, health care and
other commodity industries such as oil, gas and metals.
In the last three decades, China has transformed from an isolated country, which had
almost zero FDI flows with restricted international business experience, to one of the
world’s largest FDI recipients. Different from the western counties, cross-border
M&A in China started late and not yet evolved into the mature phrase. From 1993,
some listed China firms began to engage in transnational merger and acquisition
activities, and became prevalent in the late 1990s. From 1997 onwards, China began
to experience rapid growth and at present China is the second largest buyer in the
transnational mergers and acquisitions market after the United States. The worldwide
economy recession from 2007 resulted in remarkably reductive consumer
consumption and economical events. One of the heaviest hit is in the automobile
industry, where two in the “big three”, GM and Chrysler, were sank into the
bankruptcy situation. The Sweden luxury car manufacturer Volvo, possessed by Ford,
was acquired by the Chinese unknown brand Geely which produces low-price cars in
the low-end market.
The process of acquisition has triggered a great deal of media attention in the global,
as a matter of fact, it is the largest acquisition in the Chinese economy history. This
kind of acquisition could not image even a few years ago. However, the Chinese also
worried as they cannot ensure whether the low-end brand Geely can manage the
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superior brand Volvo well. The failure of the acquisition will exert the negative
influence on Chinese overseas acquisitions, moreover, because this acquisition is
rather well-known compare to other transnational acquisitions in China, so both the
government officials and the common people would like to see the success of this
acquisition and will set this acquisition as the benchmark in the future. A large
proportion of the unsuccessful cross-border M&A cases are arose from the negligence
of risk management. Thus, identifying and managing risks after the cross-border
merger and acquisition is fairly significant. However, the research related to this topic
is relatively less common. This is why this dissertation employs risks and risk
management after transnational merger and acquisition as the research subject.
Besides, the author would like to take Geely’s acquisition of Volvo as a representative
example in this dissertation to answer the research questions.
1.2 Objectives and key research questions
The main objective of this research is to investigate the risks after the acquisition of
Geely and discuss how to manage the risks. Then the SWOT analysis, questionnaire
analysis and secondary source analysis will be used to examine the current
operational performance and risks of Geely after acquisition. Afterwards, the findings
will discuss the risks and suggested advises on risk management after the acquisition.
In combination with the questionnaire, people’s attitudes and advises will be revealed.
Then, it will be great importance to conclude and explore this topic, and give some
suggestions.
This study tries to answer these questions:

1. What are the factors motivate enterprises engage cross-border M&A?
2. How did the previous scholars conduct in the terms of risk and risk management in
M&A?
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3. How to evaluate Geely’s performance after acquired Volvo in the last 4 years?
4. What are the risks after Geely acquired Volvo?
5. How to manage these risks in a preferable way?
1.3 Summary and plan of presentation
This dissertation is divided into six chapters, which is organized as follows:

Chapter 1 is the introduction to provide the overall framework, discusses the
background of China’s M&A, purposes of this study and the research questions to be
answered. Chapter 2 is the literature review of what other authors have been done in
this topic before, and how the research questions relate to the previous work. Chapter
3 is the statement of the research methodologies with the specific research design. In
Chapter 4, in order to answer the research questions, the case analysis and the
discussion will be involved. SWOT an analysis, secondary analysis and questionnaire
analysis will be employed for the sake of getting results. Chapter 5 is the findings,
give the answers to the questions had been noticed in the chapter of literature review.
In chapter 6, the general conclusion will be exhibited. Overall, on the basis of
analysis, the risks after the acquisition will be concluded, the suggested advises of
managing the risks will be summarized as well.
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Chapter 2 Literature Review
The term “merger and acquisition” (M&A) is used in the business activities which
companies are sold, combined takeover or brought (Chong, 2007). China has the
largest FDI outflow in the emerging economies and mergers and acquisitions have
incrementally become the major form of the outward FDI in China although it has the
high failure rate. Deng (2007) contended that China’s outward FDI basically has two
evident characteristics: the essential role of the Chinese government and the
incremental usage of the mergers and acquisitions as the method of entrance.
It is significant to have a general understanding of these concepts before embarking

on further discuss, moreover, this chapter involves the critical view on the relevant
concepts and theoretical frameworks.
2.1 M&A definition and classification
According to DePamphilis (2011), from the legal perspective, merger is an alliance of

two or more firms in which entire but one firm quit legally, the bonding entity
continues under the initial name of the survival company. In a characteristic merger,
after the election to approve the merger, the shareholders of the target company have
to exchange their shares for those of the acquiring firm. The acquisition emerges
when a firm takes a controlling ownership interest, a legal subsidiary or the selected
assets of other firms. An acquisition may involve the purchase of another firm’s assets
or stock, the acquired firm would continue to occur as a legally owned sub company.
DePamphilis (2011) considered that merger and acquisition are the significant method
to transferring resources to where they are intensely required and of removing
underachieving managers. The boundary became blurred as the overlap between the
concepts among the merger and acquisition. In order to use the notion practically and
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straightly, the academia views the merger and acquisition as the entire concept. The
transnational merger and acquisition can be either friendly or hostile (Rossi and
Volpin, 2004). In general, friendly takeovers usually accomplished at a lower price
than hostile transaction.
Porter (1985) explained that business mergers can be divided depending upon
whether the merging firms are in the same or different industries or positions in the
mutual value chain. The merger which occurs between two firms in the same industry
is denoted as the horizontal merger. The vertical merger refers to the firms take part in
the diverse phases of the value chain (Gugler et al., 2003). A conglomerate merger
occurs when the acquiring firm purchases another firm in a primarily unrelated
industry (DePhamilis, 2011).
2.2 Motivations of transnational merger and acquisition
There are massive and thorough scholarly studies in regard to why the transnational
mergers and acquisitions took place. The following context is the summary of the
proposed motivations concerning about the mergers and acquisitions.
The principle motivation of engaging in M&A is accelerating growth. This point is

echoed by Trautwein (1990), he implied that firms merge with and acquire other firms
mainly for the purpose of stimulating growth. Growth can be gained by investing in
capital projects internally or purchasing the assets of another company externally.
Graham et al. (2008) insisted that foreign market is a great opportunity to stimulate
the growth for the domestic county. Large companies undergoing sluggish growth in
their domestic markets tend to be likely of engaging foreign acquisitions, especially
in the fast-growing emerging economies. A typical instance is in 2010, Ford Motor
Company’s Volvo subsidiary is acquired by China’s Geely Automobile mainly for the
sake of increasing its international revenue substantially, which we will provide a
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detailed analysis in the following context. Growth is the main economic driving force
for the firms, obtaining more profits and improving the economics of sale are other
economic incentives.
Synergy is another common driving force that triggers mergers and acquisitions
events. The theoretical logic behind the synergy is on the basis of the simplistic
assumption “two or more firms in combination will produce more shareholder value
than if the firm operates individually”. DePamphilis (2011) argued that there are two
fundamental categories of synergy: operating synergy and financial synergy. The
enterprise in the developed industry may reduce the cost of capital than the enterprise
in the developing industry, and integrating two firms could reduce the mean cost of
capital if the integrated enterprises. Operating synergy involves economics of scale
and economics of scope, which can be influence the shareholder wealth creation
positively in large extent. The financial synergy can be realized when the acquiring
firms increase their scale, constitute an interior market and decrease the investment
portfolio’s systematic risk (Trautwein, 1990).
In the cross-border mergers and acquisitions, diversification can be realized by

enterprises investing in disparate industries in the same country, the identical
industries investing in different countries, or disparate industries investing in different
countries. (DePamphils, 2011). In order to achieve diversification, the particular
method for a firm is to afford a firm transfer its product lines or markets into the ones
with greater growth prospects. Chen et, al (1992), Stulz and Wasserfallen (1995)
pointed out that diversified companies usually reduce the cost of capital than those
are not diversified, as firms invest in industries or counties which economic cycles are
not greatly correlated may lower the entire volatility in their earnings and cash flows.
From an in-depth analysis of China cross-border M&As, the motivations for China’s
transnational M&As that are similar but characterized by its own features. These
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motivations can be summarized as strategic assets-seeking, market-seeking,

technology-seeking, resource-seeking, and the support of government.
The principle motivation for China is strategic-assets seeking. The term “strategic
asset” refers to “those resources and capabilities that are valued by the firm contribute
to competitive advantage” (Amit and Schoemaker, 1993). Shimizu et al. (2004) also
support the point by declaring that the M&A activities from developing countries
such as China to developed economies may be motivated by acquiring the invisible
assets, i.e. the patented technology, product differentiation etc., or other resources
they do not own themselves. Deng (2004) pointed out that most essential strategic
asset that Chinese firms that are positively pursued is to construct a worldwide
recognized brand, basically in order to sustain or enhance their international
competitiveness as the increasingly globalization.
Another motivation cannot be ignored is market-seeking. From October 2000, the

