"The Weaker Acquires The Stronger", A Post Acquisition Case Study of The Chinese Company, Geely Acquired Volvo

"
<"The weaker acquires the stronger", a post acquisition

case study of the Chinese company, Geely acquired
Volvo >
Supervisor: <Jon Fanning>
<20th September 2012>
Dissertation submitted in part fulfillment of the degree of <MSc> in
<Management with Business Finance>
The York Management School
University of York
"The weaker acquires the stronger", a post acquisition case study of the Chinese company, Geely acquired Volvo
Abstract
The main aim of the study is to investigate the motivations behind Geely acquiring
Volvo despite being the weaker party, thereby reviewing the previous research of the
Merger & Acquisitions (M&A) theory. Moreover, the framework of strategy
management and financial ratio analysis such as profitability and efficiency ratios will
be used to evaluate the performance and risks of Geely after M&A. Based on the
analysis, the author will conclude whether this cross border M&A is a success or not.
The study employs primary and secondary data sources from self-completion
questionnaires, official website, journals, books and some other databases. Both
qualitative and quantitative methods are utilized in it. Then, in the discussion and
conclusion part, the author outlines some key findings and points out measures how
assistance can be given in future decision making to improve the operation
management of Geely.
Generally speaking, this controversial topic appeals to me very much and this is what
prompted me to investigate it.
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Acknowledgement
At the beginning, I would like to express my sincere appreciation to my supervisor Mr.

Jon Fanning who is a respectable, responsible teacher. He gave me valuable feedback
and valuable guidance in every stage of my dissertation. He also revised this
dissertation with many patients and changed the structure to seem cleaner than before.
In addition, Mrs Liu helped me proof-reading this dissertation, which I would like to
send my deepest gratitude to her.
Further thanks to those people who fill in the questionnaires for me. Last but not least,
I appreciate my parents constant encouragement that I could finished this dissertation.
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Table of Contents
Abstract......................................................................................................................... 1
Acknowledgement ........................................................................................................ 2
Chapter 1 Introduction ................................................................................................ 5
1.1 Background .............................................................................................................. 6
1.11 Acquisition process of Volvo by Geely .................................................................. 7
1.12 Geely Background ................................................................................................. 7
Volvo Background ......................................................................................................... 8
1.13 The reasons why Geely acquired Volvo ................................................................. 9
1.2 Objectives .............................................................................................................. 10
1.3 Summary and Plan of Presentation ........................................................................ 11
Chapter 2 Literature Review .................................................................................... 12
Introduction .................................................................................................................. 12
2.1 M&A definition ...................................................................................................... 12
2.2 M&A Classification ............................................................................................... 13
2.21 Classification based on relations between participating firm and market ........... 13
2.22 Classification based on the attitude of participants.............................................. 14
2.3 The motives of M&A ............................................................................................. 15
2.31 Economic motives ................................................................................................ 16
2.32 Strategic motives .................................................................................................. 16
2.33 Managerial motives .............................................................................................. 17
2.4 Reasons of failure M&A ........................................................................................ 18
2.5 M&A History in China........................................................................................... 19
2.6 Active M&A Behavior in China ............................................................................ 20
2.7 Ratio analysis as an indicator in M&A .................................................................. 21
Chapter 3 Methodology ............................................................................................. 23
3.1 Research design ..................................................................................................... 23
3.2 Data collection ....................................................................................................... 24
3.3 Data analysis .......................................................................................................... 25
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3.31 SWOT Analysis ................................................................................................... 26

3.32 Ratio Analysis ...................................................................................................... 26
3.33 Questionnaire Analysis
Chapter 4 Data Analysis and Discussion ................................................................. 30
4.1 SWOT Analysis of Geely after acquisition ............................................................ 30
4.2 Financial Performance analysis ............................................................................. 33
Chapter 5 Results: answer the questions ................................................................. 41
Chapter 6 Recommendations .................................................................................... 42
5.1 Challenges .............................................................................................................. 42
5.2 Recommendation ................................................................................................... 43
Chapter 7 Conclusion ................................................................................................ 46
Bibliography ............................................................................................................... 49
Appendices .................................................................................................................. 57
Appendix 1 .................................................................................................................. 57
Questionnaire ............................................................................................................. 57
Glossary
USD = US dollar
M&A = Merger and Acquisition
EPS = Earning per share
ROE = Return on equity
GOE = Growth of equity
GPM = Gross profit margin
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Chapter 1 Introduction
1.1 Background
It was known that M&A is one of the popular ways by which firms attempt to create
value thereby expanding into new markets, acquiring new technology, achieving
economies of scale, reducing duplicate costs and competition. After China joined the
WTO in 2000 and its fast development of foreign investment among the domestic
companies, a new merger wave is ongoing, particular in automobile industry. Besides,
the big financial crisis that started in 2008 seriously affected the world economy,
represented by decreased market demand and new trade protectionism. Thus, some
export oriented Chinese enterprises suffered a situation of survive. They began to seek
opportunities to merge with western companies in order to keep away from trade
barriers. For example, Shanghai Automotive Industry Corporation bought 49% share
of Korean Sang Yong Motor Company for 500 million USD in 2004. (Austin, 2009)
In March, 2010, Zhejiang Geely, the biggest private automobile manufacturer in
China, acquired Volvo, the Sweden car manufacturer known for its safety first
philosophy for a price of 1.8 billion USD, which has been the biggest overseas
acquisition by a Chinese automaker. By these horizontal acquisitions, the Chinese
firms strengthen their brand value and obtain competitive advantages in the car selling
market. However, many previous researchers have investigated the M&A cases, with
many firms did not achieve economies effective. Even the result is not optimistic,
cross-border M&A still accounts for about half of the total M&A activities and despite
their low rate of success, companies continue to pursue cross-border M&A as part of
their globalization strategy (Firstbrook &Adams, 2008). As we know, there are many
studies have been done on the cross-border M&A by Chinese firms, the majority of
them focused on motives of the acquisitions and the strategic decisions in making
such acquisitions. But not many studies pay attention on the performance of Chinese
firms after M&A. Overall, the research is a topic worth discussing and would be
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appropriate for further research.
1.11 Acquisition process of Volvo by Geely
A little known Chinese company Geely, which makes low cost cars prepared 8 years
to set up the acquisition of the Swedish luxury car maker Volvo from Ford as soon as
the first announcement of Ford Motor about the possibility of giving up the brand
Volvo. During this time, the professional teams dedicated themselves not only to
research about the brand Volvo but also to make the overall strategy and established
the project and schedule of the operational flows. At the end of 2008, Geely handed
up the bidding proposal, which impressed the Ford Corporation deeply. Below are the
steps of this acquisition:
On 28th October, 2009, Ford named Geely the preferred buyer of Volvo
On 23rd December, 2009, the long negotiation about substantive commercial terms
finished
On 28th March, 2010, Geely Motor Corp and Ford Motor Corp reached the agreement
of the M&A of the limousine brand Volvo by the transaction of the 100% of stock for
1.8 billion USD.
On 2nd August, 2010, the deal completed after the approval of authorities.
(Acquisitions monthly, 2009)
There is no doubt that this acquisition attracts a lot of media attentions globally. In
fact, Geely, as a Chinese enterprise, opens a beginning of new era for its participation
of the largest overseas acquisition in record. It not only breaks the stereotype that the
acquiring company should be the strong party, but also gives the Chinese confidence
and sense of pride. Meantime, the Chinese are skeptical about whether they can
manage the big cake— Volvo well. This is a big test for them because the failure of
this acquisition will damage the reputation of any Chinese company trying to make a
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similar acquisition in the future. Furthermore, when the symbolic brand goes to China,
the Swedes are concerned because their national pride is leaving for the communist
country as well as the future fate of Volvo Cars and their jobs in Sweden. All these
have made this acquisition very interesting, particularly for the Swedish and Chinese
people.
1.12 Geely Background
Geely Automobile Holding Group was founded by Mr Lishufu in Taizhou of Zhejiang

province in 1986. Now it is the fifteen largest automobile producers and the third
largest independent private automobile production company in China as of 2011.
(Table 1)The company initially produced refrigerators. Then it began to manufacture
decoration materials and motorcycle components in the 1990s. By 1997, Geely
entered automobile manufacturing area and spent great effort in improving its
technology and developing new products in the last several years. Since 2004, the
company came into the market in Hong Kong securities exchange and began its
financing road to the public. Geely performed very well in the past five years with the
benefit coming from the explosive development of the domestic Chinese automobile
market. For example, the sales volume followed an increasing trend. Geely sold
421611 units in 2011 compared to approximately 200 cars in 1998. (Geely‟s annual
report in 2011) Over the past five years, the annual growth rate was 20%
approximately. Regards “let the world fill with Geely motor” as the firm‟s vision,
Geely applies to produce the safest, most environment protecting and energy saving
cars. In 2009, Geely starts to imply a globalization strategy and plans its M&A of the
Volvo brand.
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Table 1: the top 15 Auto Enterprises in China of 2011

Data from http://www.caam.org.cn/News/20120604/1605073331.html
Volvo Background
The famous motor brand Volvo is one of the top 20 motor companies of the world
with the superior quality and capacity established in Sweden in 1927, which was
appraised as the safest motor in the world. The price of Volvo‟s products is relatively
high because the firm focuses on the premium segment of automobiles. As a famous
limousine producer, Volvo was acquired by Ford for 6.4 billion USD in 1999.
However, Volvo has not brought bright prospects to Ford in the following 10 years. In
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the light of the big financial recession and reduced profits figure after 2006. Ford was
hurried to sell Volvo at a price of 1.8 billion USD to Geely in 2010, even below one
third of the former price. It was a best year ever that Volvo gained highest net sales,
operating income and operating margin thus far in 2011. Specifically, the net sales
rose by 17% and operating margin improved to 8.7% (Figure 1 and Figure 2).
Figure 1: net sales of Volvo in the last five years
Figure 2: operating income of Volvo for the last five years

Data from the Volvo‟s 2011 annual report
1.13 The reasons why Geely acquired Volvo
There are five main reasons reported that can explain the acquisition decision. The
first one is to get access to Volvo‟s advanced technologies such as safety design and
environment technology. In the previous years, Volvo continually dedicated to
optimize combustion efficiency and reduce emissions for the future development.
(Ken & Matt, 2010) After the acquisition, Geely can save the technology research
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time and money if it develops by itself. The second reason lies in the brand
enhancement. Chinese people are very proud hearing the news Geely‟s acquisition of
the prestigious Volvo, which strengthened its brand popularity around the world. Even
Geely is one of the top fifteen Chinese automobile brands; its market share only
occupied 2.4% in 2010, which is still too small. With Volvo‟s support, Geely could
penetrate into high-end brand competition (Cai, 2010) The third reason relies on the
prosperous Chinese market, although Volvo suffered a loss from 2008, Geely‟s
chairman Li Shufu believes Volvo can turn around soon in China because the financial
recession will be over soon and he can help Volvo to launch its new products in the
fast growing Chinese market. (Anurag, 2010) The annual report of Volvo of 2011 also
demonstrated Li shufu‟s anticipation, with a net sales rose by 17% to 310.4 billion
SEK compared to last year. (Volvo‟s annual report in 2011) Furthermore, from
Geely‟s annual report of 2009, only 5% of its sales come from oversea, but mostly are
Asian countries. There exists a huge potential space for Geely to enter European and
American markets. The last reason bases on the financial support from local bank and
government, this acquisition directly enhanced Chinese brand on the world stage.
1.2 Objectives
The main objective of the study is to investigate the motivations behind the
acquisition for both the stronger and the weaker parties and what is the benefit to
them. After that, SWOT analysis and financial ratio analysis will be used to examine
the current performance and risks of Geely after acquisition. Then, the results will be
displayed to indicate whether the decision of Geely was correct or not. Combining the
self-completion questionnaires, people‟s opinion about Geely‟s strength and weakness
can be acknowledged. Shortly, it will be of great significance to explore this topic and
give suggestions for Geely to draw on.
The study tries to answer questions: What is the concept and classification of M&A,
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what is the reason that Geely wants to acquire Volvo, what are the strengths and
weakness of Geely, how can Geely make full use of Volvo‟s advantages, What is the
outcome of acquisition when comparing the financial report after acquisition to the
last three years. Besides, opportunities, challenges and recommendation of Geely will
be discussed in the last two chapters.
1.3 Summary and Plan of Presentation
The dissertation consists of seven chapters, which is organized as follows: Chapter 1

is an introduction, discusses the background of the M&A subject, purpose of this
study and the questions to be answered. In Chapter 2, a literature review of M&A
theory is provided. Chapter 3 outlines the research methodologies with the specific
research design. After that, in chapter 4, the data analysis and questionnaire analysis
will be discussed, followed by a research result in order to answer the posted
questions. Chapter 5 gives a result to answer the questions pointed out in Literature
review. The recommendations such as the opportunities and challenges within the
firm will be briefly summarized in chapter 6. At the last chapter, the author will
present an overall conclusion. Briefly, based on the macroeconomic environment of
China and the weaker status of Geely, the reasons about the motivations behind
acquisition are easily concluded.
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Chapter 2 Literature Review
Introduction
This chapter will introduce literature about the concept and classification of M&A
first; followed by the numerous motives behind M&A. Culture differences that affect
the M&A will also be discussed. Then, the reasons of failure M&A were presented.
After that, due to the support of Chinese government policy, M&A behaviors in China
and cross-border M&A wave were necessary to introduce. At the last part of this
chapter, financial ratios were considered as an indicator to judge whether Geely‟s
acquisition performs well. It is meaningful to acknowledge people‟s opinion about
this acquisition after analysis their responses.
2.1 M&A definition
M&A is the abbreviation of Merger and Acquisition. Although these two phrases
stand for different economic behaviors, they hold a similarity that the aim of them is
to obtain the rights to control others by monetary method. Merger is the behavior of
the combination of two or more companies under the law procedure, the company has
been purchased will lost the corporation qualification with the shift assets, obligation
and control right. While acquisition is the share purchase behavior that one company
obtains the shares of others company by purchasing or exchanging, in which the
purchasing shares should be enough to control the acquired company. (Imad, 2010)
According to Machiraju (2003), merger is the combination of two or more companies

that expect a future growth opportunity with only one survives while the other is
dissolved. He then defined acquisition as a situation where one firm acquires another
and the other firm stops to exist. The firm tries to acquire another company is named
an acquiring firm. A target firm is being controlled by the acquiring firm. The assets
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of the target firm would be owned by the acquiring company. The shareholders of the
acquiring company are paid either cash or given shares in the process. After the fifth
wave of M&A in the world, cross border M&A has become popular.
2.2 M&A Classification