Chinese government implemented “Go global” strategy as segment of its
innovation-oriented plan in the long run. Deng (2004) explained that in many
industries, Chinese markets have reached the peak of its available demand, such as
the industries of footwear, clothing and electrical devices. Consequently, numerous
companies exploit foreign markets to sell their products.
Firms in emerging economies like China invest in developed economies are also
motivated by the technology-seeking, thereby compensating their competitive
weaknesses. China firms are increasingly interested in capturing the advanced
technology and process know-how in multiple-fold industries (Deng, 2007).
The resource-seeking is another motivation for China firms. Despite China is

endowed with its own resources, the availability of per capital is very low, especially
in the industries like timer, copper, iron ore and aluminum etc. Besides, through
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exploiting the resources in the foreign counties, China can cut down the costs of its
internal manufacturing and exporting.
The support of government is also a significant motivation for Chinese enterprises. As

Deng (2007) mentioned, Chinese government has played a critical role in the
composition of the China’s approved external investments. The policymakers of
Chinese government extensively recognized M&A as a precondition of their
capability to compete in the worldwide.
Although the theory of M&A has been broadly investigated before, there are still
many gaps of the literature review. Limited researchers study on the motivations and
the influence of merger after the acquisition. Besides, problems inside the firm have
not been proposed. How M&A affects the human resource and the employees
reactions after the M&A still not clear.
2.3 The reasons of failure in transnational M&A
Averagely, sixty to eighty percent mergers failed (Homburg and Bucerius, 2006). The
factors contribute to the failure of cross-border M&A has been proposed by several
scholars. After review the literature, the primary factors can be summarized as
overpaying, overestimating synergies and slow pace if integration.
Mirvis and Marks (1992) argue that M&A is lied on the synergy. However, the effect
of synergy is not always achieved. The longer the period of integration, the higher the
likelihood other factors will influence the performance. Besides, if acquirers have
overestimated potential synergy significantly, they may not be capable of realizing the
anticipated goals, it would be a heavy burden for the acquirer firm, for instance, the
disappearance of the customers and the financial crisis. Another major factor is
overpaying. Firms are likely to overpay companies depend on their previous
performance. The low-speed of integration also results in the failure in M&A. It is
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mainly due to the differences among different firms. Vaara (2000) indicated that in the
past decades, several failure cases are caused by the slow pace of integration, which
contribute to the difficulty in communication of two firms and affected the
enterprise’s long-term performance.
As the author mentioned, the failure rate of M&A is relatively high, and the time of
the formation of socialist market economy is relatively late in mainland of China,
consequently, there are still considerable limitations in Chinese transnational M&As
in terms of theories, methods and procedures, so the risks in cross-border M&As are
inevitable.
2.4 Theories in risks and risk management of transnational M&A
In the attempt to reconcile different organizations, the cross-border M&A also include
risks. Schmid (1995) pointed out that the risks in M&A tend to be existed, because of
the information asymmetry between the two firms, the uncertainties of the external
environment and internal management activities, and the complexity of managing
firms capacities etc. Combined with the previous studies, the author summarized the
risks in three aspects: financial, cultural and human resource.
2.4.1 The financial risks and risk management
Financial risks
According to Marks and Mirvis (2001), less than 25 percent of mergers and
acquisitions obtain their financial goals, mainly because of purchasing the incorrect
firm, paying at the wrong the price, not making the deal in the suitable time and so
on.
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Luo and Sun (2008) insist that the financial risks after M&A basically involves three
dispersed aspects: the target business valuation risk, the financing risk and the
integration risk. First of all, the value assessment of the target company is crucial to
the acquiring firm. Agrawal and Jaffe (1999) deemed that the acquirers are more
likely to overpay for the alleged high-growth companies on the basis of their previous
performance. The legacy of overpaying is lasting for a long time. The acquirers have
to overcome to earn the cost of capital on account of the possibilities of obtaining the
prospective synergies timely. As a result, the share price in the post-merger period for
such firms may under the average level of wider industries because the future growths
guides to more normal levels. Secondly, in the preparation phase, the financing risk
refers to whether the acquiring firms are incapable of raising full funds on time to
ensure the M&A completed successfully (Luo and Sun, 2008). After completed the
M&A, the operating cost of the target company is huge as well. Thirdly, Haspeslagh
and Jemison (1991) pointed out that the process of integration is crucial to the success
of acquisitions in large extent. Zhou and Zhang (2010) also echoed this view by
explaining that there are many uncertainties in the integration, i.e. the risks of not
achieving the anticipated profitability, the information asymmetry between two firms
and the challenge of anatomic integration etc.
Financial risk management
Financial controls should be highly emphasized because the cross-border merger and
acquisition always tend to be extremely expensive (Thomson, 1998). As the author
mentioned previously, financial risks in cross-border M&As basically includes three
aspects: the target business valuation risk, the financing risk and the integration risk.
Correspondingly, the risks can be managed in the following methods. Firstly, the firm
should select the suitable target company and set the reasonable price of the target
company. The due diligence is an important step for the acquiring company, the value
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of target firm should evaluate carefully and thoroughly. Luo and Sun (2008) point out
that the acquiring firm should analyze the target company’s industry environment,
financial situation, operating capabilities etc, hence avoiding the over-high
purchasing price. Secondly, the firm is recommended to reduce the financing costs by
choosing the preferable payment methods. Some companies select the cash payment
in order to accomplish the M&A, which often generate the burden of the free cash
flow to the firm, particularly in the wholesale merger and acquisition. The enterprise
should choose the diversified payment methods. Thirdly, it is significant to enhance
the risk prevention especially in the initial integration stage. After acquisition, the
acquiring company should conduct a synthetic audit of the target firm, thus create the
ideal capital structure of the target company and decrease the financial risk in the
future.
2.4.2 The culture risk and risk management
The culture risks
Carleton (1997) discovered that 55% to 70% of the mergers and acquisitions were not
eligible to achieve the anticipated target mainly because of the culture differences.
Besides, Buono et al (1985) mentioned that culture issues have been proposed by
many scholars as the determinant factor in affecting the performance of M&A
activities.
On the one hand, when possessing M&A activities, Chinese enterprises basically put
emphasis on financial aspects while the aspects of culture was usually ignored. It is
well-known that Chinese culture is extraordinary different from western culture. Li
(2011) demonstrated that western people do things directly while Chinese people
usually express themselves implicitly.The differences among cultures may contribute
to problems such as unwilling to change, hostility, difficulty in communication and
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transmit information, reduction in earning and productivity and so forth (Olie, 1990),
which are extremely disadvantageous to the communication and collaboration of two
enterprises. In a research of M&A by Olie in 1990, the conclusion was one third of
the total M&A failures are caused by imperfect integration, and the differences
among national culture is the major contributory factor. When measure the national
culture differences, Hofstede (1991) divided the differences into five measurements:
power distance, individualism, uncertainty avoidance, masculinity and long-term
orientation.
Measurements Definitions
Refer to the extent which society would inequity

among people. In high-power distance country,
Power distance people believe that power is distributed and tend
to adapt the social hierarchy.
Put emphasis on the degree of interpersonal

connection. In the culture of individualism, the
personal goal is prior to the team goal and the
concept of “I” is emphasized. In the culture of
Individualism and Collectivism collectivism, people tend to loyal to the group and
dependent on group to take care of them.
It refers to people’s attitude against ambiguity and

uncertainty. In the culture with high-uncertainty,
Uncertainty avoidance people tend to construct social criterion and rules
for the sake of avoiding uncertainties.
It examines the relationship between gender and

work characters. In the cultures dominated by
masculinity, wealth and career accomplishment is
Masculinity and Femininity valued in such cultures. In feminine society,
people pay more attention to the sexual equity and
quality of life.
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It stands for the attitudes against time, tradition,

face and perseverance. In the countries
characterized by the long-term orientation, people
Long-term and short-term orientation put emphasis on long-term aims and orders of
society. In short-term featured countries, people
usually seek for the short-term objectives.
Figure 1: Hofstede’s model