In accordance with the different angle, M&A could be divided into various categories:
internal M&A and cross border M&A are summed up based on the geographical areas,
while friendly M&A and hostile M&A according to the attitude of each company.
What distinguishes from the angle of industrial chains between the participating firms,
M&A could be divided into three kinds: horizontal, vertical and conglomerate. The
following parts of this section will introduce these types of M&A and their characters.
2.21 Classification based on relations between participating firm and market
A Horizontal M&A
Horizontal M&A refers that the two firms belonged to the same industry. For instance,
in the acquisition process between Geely and Volvo, both of the two companies are
automobile makers. Additionally, the combination of them attempts to rapidly expand
the firm‟s scale and improves the marketing profits and occupation. Horizontal M&A
is a method that by reducing the competitor quantity and consolidating the resources
to enhance the competitiveness in the industry. It could effectively strengthen the
marketing control and obtain the monopoly advantages, which is also the root that
each country makes up strict limitation and inspection system and anti-trust laws.
However, when horizontal M&A reduces the numbers of firms in one industry, it
leads to monopoly and monopoly profits. (Buono & Bow, 1989)
A Vertical M&A
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Vertical M&A relates to the different stage of production or value chain. Some firms
hold some relations in the links of the industry such as raw material providing,
manufacturing, transporting and warehousing. This kind of M&A always occurs
between the corporations of manufacturing and their supporting companies, their
combination could intensify the coordination of each link in the manufacturing
process so as to reduce the trade cost and transaction cost as well as accelerate the
producing speed and shorten production cycle. If the horizontal M&A is a kind of
method to improve the firm‟s strength from the external link, the vertical one is a
promotion from the internal adjustment. (Aekapol & Jung, 2007)
A Conglomerate M&A
If the firms operated in unrelated types of business activity, these firms belong to
conglomerate type. The purpose of conglomerate M&A is to enter a new industry and
enlarge the managing areas by combining with the firms of relative industry. For
instance, recent productions of General Motor cover numerous industries with almost
300 kinds of commodities such as the household appliances, electronic equipments
and chemistry productions and so on. The conglomerate M&A usually occurs in the
large scale firms that obtains both horizontal and vertical M&A. After finishing the
primary period of expansion and development, most firms prefer to start new
managing branch to get more profits and avoid marketing risks. In this condition,
conglomerate M&A becomes a perfect choice for those firms who have funds
shortages to start the business by their own. Conglomerate merger can collect and
allocate financial resources to transfer managerial capabilities. It also can reduce
capital cost by combining imperfect cash flow which reduces bankruptcy and increase
debt capacity. (Staplenton, 1982)
2.22 Classification based on the attitude of participants
Friendly M&A
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In the M&A process, the managing level of the target firms focus on the profit, they
could obtain if they agree to give up their ownership to the firm, that is to say, the
both side would bargain the price of the firm to achieve the agreement. If owner of the
acquired firm could be satisfied as to the rate of return from the acquisition and the
acquiring party favorably receive the behavior, they could handle the process under a
friendly and harmonious atmosphere. The board of the directors of the acquiring firms
plays an important role in creating the friendly atmosphere and guiding to a successful
M&A because of their leading and information controlling status in the firm. Lacking
enough information would make the small shareholders difficult to comprehend the
advantages and disadvantages of the M&A, so they will prefer to accept the view of
the board. Besides, in a certain extend, the view of the acquiring board manifests the
attitude of the acquiring firm. Under a friendly atmosphere, the coordination of the
blending of management and operations could be easily achieved.
2.22 Hostile M&A
When the managing level is dissatisfied or disagreed to the acquisition, the acquiring
company may purchase the company compulsory. The acquiring firm has two options
called a tender offer or a proxy fight. Through a tender offer, the acquiring firm can
buy the stock of the target firm either directly from the firm's shareholders or from the
secondary market. This method tends to be an expensive way of acquiring the stock
since the share price is bid up in anticipation of a takeover. (Langeteig, 1978)
2.3 The motives of M&A
In the M&A study, economists try to dig out and explain the reason of M&A. These
phenomena provide various motives for M&A, which extend from economies of scale
to market expansion. The author categories the motives into three different aspects:
economic motives, strategic motives and managerial motives.
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2.31 Economic motives
From the angle of scale effect theory, an enterprise is a function that obtains input,
modifies it to an output. Constituted by one or more factories, the scale of an
enterprise is determined by the cost. When the whole cost reach the lowest level, the
scale is the most appropriate. When the actual output is less than the theoretical output,
enterprises could rapidly expend the output to obtain the scale effect through M&A.
This theory could be proved by numerous giants like American Steel, American
Tobacco appear in the first M&A surge. To some extend, horizontal M&A could
effectively enlarge the firm scope and allocate resources in a rational condition.
Moreover, Manne (1995) highlighted corporate managerial efficiency has a
relationship with firm‟s market price of shares. If one firm was poorly managed, the
market price of the shares will lag behind that of other peer firms. This difference in
share price indicates the potential capital can grow if a more efficient management is
implemented. The company in question becomes an attractive takeover target for
those who believe that they can manage the company more efficiently. The second
motive is tax consideration. Sometimes the tax policy may encourage enterprises to
participate in M&A. If the income tax and the profit tax could not match each other,
the owner may sell the firm to get some benefits. From the concrete operations, if the
acquiring firm have surplus financial ability but lack of proper investment directions,
while the target firm holds the approximate industry without funds. They could
consolidate to make full use of the resources. If one firm is in a long term of deficit
conditions, it may always become the target of the acquiring firm because of its tax
advantages. (Bruce & Associates, 2009) Through M&A of the deficit and profitable
firms, the benefit could be shared between the two sides and tax could effective
evaded.
2.32 Strategic motives
Market expansion theory regards that the organic method of growth takes time.
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Organizations need people, regulatory approval and other resources to expand into
newer product categories or geographical territories. Acquisition of another
organization with complementary products or geographic spread provides all these
resources in a much shorter time, enabling faster growth. Some small businesses need
to be acquired in order to improve their buying power and it is a quicker way than to
grow through ordinary internal development. With the increases of firm‟s size, market
share subsequently increases and as well as the ability to set price above competitive
levels. Beside the above theory, product differentiation, market share and entry
barriers are the three sources of market power. This theory regarded the objective of
M&A is the improvement of market occupation to achieve the scale expansion.
(William & Daniel, 2003) In fact, M&A with such objectives are subject to
anti-competition and anti-collusion rules and legislation. Another diversification
theory argues that diversification happens when firms want to expand into new
markets or add new products or services. According to the saying “Do not put all your
eggs in one basket”, firms use diversification strategy to transfer skills and control
market supply. In addition, diversification can present a platform for spread business
risk when the inferior companies are balanced by the superior companies.
Productiveness theory think the motivation of M&A is the management
productiveness disparity existed between superior and inferior enterprises within the
same industry. By M&A, the both sides could obtain more profits than before because
they can combine more product lines in one firm. This situation always occurs in the
enterprises with high managing levels.（Andrew, 2000）.The scattering scale of
producing model may cause a relatively large cost and developing limitations in some
industries.（Xiao Guangwei, 2008）. So the enterprises would like to purchase the
firms of relative productions to establish a complete producing links so that the
human resources and producing equipment could be maximized used and shared to
obtain the coordinating and complementary effect.（Liu chicheng, 2008）.
2.33 Managerial motives
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Agency problem was caused by the difference interests between firm‟s shareholders
and incumbent managers. Managers incline towards maintaining a relaxing and
security of the job than towards maximizing shareholder profit while the shareholders
can not bear the high mismanagement cost. Mehran and Peristiani (2006) pointed out
agency problem particularly happens as there is a disagreement about how excess
cash flow should be used between managers and shareholders. Fortunately, the
asymmetric information and incentive conflict between management and shareholders
can be reduced by corporate governance like contracting, disclosure and monitoring.
Furthermore, when the old strategies do not suit to the growth of the firm and the need
to restructure is overlooked by the management, the capital market for corporate
control come to rescue. The shareholders of the target company will received a
premium price over current price to ask for them to sell their shares. (Jensen &
Ruback, 1983)
Although M&A issue had been widely investigated before, there are still several
limitations of the literature. Few researchers examine the motives and the situation
after the M&A and the influence on the implementation phase. Additionally, problems
such as the relationship between the motives of M&A and the policy changed within
the firms have not addressed. How M&A affects the human resource aspects and in
which manner are still not clear. Another area for expansion is that the employee
reactions like turnover, behaviors and attitudes after the M&A.
2.4 Reasons of failure M&A
The reasons caused failure of M&A had been explored by many researchers.
According to Allred and Holstein (2005), roughly half of all mergers and acquisitions
failed. Homburg and Bucerius (2006) claimed that between sixty to eighty percent
mergers failed. Reasons like the managers did not realize the anticipated synergies
and cost savings or incompatible facilities and technologies were mentioned before.
Other reasons give rise to business fail like inability of newly acquire business unit
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into acquiring company, overestimation of synergies, lack of communication,

different culture (Edward & Gerald, 2005). Gadiesh and Ormiston (2002) assumed
that poor strategic rationale, culture clashes, difficulties in communicating, poor
integration planning and execution and too much paying for the target company
caused M&A failure. Furthermore, Habeck el al (2002) summarized that problems
occur in seven areas.
1. Vision: Partners in M&A lack a clear idea of what the merger or acquisition has
taken place for and stated theory may be different from real situation.
2. Leadership: Firms reluctant to assign leadership tasks, which leads to chaos and
eventually generated into survival of the fittest battle. This results in waste of time
and resources and it also caused demoralization of the employees.
3. Growth: Organizations focus too many on cost synergies in short term, but they
lose long term focus on sustainable growth.
4. Early wins: On the one hand, employees anticipate the benefits of M&A, on the
other hand, they hold suspicious of the merits of M&A. If early wins like quick
tangible results can be shown and communicated to the employees, they might
acknowledge a brighter future for themselves and their organization.
5. Culture: Ignoring cultural differences and refusing to believe that change is
inevitable also leads to collapse of mutual trust. Vaara (2000) stated that numerous
failure cases in M&A over the past decades are caused by culture difference. Cultural
difference directly affected firms at the post merger periods, which also influenced the
firm's long term success or failure.
6. Communication: Close involvement of managers and employee may help in
diminishing uncertainties things.
7. Risk management: various risks like stakeholders risks, execution risks should be
recognized and resolves.
2.5 M&A History in China
In China, the M&A started from the beginning of the Reform and Opening period. In
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1989, The Chinese government announced two laws to regulate the M&A behavior
that make the M&A an independent economic phenomenon to a theoretical research.
In the first level, the authority encourage the M&A to the deficit stated owned
enterprises. In this period, most target firms are those state owned enterprises that in a
mismanagement status. Constantly, the limitations have extended and all the
enterprises could participate in the M&A to speed up their development.
The performance of Chinese cross-border M&A had been examined by some