(Adapted from Hofstede, 2010)
Hofstede’s model is commonly treated as the most authoritative framework in terms

of national cultures. However, McSweeney (2002) critique that the model only
represents the national differences but did not explicate behaviors at individual level.
The organizational culture should not be ignored.
The conflicts in organizational culture include many aspects, which include

management practices, core values, brand conflicts and organizational
communication etc. According to Miller (2000), organizational culture is the pattern
of values and beliefs, and affect the individual and group behavior inside an
organization. The core of the organizational culture is the daily practices, such as
staff’s values, growing backgrounds and methods of expressions, etc. The conflicts in
organizational cultures could exert negative influence on the communication between
the management and employees of different firms, thus contribute to the poor
efficiency of the corporate structure (Scweiger and Goulet, 2005). Besides, in terms
of organizational communication, Dooley and Zimmerman (2003), whether the
cultural information can be communicated smoothly is critical to culture conflicts.
Wang (2009) insisted that language tend be the largest barrier in the communication.
The culture risk management
To reduce the risks in culture, different scholars have raised different methods. Brahy
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(2006) proposed three principles for successfully integration of M&A: reservation of

key talent, efficient multicultural communication and the integration of different
corporate and national cultures.
Chen and Liao (2010) had summarized three fundamental methods to reduce the
culture risks. In the first place, both of the two firms should hold the democratic
attitude against the different national and corporate cultures. Weber et al. (1995) also
encouraged the multicultural coexistence by explaining “the multicultural
organization not only allows the existence of many cultures, but actively encourages
cultural diversity”. Secondly, both enterprises are suggested to eliminate the
disadvantages in cultures actively. Brahy (2006) suggested that the very first step of
successful cultural integration of cross-border M&As is to comprehend other
company’s national and corporate cultures. Thirdly, each enterprise should learn the
relevant knowledge about partner’s culture in advance in order to maintain the
successful communication.
2.4.3 The human resource risk and risk management
The human resource risk
Many scholars have perceived the importance of the human resource before. Booz
Allen and Hamilton (2001), Cartwright and Cooper (1994) summarized the most
common problems in the human resource management (HRM): difficult to blend the
different cultures and systems, poor motivation of the employees, reduction in the
quality of service, loss of the key personnel, contradictions among the customers and
the deprivation of the long-term objectives.
The acquiring firms in transnational M&A are high possibility to confront the human
resource risk. Firstly, mergers cannot obtain the anticipated expectation without active
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employee input (Bryson, 2002). However, it is familiar for management to employ

merger as an opportunity to cut down staff and improve the employment conditions.
Even in the benign takeover, the staff fear may be the invisible agenda. Dalton (2006)
argue that if a firm choose an employee already in the merged company as the top
manager, the failure rate of M&A in the 18 month is 34 percent, on the opposite, if
the board choose a person who is not work in the merged firm to replace the senior
manager, the failure rate in the 18 month is 55 percent. Besides, the existing workers
are well-trained, it will highly cost to replace them with the fairly entitled employees.
More importantly, the loss of workers tend to reduce the morale as well as the
productivity of the remaining firm, and the workers may feel deprive of the long-term
objectives. Schweiger et al. (1993) mentioned that job security is the most significant
factor for the employees in the M&A.
The human resource risk management
Schweiger et al. (1993) pointed out that dealing with the HRM risk is facilitated by
the employ the strategies which pursue to stabilize the workforce. After review on
several previous studies, in order to stabilize the workforce and reduce the human
resource risk in the M&A, three factors should be highly considered: job security, the
fairness through the M&A procedure and communication.
Firstly, the employees are not only concerned about the security but also how the
firms select decisions. Consequently, the consciousness of procedural fairness in the
M&A is a pivotal factor for the in determining the workforce attitudes. In the
traditional point of view, the HR department has been centralized and has many
responsibilities tend to be high cost. Hence, Porter and Wood (1998) suggest to move
the HR function into the operating unit, where may be gain more efficiency in the
hiring and training the employees. Furthermore, Hunsaker and Coombs (1988)
pointed out that firms should keep in touch with the employees timely. Employees
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should be acknowledged about what is going to happen on a timely basis. The timely
communication between the enterprise and the employees is vital. For instance, if any
turnover or downsizing will happen, the employees should be acknowledged on a
timely basis. Consequently, DePamphilis (2011) considered that the company should
establish a program in the integration stage, named as management integration team
(MIT). The team should communicate with the employees to help them overcome the
merger stress and give them the positive feedback to let them pay more attention to
the work.
All the literature reviews above shows the definition and classification of M&A, the
motivations of M&A, the reasons of failure in M&A. Moreover, based on a great deal
of previous studies, the risks and relative suggested strategies of reducing these risks
after the acquisition are proposed from three aspects: financial, cultural and human
resource. However, in order to answer the key questions and summarized the risks
and relative risk management thoroughly, a specific case study should be employed.
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Chapter 3 Methodology
In this dissertation, both qualitative and quantitative research method are used,
because these two are widely used research method in business research and
potentially complementary with each other (Bryman and Bell, 2011). Quantitative
research method is put emphasis in the collecting and analysis of data. Oppositely, the
qualitative research method is frequently underlie words rather than quantification in
the collection and data analysis, it usually pay more attention to the generation of
theories. The qualitative research tends to be more open-ended and is particularly
recommended when the research questions are concern with the “how” and “what”
questions (Yin, 2003). According to the research questions in the dissertation, the
qualitative research method will be predominantly employed while the quantitative
research method will be used if need.
3.1 Research design
Maxwell (2005) defined a research design includes a framework for the accumulation
and analysis of data. In this dissertation, the role of research design is act as a guide.
This study decides to use the case study design. Eisenhardt and Graebner (2007)
explain that case study approach is common, extensively employed in the business
research, case study involves the complexity and special characteristic of the case in
question (Stake , 1995).
Case study may include several cases, which named as multiple case studies.
However, Gerring (2007) explains that “the fewer cases there are, and the more
intensively they are studied, the more a work merits the term “case study”. Hence, in
this research, in order to answer the research questions intensively, the author choose
one representative case to investigate - China’s Automobile firm Geely acquired Ford
Motor Company’s Volvo. Moreover, several qualitative methods can be used in the
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case study together and avoiding too much reliance on one single approach (Knights
and Mccabe, 1997). The secondary data analysis, the SWOT analysis and
questionnaire analysis will be employed in this dissertation.
3.2 Data collection
Once a case has been chosen, a particular method is required for collecting data.
Questionnaires, interviews and secondary source are primary sources for obtaining
the information.
Researching secondary sources is demanding (Cooper and Schindler, 2001). There are
basically three categories of sources: primary sources, secondary sources and tertiary
sources. Secondary sources were mainly utilized in this dissertation. Through
secondary source, the author searched information such as published statistics and
reports, personal literature reviews and newspaper articles in the media. It is
important to mention that the annual report can be viewed as a primary source as it
represents the official position of the corporation (Cooper and Schindler, 2001). Neel
(2010) pointed out that secondary data is seldom treated as useful and accurate as
primary data. For the sake of validity and reliability, the author chose the secondary
sources mostly from the authorized published works and official media.
Moreover, interviewing can be expensive compare to other research methods

(Bryman and Bell, 2011). Besides, because the author is in United Kingdom recently,
it is unfeasible to interview Geely’s managers face-to-face as they live in China and
their schedules are busy. Tourangeau and Smith (1996) pointed out that compare to
the interview, there are several advantages of questionnaire, such as cheaper and
faster to administer, shortage of interview effects, no interview variability and it is
convenience for respondents. Consequently, the self-completion questionnaire is a
preferable way to gather data.
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3.3 Data analysis
In this dissertation, qualitative data is the case of Geely’s acquisition which acts a
typical example to identify the risks after the acquisition. The author employs SWOT
analysis to analyze the qualitative data, which includes a firm’s assessments of its
strengths, weaknesses, opportunities and threats (Wang, 2008). The author also uses
questionnaire analysis to investigate people’s attitude against the acquisition. Further,
quantitative data is gathered from the secondary source.
3.3.1 Secondary data analysis

Secondary data analysis employed data gathered by someone else or for some other
previous studies to answer the research questions by using different statistical
techniques (Bryman and Bell, 2011). Compared to primary data analysis, secondary
data analysis is easier to collect and less time-consuming. McLaney and Atrill (2008)
insisted that financial ratios are considered to be an indicator to evaluate the financial
performance of an enterprise before and after the M&A. The process includes the
calculation of the critical ratios related to financial profitability, liquidity, efficiency,
and investment.
In order to ensure the validity, the data was collected from the recent five years
Geely’s Annual Report. After analyze the financial ratios, the author will also evaluate
the market performance in the recent years. Combine with the financial ratio analysis
and market performance analysis, the objective valuations of Geely’s operational
performance before and after the acquisition can be summarized and then summarize
the relative financial risks.
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Return on equity
Profitability Operating profit margin
Net profit margin
Current ratio
Acid test ratio

Liquidity
Debt asset ratio
Long-term liability ratio
Dividend payout ratio
Dividend yield ratio

Investment
Earning per share
Price/earning ratio
Efficiency ratio Assets turnover
Figure 2: the financial ratios

(Adapted from McLaney and Atrill, 2008)
3.3.2 SWOT analysis
Westbrook (1997) suggest that there is a great deal of frameworks and approaches
employed in the analysis of a firm’s situation, SWOT analysis is the most
straightforward one. SWOT is an acronym for “strength, weakness, opportunities,
threats”. SWOT analysis involves aspects of strength and weakness inside the
organization, and the aspects of opportunity and threat in the external environment of
the organization. Through SWOT analysis, the author could identify the risks after the
acquisition from the aspects of weakness and threats, and summarize the
corresponding countermeasures against the risks, and valuate the competitive
advantages of the firms from strength and opportunities.
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3.3.3 Questionnaire analysis
Questionnaire is a qualitative method that includes a list of written questions.