researchers. (Chi et al, 2008) researched the performance of acquiring firms in the
Chinese stock market. The conclusion showed that there was an obvious positive
profit before the M&A announcement, but long time abnormal profit was not
significant. He also added that the primary motivations of cross-border M&A were to
increase market share, obtain foreign technology of resources and enter new markets
for diversification.
2.6 Active M&A Behavior in China
The first period started between the year 1989 and 2001 with the government‟s help
and support. In order to impel the smooth process of enterprises, the government
provides some preferential policy and benefits to firms. M&A behavior in this period
meets relatively few obstacles and both sides of the M&A are state owned enterprises.
Mainly, the superior state owned firms on the verge of bankruptcy. The two laws of
M&A (The Interim Measure of Enterprises Merger and The interim Measures of
Selling Property Rights of State Owned Small Enterprises) all emphasize the
conditions of the acquired firms. To encourage M&A to the inferior firms, the state
also announces some preferential policies such as preference of loan interest,
preference for land transferring funds, exemption for land value increment tax in
M&A and so on. In this period, Chinese enterprises are mainly in a level of try and
exploration. The Chinese economy stay in a turning point from the planned economy
to the market oriented economy systems. The environment and developing conditions
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are immature and unsound. (Wang Zhile, 2006)
After 2001, the transferring economy of China starts finishing the primary chaos
situation and steeping into a more stable and mature level. M&A between firms came
alive constantly, tasted the sweetener of M&A. The Chinese government relaxed the
restriction and reduced intervention to the vast enterprises. The authority no longer
restricts the range of M&A enterprises. Besides the warming trend of M&A in the
quantity and trade amount, the other obvious characteristic in this period is that the
domestic enterprises start to join the international M&A trades. The M&A in the
recent years manifests that more and more international enterprises hold raising
interest in consolidating with Chinese firms. Furthermore, the domestic enterprises of
China begin to join in the M&A actively to purchase and acquire the foreign firms
instead of staying still and waiting for being acquired. In this period, the motivation of
M&A becomes constant clear. In order to regulate the M&A behavior and guide to a
standard mode, the Securities Law is announced that focus on the issues and flows of
big scale consolidations. M&A and reorganization of China‟s firm enter a standard
operation level, which strongly push forward the China firms‟ M&A to the
market-oriented directions. The private enterprises, cross ownership enterprises,
international enterprises start to enter the M&A market. (Patrick M. N & Howard C,
2001)
Based on these two periods of the development of Chinese M&A trade, it may
transparent that M&A in China is developing under the asylum of the government.
Using the administrative resources, the government influences and restricts both
enterprises of M&A. Overall, in China, M&A only has 20 years history and
development, although the recent M&A market starts its steps to a more standard and
advanced mode, the whole situation and its status are in the primary explorative level.
2.7 Ratio analysis as an indicator in M&A

Ratio analysis helps to analyze the performance of acquisition of same industry
21 20/09/2012
having different size can be better compared. The ratio can be divided into four
categories that are Liquidity Ratio, Profitability Ratio, Efficiency Ratio, and
Investment ratio and Financial gearing ratio (Eddie M & Peter A, 2010). Ratio
Analysis can be used to identify both potentially undervalued companies as well as
competitor attention towards the company. Through ratio analysis of its competitor,
once the company was identified as undervalue, a potential bidder will take action
(Brain C, 2000).
From the literature review we can see that the following are the most important
measures of a successful M&A, the nature of the organization tells us that Geely
acquired Volvo, and therefore in order to evaluate the success of this acquisition I will
answer the following questions:
What is the concept of M&A and post merger acquisition?
What is the reason that Geely wants to acquire Volvo?
What is the strength and weakness of Geely after acquisition?
Is the outcome better when comparing the recent five years financial report？
What should Geely improve its strategy after acquisition from general public‟s
perspectives?
Does the acquisition causes increased innovation in either or both participants?
All the literature above showed that Geely‟s acquisition was friendly and horizontal
with economic, strategic and managerial motives. By introducing the failure reasons
of M&A in history, Geely can avoid the mistakes of previous cases.
22 20/09/2012
Chapter 3 Methodology
This research focuses on the Chinese firm—Geely‟s cross-border acquisition. It was

known that China experienced a transformation from the planned economy to the
market oriented economy system, which arouses Chinese automobile industry to
develop rapidly under the policy preferences and supports. The automobile firms tend
to expand their market occupations and strength by M&A. For example, the
international advanced technology and management skills will bring mature
developing systems to China. Besides, the concentration of capital and resources
could be effectively optimized and allocated to achieve their best utilization. The
globalization also calls for mutual help of each nation.
Although Greely‟s cross-border acquisition has attracted worldwide attention, it is a

relatively new case that may difficult to foresee. There are no extensive and specific
investigations on this acquisition concerning about threats and opportunities, the
strategies they should adopt and the long term impact. Even if there are some
investigations, the results may have not been finished or published.
According to Creswell (2003), he claimed that research comprises three steps: post a
question, collect data to answer the question and present an answer to the question.
Researchers used these three steps to increase the understanding of a specific topic.
This section will describe the research design, data collection and data analysis.
3.1 Research design
Research design acts as a guide to the whole dissertation. Maxwell (2005) defined that
a well structured research design relies on the harmonious working of each part to
promote the results of the study. Saunders et al (2009) argued that a well defined
research design should be linked so as to achieve objectives.
23 20/09/2012
Grix (2004) divided research into three types: descriptive, exploratory and
explanatory. Descriptive research pays attention to the description of the concepts and
its measurement, exploratory research develops new concepts and answers the „why‟
and „how‟ questions, explanatory research try to dig out the underlying causes of a
phenomenon. According to these three concepts, this study can be regarded as
explorative research because it aimed at evaluating why Geely acquired Volvo and
how it performs after this acquisition.
This study adopts a qualitative and quantitative analytical method. Qualitative

research targets at exploring topics, understanding phenomena and answering
question. The benefit of qualitative research is its ability to allow investigators to gain
depth and detail information. (Patton, 1990) It has been commonly used to understand
people‟s behavior, attitude and experience. Non-numerical data collection approaches
like in-depth interviews, questionnaires, content analysis, evaluation, observation and
semiotics used in collecting data. Besides, it is a deep study approach to answer
“why” and “how” questions, small and focused samples are required to conduct the
investigation. Additionally, the research is not only for its own use but also relate to
its environment, which enables the researchers to effectively examine the research
questions, objectives and methods.
Quantitative research is an empirical method that is used to seek numerical data for
research hypotheses and verify whether predictive generalization of the theory is true.
It focuses on a specific and small question. Creswell (1994) considered that
quantitative research tried to investigate social phenomena through number analysis
and mathematical model and theory. To obtain a relatively unbiased sample, large
participants are needed.
3.2 Data collection
Morse and Field (1995) expressed their opinion that relevance is a primary factor for
24 20/09/2012
obtaining a reliable data sources. Data collection is a job thereby searching useful
information related to the issue. Pearce and Axinn (2006) stated that combination of
mixed methods of data collection achieve high quality results. Thus, both primary and
secondary sources were utilized in this study. Primary methods involved use of
interviews and questionnaires. For this study, in the light of time limitation, data
collection was done only through questionnaires. The self-completion questionnaires
used in this study have fewer open questions, which is time efficiency, cost efficiency
and convenience for respondents. Furthermore, the author makes sure that open and
closed ended questions were organized to investigate the general public‟s attitude to
the actions of Geely‟s acquisition. The yes or no questions were included to obtain
specific answers. Sampling and selection of respondents were also considered. Then,
a target population was selected for sampling, which included people who graduated
from university and worked at least one year. The reason for choosing them is because
they more or less reach the information about the Chinese big M&A event. This target
group consists of 40 various ages of people in different working area in order to
eliminate sampling bias.
Secondary data analysis used data gathered by someone else or for some other
previous studies to answer the research questions by using different statistical
techniques. (Bryman, 2011) Compared to primary data analysis, secondary data is
easier to collect and less time-consuming. In this study, secondary data are collected
inside and outside the company. Data inside the company involve company‟s annual
report, company aim and strategic plan from the firm‟s official website. Outside of the
company, it mainly relies on organization or other countries‟ statistics data from
Financial Times, WTO or GMID database. Besides, trade journals, some relevant
books and other scholars‟ research results are used to support the author‟s argument
and part of materials from Chinese publications.
3.3 Data analysis
25 20/09/2012
So as to observe the situations of the resource redistribution and adjustment of the

acquisition after integration, the author uses two different methods named SWOT
analysis and Ratio analysis. The former is an indicator to reflect the strategic
management aspect while the latter calculates the efficiency ratio, liability ratios and
profitability ratios from accounting aspect, which show the overall conditions of the
firms after its acquisition phase. Questionnaire analysis is to
3.31 SWOT Analysis
In order to make the macro judgment of the effect of the acquisition, SWOT analysis
method will be selected here to discuss the overall situation of Geely after acquisition.
SWOT analysis is a strategic management framework used to evaluate the
competitiveness of the firms from four aspects: the strength, weakness, opportunities
and threatens. These four issues sum up the whole status of an enterprise, both
internal developing conditions and external environment.
The purpose of choosing SWOT analysis method is that each firm has its unique
development route and direction under a special economic system. By conducting
SWOT analysis, the developing status of Chinese enterprises could be clarified clearly
so that the consequence of acquisition cases in China could be figured out.
3.32 Ratio Analysis
Dickerson et al. (1997) suggested that examining the effect of M&A by directly
assessing firms‟ financial profitability using accounting data. Financial ratios are
deemed as an indicator to examine the financial performance of a business
particularly comparing the data before and after M&A. The process involves the
calculation of the key ratios such us profitability, liquidity and efficiency ratios. The
financial data was collected from Geely‟s Annual Report of these five years, before
and after the acquisition. Moreover, comparison of the ratios with its non-acquiring
26 20/09/2012
Chinese automobile firms during the same period will be assessed. This study
measures the financial performance of Geely in three parts: accounting returns,
growth ability and market performance.
Accounting returns will be measured into two indicators: earning per share and return
on equity. The earning per share ratio relates the earnings generated by the business
and available to shareholders, to a number of shares in issue. (Eddie and Peter, 2010)
The Return on equity equals to the profit a firm generates with the money
shareholders have invested.
They were defined as follows:
EPS = Earnings available to ordinary shareholders / Number of ordinary shares in

issue
ROE = Net income / Shareholder‟s Equity
The growth of equity and gross profit ratio are selected for measuring Geely‟s growth
ability. Gross profit ratio is the relationship between gross profits of the business to
the sales revenue generated for the same period. A higher net profit ratio indicates a
better performance of the business.
The equations were defined as:
Growth of equity = Equity of current year / Equity of last year

Gross profit margin = Gross profit / Sales revenue ×100
Market performance can be measured in current ratio, return on assets and operating
profit margin. The current ratio compares the liquid assets of the business with current
liabilities. A low current ratio refers to the company‟s weakness because it can not
clear their liabilities or raising fund. Meeks and Meeks (1981) used return on assets
27 20/09/2012
(ROA) to measure its post-acquisition performance. Besides, operating profit margin

ratio is the relationship between operating profit and sales revenue, which directly
shows the operating efficiency of company. Debt to equity ratio (D/E) examines the
percentage of liability of the firm and reveals whether the firm use debt financing.
The ratios are calculated as follows:
Current ratio = Current assets / Current liabilities

Return on asset = Net profit before interest / Total assets
Operating profit margin = Operating profit / Sales revenue ×100
D / E ratio= Total liability / Shareholder‟s equity
However, the financial data in the study are secondary resource, which might not
exactly reflect the real situation. Problems such as the inflation, deflation and ignore
of intangible resources are not disclosure in the data. The comparison and discussion
of ratios were summarized in the next section.
Questionnaire is a qualitative method that includes a list of written questions. It is a

quick way to gather information and explore respondents‟ opinion. The author
designed 13 questions to identify people‟s attitude about the brand image before
acquisition and brand development strategy after acquisition. The questions consist of
three sections. Section A called for the respondents to answer the basic background
regarding to their age and education level. Section B was designed to explore people‟s
previous image of Geely‟s product. Besides, section C aims to investigate the
suggestion about the future strategy people wish to see. All the questions are self
administered and close-end. The questionnaire were sent to target groups—40 people
who all worked more than one year because they have more social experience and pay
more time to concern economic event. The questionnaire was attached in the
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appendix.
After finishing the research design, data collection and data analysis, three methods of
analysis were designed from qualitative and quantitative perspective in order to get
comprehensive results.
29 20/09/2012
Chapter 4 Data Analysis and Discussion
With the purpose of judging the overall influence brought in of the acquisition, the
author would like to import the strategic management analysis to discuss the
operational status of Geely. So SWOT analysis will be used in this section in order to
hold a complete understanding and knowledge to the acquisition characters,
influences and the comprehensive developing strategy.
4.1 SWOT Analysis of Geely after acquisition
Strength:
It is 8 years that Geely finished the acquisition of Volvo from Ford, which
demonstrates the sincerity of Geely and its adequate preparation.
 Firstly, the M&A of Geely is the pursuit of strategic transaction to advanced