Compare to the interview, questionnaire is easier and quicker to administer, it is also
convenient for the respondents and reduce the interviewer effects in large extent. The
author chose 12 questions to probe people’s attitude about Geely’s acquisition of
Volvo. All the questions are close-end and self-administered. The questionnaire were
delivered to the target group 50 people who work over one year as they have social
experience and have more time to pay attention to the economic events. The
questionnaire is attached in the end of this research as the appendix.
In order to evaluate the outcome after Geely’s acquisition and identify risks after the
acquisition from people’ opinion. The questionnaire is divided into three sections.
Section one invited the respondents to answer the fundamental background in regard
to their age, education level and economic situation, these information is eligible to
improve the validity and accuracy of the primary data. Section two is aimed to ask the
questions about the respondent’s evaluations about Geely’s acquisition. Section three
is aimed to identify the risks in the post integration from the respondent’s point of
view, and some questions are designed to investigate the recommendations of how to
manage the risks.
3.4 Limitations
After completing the research design, data collection and data analysis, SWOT
analysis, secondary source analysis and questionnaire analysis were designed from
the quantitative as well as qualitative research perspective for the sake of achieving
in-depth results.
There are still some limitations in the methodology. One limitation is this dissertation
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put emphasis on the individual case instead of using the multiple-case study. The
multiple-case study is highly undertaken for the sake of comparing the cases. In order
to answer the key questions thoroughly, the author choose a representative case to do
the case study. The second limitation is the truth that the questionnaire may receive
prejudiced feedback. Because it is tough to ensure each respondent’s intellectual
background, some questions in the questionnaire need relative knowledge in M&A.
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Chapter 4 Case analysis and discussion
With the purpose of identifying the risks of Geely after acquisition correctly, the
author would like to evaluate the outcome of Geely in the last five years thoroughly
with employ SWOT analysis to discuss the current situation of Geely, financial
performance analysis to evaluate Geely’s operational performance after acquisition
and the questionnaire analysis to investigate people’s suggestions against the
acquisition.
4.1 The acquisition of Geely acquire Volvo
In 2010 March 28th, Lewis Booth, the Ford executive vice president and the Geely
chairman Li Shufu announced that two companies has reached the a final deal to sell
100% equity of Volvo to Geely with the ultimate purchase price of 2.55 billion dollars,
which include 1.8 billion purchase price and 0.75 billion operational fund after the
acquisition (Larkin, 2009). The final purchase price included Volvo’s 9 sets of vehicle
products, 3 up-to-date platforms, approximately 2,400 global networks, brand and
talents, core technology, key distribution channels, and some of intellectual property
and patents. This deal became China’s largest acquisition of foreign car manufacturer
and reflecting China’s rapid growth in the auto industry.
4.1.1 Background of the acquisition
Zhejiang Geely Holding Group Limited is one of the four largest independent private
car manufacturers in China, accompanied with BYD, Chery and Great Wall. Attribute
to its low price strategy, most Geely car’s sale prices are under 100,000 RMB
(Geely’s official website). However, from 2007, confronted with the stressed
competition in the low-end auto market, Geely is planning for transforming its
competitiveness from low-price strategy to technology and performance competence.
Geely also want to increase the foreign market share.
23 12/09/2014
Volvo car corporation is a car manufacturer with its headquarter in Gothenburg,

Sweden (Volvo’s official website). In 1999, Volvo was acquired as the part of the
premier Automotive Group by Ford Motor Company. As a worldwide automobile
corporation, it has over 100 national sales firms in the global. Volvo is famous for its
high safety standards and obtainable high mileage, hence, the sales price of Volvo
cars is relatively high and it targets at the relative high-end market (Volvo Event,
2010). Generally speaking, Volvo competes with the luxury brands of Mercedes,
BMW and Audi although it is in the lower end of the luxury automobile market.
Unit: billion dollars

Time Revenue Profit Deficit
2004 171.6 3.5
2005 176.9 1.4
2006 160.1 12.6
2007 172.5 2.7
2008 146.3 14.7
Figure 3: The financial performance of Ford from 2006-2008 (adapted from
http://www.aastocks.com/en/Stock/CompanyFundamental.aspx?CFType=4&symbol=
00175)
It can be acknowledged from the table that the financial performance of Ford did not
behave well from 2006-2008, especially in 2008, the deficit boosted to 14.7 billion
dollars, since then, the Group decided to shrink the scale. The sales volume of Volvo
decreased seriously in the recent years. From 2008 to 2010, Volvo lost 2.6 billion
dollars and represented few symbols of long-term sustainability. Frankly speaking, it
became a heavy burden to Ford although Ford has invested a great amount of capital
into it. Meanwhile, Ford has recognized that China is an enormous market. Therefore,
selling Volvo to Geely can achieve several benefits, such as lower costs, reduce debt,
and improve the financial situation. Additionally, before the acquisition, 73.5% of
Volvo’s staff supported the deal.
24 12/09/2014
4.1.2 The intentions for Geely to acquire Volvo
According to Li Shufu’s response in 2009, he summarized the intentions to acquire

Volvo from three aspects.
Firstly, from the aspect of Geely, the most important motive of acquiring Volvo is to
obtain the technology innovation, particularly the safety design and product
manufacturing process. Volvo company is highly prestigious for technology advance
in safety, solidity and reliability and has maintained innovative in its safety standards,
the features are in line with the goals of Geely, which shifted the strategy from
competing on price to competing on quality, service, customer satisfaction and brands
(Safety first, 2007). Secondly, via the acquisition of Volvo, it is a good opportunity to
improve the brand image, awareness, and perception in the global market of Geely as
it usually recognized as the low-price brand in the low-end market. Volvo’s positive
impression of offering safety and green technology stands for an valuable strategic
asset for Geely since it can exert a positive spillover effect on Geely. After the
acquisition, Geely anticipates to compete with the high-end brands such as BMW,
Mercedes, and Audi in China’s luxury car market. Thirdly, through the acquisition,
Geely wants increase the export market share and learn the foreign brand marketing
strategy. The government support the cross-border acquisition, and Geely acquired
Volvo is citical for the development of automobile industry in China.
4.2 SWOT analysis of Geely after acquisition
One key research question of this dissertation is to identify the risks in the
post-acquisition, and another critical question is to find the methods to manage these
risks. With the purpose of answering these questions, the author would like to discuss
the situation of Geely by using the SWOT analysis. SWOT analysis is aimed at
identifying the company’s strengths and weaknesses internally as well as the
25 12/09/2014
company’s opportunities and threats externally.
Strengths
Firstly, the technology of Geely has been improved. The core value of Geely changed
from the cost superiority to the technology superiority (Geely’s Annual report 2007).
Geely not only purchase Volvo’s brand, but also the core technology, talents, some of
the intellectual property and patents, which could enhance Geely in strategic
adjustment and research ability improvement.
Secondly, the deal of acquiring the brand Volvo helps Geely accomplish its leap of
developing the brand. Volvo is a high-end brand which is compared to the luxury
brands such as Benz, BMW, it is a good opportunity for Geely to change its brand
image from the low-end automobile manufacturer to the high level ones.
Thirdly, Geely had some brand loyalty in the low-end market while Volvo is aimed at
produce the safety, high-quality and environmental-friendly high-end products in the
luxury market before the acquisition. Moreover, Geely has well-established sales
networks in China, and the luxury motor market is booming in China these years. So
the sales target market is not the same but complimentary.
Fourthly, the constant growth in the export market share. Geely not only purchased
Volvo’s core technology, patents and other intellectual property and other
manufacturing facilities, but also won its global distribution channels. After the
acquisition, as figure 4 presents, the proportion of export market share boosted
massively compare to the year before the acquisition.
26 12/09/2014
2009 2010 2011 2012 2013

RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Export sales volume 19,350 20,555 39,600 101,908 118,871
Annual sales volume 326,710 415,843 421,611 483,483 549,468
The percentage of
5.92% 4.94% 9.39% 21.08% 21.63%
export market share
Figure 4: The performance of Geely’s export share