technologies. Volvo‟s advanced producing technologies in energy saving and
safety preservation make it the safest motor in the world and the preference of
the common customers. From its annual report of 2007, Geely changed its
strategy from producing low price cars to the safest, environmental friendly
and energy saved cars. The core value of Geely also changed from the cost
superiority to the technologic superiority.
 Secondly, on the one hand, the behavior of acquiring the brand Volvo helps
Geely finish its leap of developing the brand. As a local China‟s motor
producer, Geely lack of the high-end brand images while Volvo is the high-end
brand that is eponymous with the brand of Benz, BMW. Geely could hold the
opportunity to change its brand image of low-end motors and speed up to the
high level motor producer.
 Thirdly, Geely had some brand images and market loyalty in the low-end
market before the acquisition behavior, so the combination of the both could
effectively enhances the strength in the market fighting and motor producing.
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For example, the main products of Volvo are safety, environment friendly and
quality design luxury motors while Geely aims to produce low price car. So
the sales market is not the same but complementary.
 Fourthly, Volvo obtains managing experiences, operational nets, global sales
channels, professional engineers and other various resources, which could
strengthen Geely in its strategic adjustment and research ability improvement.
 Fifthly, by the acquisition of Volvo, the operational scale and market share
occupation could be effective expand so that Geely could make a good control
in the cost and resources reorganization so as to improve the scale profits and
competitiveness. Adopting diversified strategy could scatter and reduce the
investment risk. As for Volvo, the acquisition could help it passing the deficit
condition and avoiding the bankrupt result.
 Lastly, Geely became the largest shareholder of the British cab maker
Manganese Bronze Holding (UK) in 2006 and acquired Australia gearbox
maker Drivetrian Systems International (DSI) in 2009. This two successful
cross-border acquisition experiences enhance the managers‟ confidence.
(Geely‟s annual report in 2009)
Weakness:
Although the acquisition effectively expands the operational scale and sales channels,
there are also many problems bring to Geely. As a Chinese enterprise, the conflict of
operational systems, the differences of the market characters and the strict laws,
especially the labor law, are all the global difficulties to handle. For Volvo, the fatal
factor to revive is the enough circulating funds supplement. (Karthik, 2009)However,
the gross income of Geely in 2009 is only 5 billion RMB, which leads to great
problems in the constant capacity of the fund chains. Furthermore, Geely lack the
experience of managing high-end brand, especially the shortage of international
talents. In addition, for Volvo, being acquired by Geely also means being acquired by
the Chinese automobile market. The huge potential market is the key factor to change
the financial status of Volvo from deficit to get surpluses and the main problem faced
31 20/09/2012
to Geely is to make Volvo localization as soon as possible. Then, the huge culture
difference causes the communication between the managers and employees even
difficult.
Opportunity:
The most important opportunity for Geely is the policy support. Although the
marketing oriented economy is the main economic strengthen systems, Chinese
government still plays an important role in the economic interference. The
government support the M&A within automobile industry to encourage Chinese
domestic automobile companies enter international market. The acquisition behavior
of Geely can help the local brand of China quickly enter the international automobile
market to manifest the strength of China automobile industry. Moreover, as mentioned
before, how Geely was financed to pay the purchasing price to Ford is still not
disclosed, but speculation from the media believed that Geely borrowed 6 billion
RMB from several Chinese banks, and got an investment of 4 billion RMB from a
local state-owned oil fund. (Avon 1, 2012) This demonstrates that Volvo can find
much needed investment in China. In fact, after thirty years of high growth rate in
GDP, approximately 10% annually, China has accumulated an enormous wealth.
Today, China has the world largest foreign currency reserve, and it is the biggest
owner of the US obligations. Now Volvo is part of the Chinese Geely, and it certainly
has better opportunity to get the needed investment in China. This certainly secures
the future investment, and increases the possibility of Volvo‟s expansion. Additionally,
even though under the global economic and financial crisis environment, the sales
volume of Geely goes up. With the huge potential market needs, the sales volumes
still shows a slow raising trend, which provide a good opportunity for the Chinese
local enterprises. For example, the low cost of the materials like steel, glass, labor in
Chinese market could effectively reduce the manufacturing prices of producing the
high-end cars of Volvo, which could expand the retained profits so as to reverse the
deficit situation as soon as possible. Furthermore, China, as a home market, always
enjoys some advantages. The first and the most important one is the patriotism.
32 20/09/2012
People usually are proud of the products produced in their own country, and tend to
buy and stick to that product. However, this might not apply to the Chinese consumers.
The Chinese consumers do value the foreign products higher than the domestic ones
in general. The culture in China manifest that the rich people try to show their status
through the products they use. Chinese people like to buy luxury products if they can
afford, even if they can not afford, they like to have the products which look similar to
those luxury one.
Threats:
The limousine market in China is a huge potential cake that attracts much attention, in
which the sales in China of three luxury brand Audi, BMW, Benz are the best around
the world in China (Hu Chong & Li Shizhou,2010) Recently, Geely wants to get a
small piece of cake is not an easy thing. Especially before being acquired, the main
market of Volvo is the North American and Europe. The approval degree of Volvo
brand in the Asian market and customers is a difficult problem in the development
strategy made. Additionally, another problem for Geely after M&A is the economic
pressure, 1.8 billion dollars is a sky high price for Geely, whose annual profits are less
than 0.2 billion dollars. The challenge of paying back the high debt and investing in
the reorganization and development is difficult to bear. Once Geely can not change
the deficit situation of Volvo to the surpluses, it will face the result of bankrupt. What
is more, the culture gap between China and western countries that manifest in the
different labor union and laws. At last, the low prices may cause some after-effect
such as the export of the local motors may set up many competitive enemies that
worse to the exporting environment and exporting expansion.
By doing the SWOT analysis of Geely after the acquisition behavior of Volvo, both
opportunities and challenges exist. The future development of Geely not only depends
on its right implement of management system and rapid concentration, but also
depends on the change trends of the international situations.
4.2 Financial Performance analysis
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Geely‟s financial situation has been very good during the past five years. While its
turnover and profit has increased year after year, even during the worldwide financial
recession. In 2009, Geely‟s net profit reaches 1.3 billion RMB, which is about 188
million USD. (Geely‟s annual report in 2009) This profit is certainly not a great
number for those big international manufacturers, but it is sufficient for Geely to
continue its operation expansion domestically and internationally.
After analyzing the financial indicators of Geely from 2007 to 2011, it can be
concluded that not only the revenue, but also the gross profit goes up significantly
from 6.14 to 20.12 in the period from 2007 to 2009, which lay a solid foundation for
its cross-board acquisition. (Geely‟s annual report in 2009) From the bar chart below,
it can be seen that the turnover, profit and equity maintain an increasing trend.
Specifically, Volvo sold 449255 units cars worldwide in 2011 compared to 373525
units in 2010, with a astonishing 20.3% growth rate. The profit attributable to equity
holders reached 1500 RMB million. (Figure 4)
Figure 3: Turnover of Geely from 2007 to 2011
34 20/09/2012
Figure 4: Profit attributable to equity holders of Geely from 2007 to 2011
Figure 5: Equity attributable to equity holders of Geely from 2007 to 2011

Data from Geely‟s 2011 annual report
2011 2010 2009 2008 2007

Revenue 20964931 20099388 14069225 4289037 131720
(RMB)
Gross Profit 1715849 1549711 2540736 651285 305767
(RMB)
Total assets 27596758 24303599 18802189 10150969 2920351
35 20/09/2012
(RMB)
Total (17446643) (15225922) (11705669) (5368488) (373281)
liabilities
(RMB)
Total 10150115 9077677 7096520 4782481 2547070
equity(RMB)
Earning per 20.72 18.59 17.08 15.00 6.14
share (Cents)
Dividend per 2.80 2.19 2.02 1.41 1.15
share (Cents)
Return on 16.11% 17.06% 18.55% 20.94% 12.91%
equity
Growth of 11.8% 27.9% 48.4% 87.7% 142.6%
equity
Net profit 7.36% 6.81% 8.41% 20.50% 229.67%
margin
Current ratio 1.13 1.33 1.37 0.97 11.12
D/E ratio 1.719 1.677 1.84 0.04 2.29
Debt asset 63.2% 62.65% 62.26% 52.89% 12.8%
ratio
Total asset 0.81 1.15 0.78 0.71 N/A
turnover
Inventory 15.44 20.37 21.97 8.81 9.46
turnover
Dividend 10.97 11.83 11.81 9.47 18.73
payout
Table 2: data calculation of Geely‟s financial ratios from 2007 to 2011

Data from Geely‟s 2011 annual report
36 20/09/2012
As one of the four largest independent private automobile manufactures in China,

Geely has been expanding rapidly. From the profitability of Geely, the increasing
trend of revenue and gross profit indicated that the scale of Geely was satisfactory. In
addition, earning per share and net profit margin followed an ongoing trend during
these five years. It can be concluded that Geely performs a good situation.
Bruce et al. (2005) considered that financial ratios that can reflect liquidity are mainly
current ratio and quick ratio. The current ratio measures firm‟s ability to pay its debts
over the next year, which is an indicator to assess firm's market liquidity. A healthy
business generally has its current ratio range from 1.5 to 3. According to the current
ratio data in the table from 2009 to 2011, the return on equity to shareholders leads to
a constant return of these years. The figure of Geely in 2007 and 2008 had a huge gap
between the standard level and real situation, problems such as short-term obligations
and working capital management may occur within the firm.
A high debt to asset ratio reflects low borrowing capacity of a firm, which results in
firm's financial inflexibility. When debt to asset ratio greater than 50%, it means that
the company‟s assets are financed through debt. The higher debt ratio of the firm, the
greater risk associated with the firm‟s operation. For example, Geely‟s debt exploded
from 0.753 billion USD to 11.19 billion USD before and after the acquisition because
it owned a high-interest loan from Goldman Sachs and some other financial
institutions. This can be reflected that debt to asset ratio is higher after 2009 because
of large amounts of money from the bank. Lots of news claimed that Geely suffered a
big debt financing problem, but the author believes that the high debt to asset ratio
does not affect its future cash flow generation. Although the debt to asset ratio of
Geely amounted to 63.2 %, it is still close to average level 65% of the world. (Geely‟s
annual report in 2009) MM theory described that without considering taxes,
bankruptcy costs, agency costs, and asymmetric information, in an efficient market,
the value of a firm is unaffected by how that firm is financed. In a word, there is no
relationship between the firm‟s value and debt structure under perfect competition, as
37 20/09/2012
well as the ownership structure. (Modigliani & Miller 1958)
The turnover rate can measure the efficiency of the firm‟s assets. Faster turnover rate
indicates that the assets of firms put into aspects of production, sales and other
business quickly, then the formation cycle of revenues and profits become shorter
while operating efficiency become higher naturally. Working capital efficiency can be
assessed by inventory turnover and total assets turnover. The inventory turnover
dropped after 2009 and the total assets turnover in 2011 is shorter than that of 2010.
What Geely should adopt is to save the inventory and increase the usability of assets.
Comparisons of Geely’s financial ratios with its industry competitors
2012 Geely BYD Anhui Dongfeng Sifang