(Adapted from Geely’s annual report 2013)
Weakness
Although the acquisition enlarges the operational scale and sales channels, it also
brings several benefits to Geely, it also confront a great some problems.
Karthik (2009) indicated that for Volvo, the most critical thing is to ensure enough
circulating funds supplement. After the acquisition, the investment in the research is
also huge. The economic pressure of Geely is huge, 2.5 billion dollars is a sky-high
price for Geely. The challenge of paying back the debt is formidable to accomplish.
Consequently, the financial risk is inevitable to confront. In addition, in order to
improve the poor financial performance of Volvo, the imperative problem of Geely is
to make Volvo localization as soon as possible. However, Geely lack the experience
of managing the upmarket brand, to make Volvo integrated in Chinese market is
difficult to resolve. Geely is usually famous for the inferior quality and relative
low-price in the low-end market while Volvo is known for its environmental-friendly
and safety technology in the luxury market. The cultures of two companies are
differences, consequently, it generates the culture risk. Furthermore, the differences of
firm’s operational systems and cultures among Geely and Volvo contribute to the
difficulties in communication, especially between the managers and employees, thus
lead to the risk of human resource.
27 12/09/2014
Opportunities
The most significant opportunity is the policy support. Chinese government still plays
an important role in the economic interference although the main economic strength
system is the marketing oriented economy. Chinese government supports the
acquisition for the sake of encouraging the domestic automobile market to enter in the
international market. The speculation from the media believed that several Chinese
banks borrowed 6 billion RMB to Geely (Rosenberg, 2012). The sales volume and
revenue of Geely represent a consecutive upward trend from 2009 to 2013 despite the
worldwide economic and financial crisis environment. The potentially huge Chinese
market provides a good opportunity to Chinese automobile enterprises. Moreover,
another opportunity is that the relative low cost of the materials such as steel, glass
and labor in China also reduce the producing price of the high-end cars of Volvo,
which could decrease the cost of the manufacturing and reverse the deficit situation of
Volvo.
Threats
The huge potentially market in China attracts a lot of attention, three luxury brands
Audi, Benz and BMW sell best in China (Hu and Li, 2010). Hence, it is difficult for
Geely to get a small piece of cake. Before the acquisition, the main market of Volvo is
in North American and Europe. The approval degree of Volvo is not as popular as
those brands. Geely had already invested huge money in the acquisition, the challenge
of repaying the high debt and investing in the integration and development is difficult
to resolve. In additional, the instabilities in terms of social and political aspects may
also exert the negative influence in the export market.
28 12/09/2014
4.3 Financial performance analysis
In order to evaluate Geely’s operational performance after acquisition objectively, the

author decide to analyze the performance in two aspects: ratio analysis and market
performance analysis.
4.3.1 Ratio analysis
Four categories of ratios will be analyzed: profitability, efficiency, liquidity, and

investment. Afterwards, the author will summarize the financial risks on the basis of
the analysis.
2009 2010 2011 2012 2013
Total assets
18,802,189 23,974,343 27,596,758 21,376,826 33,599,308
RMB’000
Total
liabilities 12,426,576 15,952,461 18,014,558 8,490,169 17,531,284
RMB’000
Total equity
6,375,613 8,021,882 9,582,200 12,886,657 16,068,024
RMB’000
Growth of
- 25.82% 19.45% 34.49% 24.69%
equity
Figure 5: Some financial data about Geely

Frankly speaking, in the last 5 years, Geely has been performed well. From the table
and the charts, it can be seen that not only the revenue and net profit, but also the
equity sustain an increasing trend from 2009 to 2013, especially after the acquisition
of Volvo.
29 12/09/2014
Figure 6: Turnover of Geely from 2009 to 2013

Figure 7: Net profit of Geely from 2009 to 2013

Profitability
2009 2010 2011 2012 2013
Revenue
14,069,225 20,099,388 20,964,931 24,627,913 28,707,571
(RMB’000)
Net profit
1,182,740 1,368,437 1,543,437 2,039,969 2,663,136
(RMB’000)
Operating
11.20% 10.85% 11.10% 10.60% 11.81%
profit margin
Net profit
8.41% 6.81% 7.36% 8.28% 9.28%
margin
Figure 8: The profitability ratios of Geely
30 12/09/2014
In terms of profitability, it can be seen from the table as one of the four largest private
automobile manufacturer firm in China, the growth trend of revenue and net profit
represent that the scale of Geely was favorable. However, the operating profit margin
and net profit margin remain steady in the last 5 years, which demonstrate that the
profitability of Geely still have room for growth.
Figure 9: Return on equity (ROE) of Geely from 2009 to 2014

ROE, which stands for the return on common stakeholder’s equity, is the core
measurement of a firm's profitability by revealing how much profit a company
generates with the money shareholders have invested. From the Figure, it can be seen
that the ratio of ROE declined after the acquisition and fall to the lowest point 15.83
in 2012, then revived slightly to 16.57 in 2013. The performance of ROE in recent
years not behave well, may due to the the difficulties in integrating different firms
after the acquisition, such as conflicts of operational system, the divergences of the
market characteristics etc.
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Liquidity
2009 2010 2011 2012 2013
Current ratio 1.37 1.33 1.13 1.19 1.29

Acid test ratio 1.32 1.25 1.04 1.08 1.19
Debt asset ratio 62.3% 62.1% 63.2% 57.9% 51.7%
Long-term
0.072 0.1301 0.0892 0.0473 0.0040
liability ratio
Figure 10: the liquidity ratios of Geely

The liquidity ratios are related to the ability of the enterprise to meet its short-term
debts (McLaney and Atrill, 2008). Bruce et al. (2005) believed that current ratio and
acid test ratio can reflect firm’s liquidity. Current ratio measures the enterprise’s
ability to pay its liabilities next year, which is a critical measurement of enterprise’s
liquidity. The ideal current ratio is considered to be 1.5 to 3. Geely’s current ratio in
the last 5 years all below 1.5, which represents that problems related to meet the
short-term obligations and working capital are existed within the firm. When debt
asset ratio over 50%, it represents the company’s assets are financed via debt. The
higher debt ratio of the firm, the greater operational risk related to the firm. Although
the debt ratio showed a downward trend constantly in the last 5 years, the figure is
still over 50% in 2013.
Investment ratio
2009 2010 2011 2012
2013
Dividend payout ratio 11.81 11.83 10.96 11.57 11.31

Dividend yield ratio 0.60 0.63 0.80 1.33 1.59
Earning per share (cents) 19.47 21.97 25.54 33.70 40.63
Price/earning ratio (times) 19.67 18.76 13.67 8.72 7.11
Figure 11: The investment ratios of Geely

32 12/09/2014
From the aspects of investors, the index of earning per share is constantly growing,
from 19.47p to 40.63p in 2009 and 2013 respectively. The growth of EPS represents
that the profits generated by the firm available to the shareholders is increasing.
However, the price/earning ratio is decreasing successively. McLaney and Atrill
(2008) pointed out that the higher the PE ratio, the greater of the investor’s
confidence in the future earning power of the firm. So the investor’s confidence in
Geely’s future development is decreasing, despite the growth of earning per share,
mainly due to the unknown development after such a huge acquisition.
Efficiency ratio
2009 2010 2011 2012 2013
Assets turnover 0.75 0.838 0.667 0.783 0.849
Figure 12: The efficiency ratio of Geely

The efficiency of working capital can be measured by the asset turnover. Combine
with the growth in both sales revenue and total assets in the last 5 years, it is not usual
to see the increase in the index of asset turnover.
4.3.2 Market performance analysis
As the figure 13 indicates, after the acquisition, the export market share of Geely is
constantly increasing. Until now, almost one fifth of the sales volume is in foreign
countries, however, according to Geely annual report 2013, the growth rate in export
markets do not achieve the original target, mainly due to the political and social
instability in the major export market, such as Egypt and Ukraine, moreover, these
places also faced a material slowdown in 2013. Consequently, the export business in
the future could confront increasing challenges. In terms of the domestic market,
although the growth rate of sales volume in China achieved 12.847%, the challenges
remain in the future because the major international brands have been strengthening
33 12/09/2014
their presence in China which imposed more competitive pressure on the domestic
brands (Geely’s annual report 2013). The completion of more strict regulatory
demands in fuel efficiency, product guarantee and emission standards in China could
also impose enormous cost pressure on the local brands like Geely in China.
2009 2010 2011 2012 2013

RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Annual sales
326,710 415,843 421,611 483,483 549,468
volume
Growth rate of
- +27.282% +1.387% +14.675% +13.648%
sales volume
Domestic sales
307360 395288 382011 381575 430597
volume
Growth rate of
domestic sales - +28.607% -3.359% -0.114% +12.847%
volume
Export sales
19,350 20,555 39,600 101,908 118,871
volume
Growth rate of
- +6.227% +92.654% +157.343% +16.645%
export sales volume
Figure 13: The market performance of Geely from 2009 to 2013

The financial information is originated from the secondary source, which might not
represent the firm’s actual situation. For instance, issues like inflation, deflation and
overlook of intangible resources are not revealed in the financial data. After analyzing
the financial indicators of Geely from several aspects, it can be summarized that
Geely did represent a recommendable performance after the acquisition even in the
worldwide financial recession. However, the risks still exist.
4.4 Questionnaire analysis
Qualitative research method was employed in this dissertation in the form of
34 12/09/2014
questionnaire. The author used this questionnaire to investigate the attitude and
suggestions of the respondents against Geely’s acquisition.
Section one invited the respondents to answer the fundamental background in regard
to their age, education level and economic situation. After collecting and analyzing
the results from the questionnaire, it can be summarized that in the 50 respondents,
74% of them are male. The majority of respondents is between 30-39 years old (75%).
The annual income of 80% respondents is between 900,000 RMB to 200,000 RMB.
When it comes to the educational level, respondents achieved a bachelor degree and
above accounted for 78% of the total. Section two is aimed to ask the questions about
the respondent’s evaluations about Geely’s acquisition. The results of questionnaire
indicate that 62% of the respondents believe that support of government is the
dominant factor contributes to the success of Geely’s acquisition, following by the
factors of obtaining advanced technology, upgrading the brand image and entering
into the foreign market. Section three is aimed to identify the risks after the
acquisition from the respondent’s perspective, and to ask the respondents concern
with the recommendations of how to manage the risks. Most respondents (80%)
believe the price is Geely’s largest competitive advantage before the acquisition, after
the acquisition, the competitive advantage transfer to price (56%), safety (52%) and
technology (46%). The respondents think that the challenges in front of Geely can be
summarized from four aspects: the management of cash flow (70%), brand
integration (82), corporate culture integration (56%) and human resource
management (64%). Furthermore, when identifying the risks after the acquisition, the
majority of the respondents choose the culture risk (72%), financial risk (90%), and
human resource risk (62%). Overall, many respondents treat this deal as a successful
acquisition to Geely, however, more respondents (68%) tend to believe that the
challenges are in the future.
The SWOT analysis has identified the favorable factors and unfavorable factors of
35 12/09/2014
Geely’s current situations internally and externally. The financial performance

analysis shows that the enterprise operates well after the acquisition. Combined with
the questionnaire, the case analysis can sufficiently generalize the performance of
Geely after the acquisition.
36 12/09/2014
Chapter 5 Findings
The key purpose of this study is to identify the risks after the acquisition. There are
huge differences between Geely and Volvo in many aspects. After the case analysis,
the risks are summarized from three aspects: financial, culture and human resource.
Correspondingly, the suggested methods to reduce these risks also involve in this
chapter.
5.1 Financial risks and risk management
5.1.1 Financial risk
Firstly, the debt-paying risk is potentially existed. Before acquired by Geely, Volvo’s
financial performance is extremely as the firm is in the deficit situation in 2008. After
the acquisition, it is a heavy burden to Geely. More specifically, as the data mentioned
in Chapter 4, the long-term liability ratio decrease substantially in 2013, mainly due
to the entire conversion of the convertible bonds (Geely’s annual report 2013).
However, the current ratio and acid test ratio decrease significantly in 2010, from
1.33 to 1.13 and 1.25 to 1.14 respectively. Mclaney and Atrill (2008) believe that the
higher these two ratio, the more liquid the business is considered to be. Consequently,
the ability of short-term debt-paying is relatively poor.
Secondly, the methods of raising funds may contribute to the risks in the operation. In
the following chart, it can be acknowledged that the domestic fund accounts for fifty
percent. Geely cost approximately 0.675 billion dollars in the acquisition from its
own operational cash flow, the remaining domestic fund was accumulated by some
short-term bank loans from commercial banks in China. When it comes to the foreign
fund, most of the firms choose the method of leveraged buyout in order to raise funds,
Geely is not the exception, which imply that the lending interest would be paid by the
37 12/09/2014
future cash flows of the acquired company. Because the acquired firm is difficult to
accumulate sufficient cash flows to repay the interests in short time, so the acquiring
company may suffer from the debt risk.
Figure 14: Geely’s payment methods for the acquisition of Volvo

(Adapted from Wang, 2009)
As the following table shows, the index of equity multiplier is increased from 2010 to
2013 annually, with 2.677 and 2.769 respectively. The growth indicates that Geely’s
degree of debt is increasing, which could bring more leverage benefits, however, the
related financial risk is increasing as well.
2009 2010 2011 2012 2013
Equity multiplier 2.949 2.677 2.721 2.732 2.769
Figure 15: The equity multiplier o Geely from 200 to 2013

Thirdly, the increasing integration cost may accelerate the financial pressure. Luo and
Sun (2008) indicated that integration cost is huge and cannot be neglected after the
acquisition. If the firm do not have sufficient funds timely, the enterprise may
immersed into cash flow difficulties. After the acquisition, the administrative
expenses and additional expenses increased because of corporate restructuring and
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higher research and development (R&D) investments. Other than the inevitable
expenditure in the integration stage, Geely also need to pay off the previous debt, so
the financial pressure in integration stage is huge. As the author mentioned before, the
ratio of ROE declined after the acquisition and fall to the lowest point in 2012,
mainly due to the incremental integration expenditure. As a Chinese firm, the
conflicts of operational system, the divergences of the market characteristics are the
difficulties to integrate, thus contribute to the huge expenditure after acquisition.
Fourthly, the fluctuations in exchange rate pose effects on the export deals. From
2012, the percentage of export market is over 20%. Although Geely’s remainder
market share is in China and the assets and liabilities are dominated in Renminbi,
however, the fluctuations of exchange rate in different currencies is becoming a
potential risk due to the increasingly export market share. The products are retailing
at local currencies at the export markets, the devaluation of the local currencies
against RMB could also have negative influence on sales volume in these markets.
5.1.2 The risk management of financial risk
Cross-border merger and acquisition usually need a great deal of capital, in China,
most of the enterprises use the cash payment to pay the deal. However, the cash flow
payment usually contributes to the heavy pressure on the enterprise. In the case of
Geely acquired Volvo. Consequently, to reduce the financial risks, Wang (2007)
proposed that the firm should select the reasonable payment methods to satisfy the
acquisition demands, such as the bank credit, stock exchange and other ways. In this
case, in order to follow the latest financial information of the firm, Geely could
establish a financial warning index system in order to prevent the financial
breakdown.
In the terms of the integration cost, Geely and Volvo should utilize the effective
39 12/09/2014
control methods: obtain maximum benefits with the lowest cost. Due to the fact that
China has the abundant and relative inexpensive labor resources, Volvo could set up
its own manufacturing factories in China, which could reduce the cost largest.
Furthermore, in order to reduce the financial risk, a reasonable analysis in exchange

rate is unavoidable. Foreign currency exchange rate is affected by many factors, such
as inflation, fluctuations in different interests, the disparities between the official and
unofficial exchange rate, the storage of international currencies and so on. The
employee has to anticipate the exchange rate movements correctly. Geely could
practice or employ some experts in this area to analyze the exchange rate. For the
purpose of reducing or avoiding the debt risk, it is critical to recognize the acquired
firm’s value properly and confirm the circulation of the cash flows.
5.2 Culture risk and risk management
5.2.1 Culture risk
The following chart is the comparison of China and Sweden in terms of five cultural
dimensions proposed by Geert Hofstede in 2010 which the suthor mentioned before.
The differences may exert negative influence on the values and beliefs of the staff in
Geely and Volvo, hence affecting the corporate culture.
From the chart, it can be seen that except the avoidance of uncertainty, there are sharp
differences in other culture dimensions. As for individualism, Swedes suffer the
normal individual stress while Chinese suffer more. In terms of power distance, China
marks 75 while Sweden marks 25, which represents that there is no distinct
hierarchical differences could be found in Sweden society. The enormous difference
in the dimension of masculinity demonstrates that Chinese society is dominated by
high masculinity. The sharp contrasts in long-term orientation represents that Chinese
40 12/09/2014
people prefer a long-term attitude and slow progress while Swedish people focus on
the quick outcomes.
Figure 16: Hofstede’s Cultural Dimension