Jianghuai
Return on 3.09% 1.06% 0.59% -0.79% 3.99%
Assets
Return on 16.38% 5.56% 6.55% 5.14% 7.83%
Equity
Total Asset 0.8 0.7 1.6 0.9 0.5
Turnover
Inventory 11.3 5.5 12.7 6.3 2.1
Turnover
Current 1.2 0.7 0.9 1.1 4.8
Ratio
Quick Ratio 0.9 0.4 0.4 0.4 3.9
Debt to 45.2% 75.2% 23.1% 0.8% N/A
equity Ratio
Debt Asset 61.1% 64.8% 63.4% 59.9% 18.8%
Ratio
38 20/09/2012
Table 3: financial ratios of Geely and its industry competitors

Data from http://investing.businessweek.com
When comparing Geely‟s competitors, the ROA and ROE of Geely exceeds the
average level among these four automobile companies but it underperformed its
competitors in terms of the inventory turnover. What is more, the quick ratio of Geely
is below 1, which indicates that the firm is unable to meet their short-term liabilities.
A relatively high debt to equity ratio shows that the debt is used as a major channel to
invest and develop. Overall, Geely did show a commendable performance after the
acquisition.
However, the financial data in the study are secondary resource, which might not
exactly reflect its real situation. Problems such as the inflation, deflation and ignore of
intangible resources are not disclosure in the data. Based on the analysis above, Geely
underwent a good financial status after the acquisition. The acquisition did create
value and profitability for shareholders. The result verifies Fitth‟s finding (1980), he
claimed that almost all the acquiring firms have average or above average profitability
after acquisition.
The financial ratio analysis examined profitability, liquidity, growth ability and
market performance of Geely. Even though some results such as asset to debt ratio
turn out to be either not satisfactory or below industry average, the overall
performance of Geely is quite good. The money had been used effectively in the right
place in the past five years.
4.3 Questionnaire analysis
Qualitative research method was used in the study in the form of questionnaire. The
author designed this questionnaire to probe the attitude and anticipation of the
customers toward Geely‟s acquisition. The former questions required the respondents
39 20/09/2012
to answer their gender, age, annual income and education level in order to know the
background of consumers. After collecting and calculating the results from
questionnaire, it can be concluded that 40 respondents are mainly male (70 %). The
largest number of age group situated in the age 20 to 35 (72.5 %) and the bulk of
annual income of the respondents is between 100000 RMB to 200000RMB.
Considering the education level, people got bachelor degree and above occupied
82.5% of the total. Moreover, the consumers thought the quality of the Geely car is
acceptable and the price before acquisition is relatively cheap. Besides, the finding of
the questionnaire indicated that the most important improvement that Geely should
carry out currently is function, with a percentage of 52.5 %. The respondents thought
the priority goals of Geely were acquiring technology and raising international profile.
They think Geely‟s success based on Chinese growing automobile market. Using the
cheap resources can directly reduce its transaction cost. However, the challenges in
front of Geely are corporate culture and cash flow management. When asking about
respondents‟ purchasing attitude, about 45% of them will purchase Volvo if they can
afford. They also recommend Geely to adopt quality leadership and technology
leadership, with a percentage of 47.5% and 25% respectively. Overall, the majority of
people think the acquisition is a success for Geely (77.5%).
SWOT analysis has identified the internal and external factor that are favorable or not
to reach Geely‟s aims. The change of ratios in financial ratio analysis shows a
satisfying result. Associating with the questionnaire, the above analysis can fully
describe Geely‟s operation performance after acquisition.
40 20/09/2012
Chapter 5 Results: answer the questions
The concept and classification of M&A has been introduced in the first chapter.
According to the definition, Geely's acquisition belongs to a horizontal and friendly
one. Economic motives, strategic motives and managerial motives are three main
motives behind M&A theory. To explore the reasons why Geely acquired Volvo, It
was reported that five main reasons can urge this acquisition. With the help of Volvo's
advanced technologies, brand enhancement, financial support from the bank and
government, Chinese prosperous market and opportunity in foreign market, Geely
gets access to many intangible resources. Along with these opportunists, challenges
such as culture integration, weak brand image of Geely and different marketing
promotion strategy are problems need to be deal with. Briefly, it is a “win-win”
situation as both companies developed new motor models and sold well in the whole
world.
The easiest way to determine whether the acquisition is success or not is to compare
the results before and after acquisition, such as gain market share, acquire a new
technology, or consolidate an industry. From the angle of stock market based studies,
accounting indicators are employed to use by many financial economists. They
compared the difference between earnings, margins, productivity and liquidity before
and after acquisition (usually five years). Andrade et al (2001) found that the
operating margins relatives to the industry increased 0.3% after the acquisition.
Furthermore, Earning per share is a key indicator that board of directors and
shareholders are interested in. The data analysis chapter demonstrated that almost all
financial ratios except debt to asset ratio are following a benign trend. The high debt
and loan can be regarded as the need of investment. Overall, Geely operates its
business effectively till now.
41 20/09/2012
Chapter 6 Recommendations
6.1 Challenges
Managing an international organization is the biggest challenges for Geely when faces
the queries from general pubic. Along with opportunity, it is concluded that there are a
lot of challenges lying ahead for Geely and Volvo. The financial crisis is far from
resolved, and as a result there is still some uncertainly in culture integration,
consumer confidence and car demand. First and foremost, the main problem is how to
overcome the culture difference between two companies or two countries. There is no
common customer base between Geely and Volvo. Cross culture difference and
language difference may block the frequent communication among managers and
employees. With the restriction of labor union on Chinese manufacturing industry, it
can not run smoothly itself. Second, how to defend the brand and customer loyalty of
Volvo are the tasks to be solved. Geely‟s brand is very weak and unknown to people
in China. The low price and low quality image of Geely products does not improve
the value of Volvo brand. After the acquisition, the former customers of Volvo may
not trust Geely and satisfy with the products under Geely‟s design. Then, Geely and
Volvo have serious disagreements about the range of models would be produced and
the marketing promotion strategy about current model. It is unreality that a firm does
not have the same objective. (John, 2012) For instance, Geely wishes to change the
company into premium level, while the managers of Volvo do not want to venture into
this segment. Last but not least, in the integration process, vast money is needed to
establish brand, change product line and build new factory. Additionally, the limited
sale networks in China make the selling channel blocked. According to the annual
report of Geely in 2011, the debt to asset ratio was 62.65%, around the international
alert level of 65%. (Geely‟s annual report in 2009) If Geely could not deal with debt
financing after acquisition, it will be in trouble itself.
Through acquisition, Geely gains a chance to enter a bigger international market in
42 20/09/2012
the form of high volume of export motors after 2010, but there are numbers of
competitors in the fierce domestic automobile market. Those firms all spare no effort
to implement appropriate development strategy or set a target to gain more market
share. Therefore, the challenges themselves indicate that the risk of failure of this
acquisition is relatively big.
6.2 Recommendation
The landmark event of Geely acquires Volvo has a milestone meaning to Geely and
even the whole Chinese automobile industry. The author believes that there is no
meaningful way to judge whether the acquisition decision is correct or not after the
event has already happened. What people should concern is that how can Geely make
full use of Volvo‟s intangible resources and how to improve the competitive of
self-owned automobile firm in domestic market. If Volvo retains its high quality, can
it sell at an affordable price?
As numerous Chinese firms regard M&A as a need of strategic expansion and

internationalization. Some previous cases included Lenovo acquired IBM and China
Investment Corporation invested in 10% IPO of Blackstone for 3 billions USD, the
Corporation of China spent 14.1 billion USD to acquire Rio Tinto Group, Beijing
Automotive Industry Holding Corporation acquired SAAB‟s intellectual property at
200 million USD in 2009. (Doris, 2009) The result of these M&A cases were less than
satisfactory, China Investment Corporation lost more than 1 billion USD until 2008
together with SAAB and Korean Sang Yong went bankrupt. In the light of the aim is
to expand in the growing Chinese market and minimize the production cost by better
supply chain management. The recommendations are presented below.
Firstly, local manufacturing is very important to save costs. Cheap labor costs and
cheap locally produced components are used to reduce cost. The high cost of
transportation from abroad to China and 25% import tax can be avoided. As a result of
43 20/09/2012
cheap motor components and labor cost, Geely can support Volvo with a competitive
price from its domestic supplier. Fully using local supply chain is a target in recent
year, it not only supplies components for the local produced Volvo, but also to be used
in the Volvo cars produced in Europe. This will decrease the cost of the products, thus
increasing the competitiveness of Volvo in the global market.
Secondly, Volvo should set a design center in China because the low cost of the local
Chinese engineers. The local people have better sense in what products the customers
like. For example, High ranked Chinese officials and the rich Chinese usually do not
drive their cars by themselves. Instead, they sit in the back seats. So it is wise to
produce cars with bigger space for the passages who sit on the back seat space. With
the local design team, it will be easier to catch the special requirement of the local
customers. Volvo should look into the up-end segment to strengthen its position into a
higher level considering the sales of BMW7 and Audi 8 series are increasing
dramatically every year in China. A case in point is that Chinese government agreed
that Volvo car could build new plants in Chengdu and Daqing in order to cover the
western and north eastern market of China. (Avon 2, 2011) Moreover, there is a
necessity for Volvo to set up its own manufacturing plants in China because Geely has
a better position to negotiate with local government. Volvo may benefit in saving the
land cost and local tax.
Thirdly, developing innovative products can improve Geely‟s competitive advantages.