(Adapted from Hofstede, 2010)
The national differences among China and Sweden will affect the beliefs as well as
values of the employees between Geely and Volvo, hence influencing the
organizational culture. In order to analyze the culture differences thoroughly, the
author summarizes the differences in terms of corporate cultures between Geely and
Volvo.
41 12/09/2014
Geely Volvo
In the low-end market with Luxury brand which compete
Brand inferior quality and relative with Benz, Mercedes, BMW.
low-price.
Design, low-price strategy, Safe, energy-saving

Core values
Environmental protection environmental-friendly
Cost control, People-oriented,

Operational philosophy
Profit orientation. Development orientation
Let Geely’s automobile go to To be the world’s most safety

Enterprise’s objectives
global. car.
Chinese English
Language environment The language belongs to the The language belongs the
high-context culture low-context culture
Figure 17: the comparisons between Geely and Volvo

(Adapted from Luo and Sun, 2008)
Brand conflict is the center of the organizational cultural differences. In this case, in
terms of the spiritual culture, Volvo, as the top car brand in the worldwide, pursued
the high-quality and high-safety standards to meet the demands of the high-income
customers. However, before the acquisition, the main sales market of Volvo is in
western countries, such as Sweden, Germany etc. It is not difficult to anticipate that
maintaining the brand value of Volvo is a tough challenge for Geely in China, not to
mention that the mission of improving Geely’s low-end brand. According to an
interview with China’s state-owned TV cited in Economy news, Geely wanted to
produce automobiles to meet the demands of Chinese customers while Volvo devote
itself to manufacture the safety and environmental-friendly cars. Moreover, the power
distance in Sweden is the smallest in the world while the power distance is relative
high in China (Grunwald and Damian, 2002). Volvo’s hierarchy is oriented with team
and uses humanity management, which put emphasis on the employee’s interests and
42 12/09/2014
encourages the fair competition while Geely owns a distinct hierarchical top down
structure, with the power central on the top of the pyramid. The conflicts can be a
tremendous obstacle in the management of employee after the acquisition.
Furthermore, in terms of the corporate communication, the official language of Geely
is Chinese while the formal language of Volvo is English. The differences in
employee’s backgrounds, values and methods of expression could even make things
worse, hence leading to the low efficiency of firms.
5.2.2 Culture risk management
On the basis of above analysis, some suggested advises may help to reduce the level
of risk. Firstly, recognize the culture differences. Even though there are several
differences between Geely and Volvo, Geely should keep flexibility and be tolerant of
some particular practices of Volvo. Geely’s management level need to collect Volvo’s
corporate culture information carefully, and identify the conflicts in the post-merger
stage correctly. For instance, the Labor Union system is the most critical institution in
Volvo’s corporate culture, it should be retained, and since the Swedes have the high
level of social welfare for a long time, so Geely need to adopt cautious steps to cope
with these problems.
Secondly, choose the preferable culture integration code. The huge differences
between in national and corporate cultures between Geely and Volvo make it difficult
for Swedes to abandon their own cultures entirely and blend in Chinese culture. Geely
is becoming a multicultural firm which adopts the policy of “cultural pluralism”, for
both cultures remain intact (Luhmann et al, 2010). Geely should maintain flexibility
and adapt to some special practices in Volvo. Because the organizational culture
integration need a transition phrase, so the some managers in two companies can
exchange the working environment for some time in order to gradually obtain culture
integration such as market, management styles etc.
43 12/09/2014
Furthermore, maintain successful organizational communication is of significant

importance. In order to keep the mutual communication efficiently, the language
obstacle should be overcome in the firm. Hence, when Geely need to recruit
managers, the English level should be considered while the Volvo may recruit some
staff who comprehends the Chinese language and culture.
5.3 Human resource risk and risk management
5.3.1 Human resource risk
Allen and Hamilton (2001) indicated that the most familiar problems in the human
resource management (HRM) include: reduction of key personnel, difficult to blend
cultures and systems, poor motivations to the employees and the loss of long-term
objectives.
Employees can be influenced greatly after the acquisition. Obviously, mergers can not
achieve their entire potential without positive employee input. However, even in a
benign merger, staff fear may be the inevitable management agenda. In this case,
although Geely promised not to downsize the scale of Volvo, some managers and
technicians of Volvo are still worries about lose their position and competitiveness in
the company. On the other hand, as the previous context mentioned, the culture
differences among two enterprises are huge. Volvo’s staff has high-level of welfare
and comfortable working environment while Geely’s working environment tends to
be intense. Consequently, the employees of Volvo need to adapt to the new
environment. Furthermore, for both executive managers from two firms, the
acquisition brings a great deal of pressure. Many media in China hold the negative
views over this acquisition, they called the acquisition “Snake eats elephant”. For the
managers and employees, with the applied of new technology, new language and new
44 12/09/2014
environment, if they are not willing to accept the new things, it will be an obstacle for
the future development.
5.3.2 The risk management of human resource risk
Maintaining the stability of workforce during the merger is a fundamental risk

management strategy of human resource risk. Krug (2009) points out that the loss of
key personnel is basically because some staff are worried that they do not have the
ability to adapt the brand new environment, so they vanish in order to escape the
generated attrition during the culture integration process. Talents are critical
intangible resources for a firm. Consequently, how to control the loss of talents and
stable the human resource is becoming significant, which requires a reasonable
human resources integration strategy.
In the first place, in order to increase the employee participation, Geely can establish
a conversion team which includes two sides. When the team joins in the
decision-making and implementation process of strategies, the employees can feel the
promoting communication of two sides and the increasing involvement in the
integration process.
Furthermore, Geely needs to adopt particular measures to maintain key talented

personnel. Some staff may become doubtful about their future because of the
uncertainties from the acquisition. In order to keep these personnel, some policies,
such as raising salaries, benefits options are essential to stabilize them. By doing this,
the core personnel can perceive the future development and benefits after the
acquisition, thereby producing more value for the firm.
In the integration stage, Berry (1997) indicated that there will be a comparatively high
rate of personnel turnover and overlap of employee positions among two firms. It is
45 12/09/2014
obligatory to realign the new personnel structure and redefine the responsibilities of
various levels of management. For the acquiring company like Geely, the most
reliable way to obtain efficient control of the acquired firm is to send staff from the
parent firm who is familiar with the target firm’s situation, to take charge of the
acquired company. As a matter of fact, Geely had put this policy into practice by
appointing personnel with the intercultural background as managers to Sweden.
46 12/09/2014
Chapter 6 Conclusion
6.1 Summary and conclusion
The research attempts to identify the risks in the transnational merger and acquisition
(M&A), and investigate the strategies in the risk management. The conclusions can
be made on the basis of the precious analysis.
Firstly, this study review the literature on the definition and classification of M&A,
then summarize three motives behind the cross-border M&A, which were divided
into three reasons: accelerating growth, pursuing synergy and diversification. The
motivations of China had also been summarized from five aspects: strategic
assets-seeking, market-seeking, technology-seeking, resource-seeking, and support of
the Chinese government. Moreover, the failure reasons of M&As, the previous
studies on risk and risk management in the cross-border M&As are investigated.
Besides, the employment of SWOT analysis is aim to examine Geely’s current

situation by investigating the favorable and unfavorable factors internally and
externally. However, previous researches did not put emphasis on the financial
perspective, so the financial performance in the last 5 years has been analyzed in
terms of the ratio analysis and market performance analysis. Although the operating
performance and the market share maintain an increasing trend, however, a relative
high debt asset ratio, the huge integration cost after the acquisition, and cash flow
problems will bring several risks.
The author uses a questionnaire to investigate people’s attitude about Geely’s

acquisition of Volvo and suggestions in the risk and risk management. Through the
questionnaire, it can be summarized that the majority of respondents believe Geely
may confront with the challenges in terms of cash flow management, brand
integration, corporate culture integration and human resource management, and they
47 12/09/2014
wish Geely could obtain the advanced technology and upgrade the brand awareness
through this acquisition. Overall, many respondents believe this acquisition is success
until now while large majority of the respondents tend to believe the challenges are in
the future.
After review the previous literature and the employment of SWOT analysis, financial
performance analysis and questionnaire analysis, the risks are summarized from three
aspects: financial, cultural and human resource. To reduce these risks, the preferable
strategies should be adopt and implemented. The financial risk involves the aspects of
debt-3paying, the methods of raising funds, the increasing integration cost and the
fluctuations in exchange rates. The strategies against risks had been summarized as
follow: select the reasonable payment methods, utilize the effective control methods
to maximum the profits and minimize the costs and conduct a reasonable analysis in
exchange rate. The cultural risk can be analyzed from two perspectives: national and
organizational. This study employ the Hofstede’s Cultural Dimension model, which
compare the differences of two enterprises from the dimensions of power distance,
uncertainty avoidance, individualism and collectivism, masculinity and femininity,
long-term and short-term orientation. The results suggest that except for the index of
uncertainty avoidance, there are sharp differences between China and Sweden in
other indexes. To analyze the organizational culture differences, this study discuss the
differences in terms of brand, core value, operational philosophy, enterprise
objectives and language environment. The findings represent that several cultural
differences exist between two firms, which contribute to the culture risk. To reduce
the risk, firstly, the enterprise should recognize the cultural differences, Secondly,
choose the preferable culture integration code. Thirdly, it is significant to maintain the
successful organizational communication. Furthermore, the difficulties in managing
the human resource management include reduction in key personnel, poor
motivations to the employees, and loss of long-term objectives, thus leading to the
human resource risk. In order to reduce the risk, the fundamental strategy is to
48 12/09/2014
maintain the stability of staff, Geely can also establish a conversion team which
include two sides in the integration stage. Furthermore, Geely should put more
emphasis on sustain the key personnel.
After completing the research design, data collection and data analysis, SWOT
analysis, secondary source analysis and questionnaire analysis, both quantitative and
qualitative research perspective were used for the sake of achieving in-depth results.
6.2 Research limitations
This dissertation summarized the risks after transnational M&A from three aspects:
financial, cultural and human resource. Although the fundamental risks after M&A
are mainly from these three aspects, the risks originate from other aspects are also
existed.
.
Besides, since the dissertation is based on the methodology of case study, many
materials are from secondary source. Hence, the information are collected from the
several sources, such as Internet, annual report and public medias etc. It is difficult to
ensure the all the materials in research are totally accurate, thereby for the purpose of
validity and reliability, the author choose the information from the authorized
published works and official media.
Because of the limitation time and space, the author is not capable to interview the
Geely’s managers who in charge of the risk management face-to-face,. However, the
author had tried collect interview information of Geely’s managers in Geely’s official
website and from other official published media.
Another limitation is that the questionnaire may receive prejudiced feedback. Because
it is tough to ensure each respondent’s intellectual background, some questions in the
49 12/09/2014
questionnaire need relative knowledge in M&A, so the author select target people in
advance to ensure the validity as far as possible.
6.3 Further research
Overall, this dissertation could identify the risks after M&A are from the terms of
financial, cultural and human resource. The findings support the hypothesis that the
risks after Geely acquired Volvo are summarized as financial risk, cultural risk, and
human resource risk. The study also gives the corresponding strategies to reduce the
risks. However, this dissertation is still at its initial stage and is on the basis of the
previous M&A literature. After the transnational merger and acquisition, the risks
may also involve other aspects, such as the instability in aspects of political and law,
overlook of intangible assets etc., which are worthwhile to investigate thoroughly in
the future.
50 12/09/2014
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Appendices
Appendix 1 Questionnaire
Section 1
1. What is your gender?

A. Male
B. Female
2. What is your age?

A. Below 20 years old
B. 20-29 years old
C. 30-39 years old
D. 40-49 years old
Over 50 years old
3. What is your annual income

A. Below 90,000 RMB
B. From 90,000 RMB to 200,000 RMB
C. Over 200,000 RMB
4. What is your education level

A. High school
B. Bachelor degree
C. Master degree or above
Section 2
5. What is the most important factor do you think contribute to the successful of
60 12/09/2014
Geely’s acquisition?
A. Sufficient preparation
B. The support of government and policy
C. Enormous potential domestic market with low cost of labors and resources.
D. Other reasons
6. What are the motivations urge Geely acquired Volvo? (Choose three)
A. Obtain advanced technology
B. Upgrade the brand image
C. Acquire advanced management skills
D. Entering in export market
E. The growth in market share
F. Government support
7. What is your evaluation about this acquisition?

A. It is a success for Geely
B. It is not a success for Geely
C. The challenges are in the future
D. Not sure
Section 3
8. Comparing with other competitors, from your point, what are the competitive
advantages Geely have before the acquisition? (Choose three)
A. Car configuration
B. Brand meaning
C. Safety
D. Technology (i.e. Fuel efficiency, environmental friendly)
E. Price
F. Appearance
61 12/09/2014
9. Comparing with other competitors, from your point, what are the competitive
advantages Geely have after the acquisition? (Choose three)
G. Car configuration
H. Brand meaning
I. Safety
J. Technology (i.e. Fuel efficiency, environmental friendly)
K. Price
L. Appearance
M. After-sale service
N. Auto-mobile power
10. What do you think are the challenges of Geely after the acquisition? (Select all if
you want)
A. Corporate cultures integration
B. Cash flow management
C. Exchange rate
D. Human resource management
E. Brand integration
F. Intellectual property and technology
G. Laws and political factors
11. What do you think are the risks of Geely after the acquisition? (Choose four)
A. Strategic risk
B. Culture risk
C. Financial risk
D. Human resource integration risk
E. Market risk
62 12/09/2014
F. Other risks
12. What the strategies you recommend are suitable for Geely to adopt? (Select all if
you want)
A. Select the reasonable payment methods
B. Conduct a reasonable analysis in the exchange rates
C. Choose the suitable integration code
D. Maintain the communication between the acquiring firm and acquired firm
F. Maintain the stability of workforce
G. Pay more attention on sustain the key personnel
63 12/09/2014
Appendix 2. The financial ratios
Profitability ratio
Return on equity = Net income / Shareholder Equity
Operating profit margin = Operating income / Net sales
Net profit margin = Net profit / Revenue
Liquidity ratio
Current ratio = Current assets / Current liabilities
Acid test ratio = Cash + Accounts Receivables + Short-term Investments / Current
liabilities
Debt asset ratio = Total debt / Total Assets
Long-term liability ratio = Long-term debt / Total assets
Investment ratio
Dividend payout ratio = Dividends / Payout
Dividend yield ratio = Annual Dividends Per Share / Price Per Share
Earning per share = Net Income - Dividends on Preferred Stock / Average
Outstanding shares
Price/earning ratio = Market Value Per Share / Earning Per Share (EPS)
Efficiency ratio
Assets turnover = Revenues / Total Assets
64 12/09/2014

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Study on risks and risk management after transnational M&A: the acquisition of Volvo by Geely

the acquisition of Volvo by Geely

Supervisor: Michael Guo

Dissertation submitted in part fulfilment of the degree of MSc in

Management with Business Finance

The York Management School

Firstly, I want to express my sincere appreciation to my supervisor Dr Michael Guo,

Secondly, Mr Li was helped me proof-reading in this dissertation, which I would like

5.3 Human resource risk and risk management....................................................................... 44

Transnational merger and acquisition (M&A) is becoming an important entry mode

1.2 Objectives and key research questions

This study tries to answer these questions:

1.3 Summary and plan of presentation

This dissertation is divided into six chapters, which is organized as follows:

Chapter 2 Literature Review

It is significant to have a general understanding of these concepts before embarking

2.1 M&A definition and classification

According to DePamphilis (2011), from the legal perspective, merger is an alliance of

2.2 Motivations of transnational merger and acquisition

The principle motivation of engaging in M&A is accelerating growth. This point is

In the cross-border mergers and acquisitions, diversification can be realized by

motivations can be summarized as strategic assets-seeking, market-seeking,

Another motivation cannot be ignored is market-seeking. From October 2000, the

The resource-seeking is another motivation for China firms. Despite China is

The support of government is also a significant motivation for Chinese enterprises. As

2.3 The reasons of failure in transnational M&A

2.4 Theories in risks and risk management of transnational M&A

2.4.1 The financial risks and risk management

Financial risk management

2.4.2 The culture risk and risk management

The culture risks

Refer to the extent which society would inequity

Put emphasis on the degree of interpersonal

It refers to people’s attitude against ambiguity and

It examines the relationship between gender and

It stands for the attitudes against time, tradition,

Figure 1: Hofstede’s model

Hofstede’s model is commonly treated as the most authoritative framework in terms

The conflicts in organizational culture include many aspects, which include

The culture risk management

(2006) proposed three principles for successfully integration of M&A: reservation of

2.4.3 The human resource risk and risk management

The human resource risk

employee input (Bryson, 2002). However, it is familiar for management to employ

The human resource risk management

3.1 Research design

3.2 Data collection

Moreover, interviewing can be expensive compare to other research methods

3.3 Data analysis

3.3.1 Secondary data analysis

Profitability Operating profit margin

Net profit margin

Acid test ratio

Long-term liability ratio

Dividend payout ratio

Dividend yield ratio

Efficiency ratio Assets turnover

Figure 2: the financial ratios

3.3.2 SWOT analysis

3.3.3 Questionnaire analysis

Questionnaire is a qualitative method that includes a list of written questions.

Chapter 4 Case analysis and discussion