Geely‟s EC7-RV was awarder as “Independent Brand Passenger Car of the Year”
because it was equipped with automatic climate control system and navigation system.
This model occupied 20% of the total sales in 2010. (Geely‟s annual report in 2011)
The result from the questionnaire also demonstrated that the primary task of Geely is
to improve technology. Turning to Volvo, fleets of Volvo C30 are running in Europe
and China with successful results. Volvo had launched the world‟s first
diesel-powered plug-in hybrid called Volvo V60 in 2011. (Volvo‟s annual report in
2011)
44 20/09/2012
Finally, Li shufu insisted that two companies would remain separate; he said that
“Geely is Geely, and Volvo is Volvo. They are brothers, not owners.” Volvo must be
given a high freedom to operate independently. (Chinabizgov, 2012) Geely aims to
occupy the low-end brand market in China, while Volvo had already been recognized
for it safety and high-end brand. Once this image is damaged, the customer base will
soon down in western countries. The best way is to keep its original management
team with only some necessary changes and balance the culture conflict. For example,
human resource department has an arduous task to balance the inter-culture difference.
Good cooperation requires efficient communicating and mutual understanding,
especially the mangers themselves. A good solution is to encourage management teem
flow to the each country to learn the diverse culture. International training course
should be regularly assigned for those managers. As to Geely, the recruitment of
future employees must be conducted with an English test.
Only Geely conquers its challenges and adopts new technology for its product to enter
new international market, can the firm goes further and gain abnormal profit.
45 20/09/2012
Chapter 7 Conclusion
The study attempts to identify the reasons why a weaker party can succeed in
acquisition of Volvo and whether the financial situation changes after the acquisition.
Questions such as opportunities and challenges were detailed assessed. From the
analysis above, the following conclusions can be made:
The Geely‟s acquisition action is the outcome that combines globalization, fierce
industry competition and worldwide financial recession. This study first reviews the
literature on the concept and categories of M&A and three motives behind M&A. The
motives of M&A were divided into three aspects: economic, strategic and managerial
motives. After that, the failure reasons of M&A, M&A history and active M&A
behavior in China are investigated. Moreover, the SWOT analysis is a qualitative
strategic framework, which aims to examine the internal and external environment of
Geely after acquisition. Many reasons prompt Geely‟s acquisition such as a short way
to obtain Volvo‟s advanced technologies and brand value, a rapid and growing
Chinese market, the low price of acquisition deal and so on. However, previous
studies do not pay much attention on its risk in financial angle. To another perspective,
ratio analysis, an accounting method, was used to examine the financial performance
after the acquisition. Although the profitability and market growth rate are remain an
increasing trend, but a high asset to debt ratio will bring the debt and cash flow
problems.
The author also designs a questionnaire to find customer‟s attitude and suggestions
about future development strategy. After analyzing of the questionnaire, it can be
concluded that Chinese customers have a high demand on the quality of Geely‟s
products. They wish Geely can acquire Volvo‟s advanced technology to produce high
quality and environmental friendly motors in the future.
46 20/09/2012
Geely, as a weaker party, certainly has a series of challenges lying ahead. The main
challenges compromise how to conquer the culture clashes between the two
companies, how to manage the multi-national organization effectively and how to
defend the brand and customers loyalty. Overlooking the strong competitors may
result in wrong strategic decision and down in market share.
To realize Geely‟s opportunities and reduce its risk of failure, right strategies must be
developed and effectively implemented. Firstly, the running of two separate
companies is an effective way to defend Volvo‟s brand, at least in the short term. This
will keep Volvo‟s traditional customers in Europe and the US. Secondly, a new
strategy must be established to catch the expansion opportunities in the fast-growing
Chinese automobile market. It is urgent for Volvo to establish more special features in
the product or new products suit to the Chinese market. With the help of Geely, Volvo
can own a big supply chain. Thirdly, Volvo and Geely should quickly establish mutual
trust and respect on the top manager level to solve the inter-culture conflict. In this
aspect, the human resource department should play a great role.
Because of its relatively short period after the acquisition behavior, it is difficult to
access the strategies Volvo and Geely have adopted. For example, recent five years
annual report can not indicate a detailed picture about its financial performance. The
strategies were adopted are still in the process after 2010.
In summary, from the conventional wisdom, due to the big difference in brand value,
product range, customer group, firm culture and languages, the Geely‟s acquisition
was a shocking case of snake eats elephant. However, the aspect of Chinese does give
a lot of hopes for the success of the acquisition. By access to the world largest and
fastest growing automobile market as the home market, this lies in the hand of the
owner and the top managers. If Volvo can successful survive in the Chinese market as
planned while at the same time expand its current market share in Europe and the US,
Geely will be happy to see this situation. This acquisition not only help Geely boosts
47 20/09/2012
its growth rate, but also enhances the real experience of international market
management level. Geely‟s sales volume have been kept growing, Geely has already
change its strategy from the price leadership to technology leadership, from the cost
leadership to the brand innovation, from low cost leadership to technology leadership,
quality leadership, customer satisfaction, from cheap car, turning to the environmental
friendly, safety and the most efficient car (Wang Xiaoling, 2012). In the June of 2012,
Geely first jumps into Global Fortune 500 Companies and ranks the position of 475.
From that on, Geely starts to follow a benign economic development with a core of
value and quality.
48 20/09/2012
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Appendices
Appendix 1 Questionnaire
Ladies /Gentleman,
I am a master student in University of York. I am conducting this survey about post
acquisition of Geely automobile for my dissertation. We would be grateful if you
could spend few minutes to complete the questionnaire for me. Thank you!
Section A
1. What is your gender？
A male
B female
2. How old are you?

A less than 20
B 20 to 35
C 36 to 54
D more than 55
3. What is your annual income?

A Below 100000 RMB
B Between 100000 RMB to 200000 RMB
C Between 200000 RMB to 400000 RMB
D Above 400000 RMB
4. What is your education level?

A High school
B Bachelor degree
C Master or doctor degree
57 20/09/2012
D Others
Section B
5. What do you think about the quality of cars made by Geely?
A Bad
B Acceptable
C Excellent
6. What do you think of the price of Geely car before M&A?

A Very expensive
B Expensive
C Moderate
D Cheap
E Very cheap
Section C
7. Which aspects should Geely put more effort to improve after M&A ?
A Appearance
B Function
C Price
D Promotion strategy
8. What do you think are the goals of Geely? (Select all that apply)
A Acquire technology
B Acquire management skills
C Enter a new market
D Raise international profile
E Acquire famous brand power
F other
58 20/09/2012
9. Will you consider buying a Volvo car made by Geely in the future if you can afford
it？
A Yes
B maybe
C no
D not sure
10. What is your general opinion about this acquisition?

A It is a success for Geely (turning to question 11)
B It is a challenge for Geely (turning to question 12)
C It will be a failure after acquisition
D not sure
11. What is the main reason bringing to Geely‟s success acquisition?

A Adequate preparation
B Government and policy support
C huge potential domestic market with low cost of resources and labor
D other external factors
12. What do you think are the challenges of Geely after this acquisition？(Select all
that apply)
A Human resource management
B Corporate cultures
C Brand strategies
D Cash flow management
E Intellectual property of technology
F Exchange rate
G Laws and trade union
13. Which strategy do you recommend Geely to adopt?

59 20/09/2012
A Price leadership
B Technology leadership
C Quality leadership
D Brand innovation
60 20/09/2012

"The Weaker Acquires The Stronger", A Post Acquisition Case Study of The Chinese Company, Geely Acquired Volvo

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"

<"The weaker acquires the stronger", a post acquisition

Supervisor: <Jon Fanning>

<20th September 2012>

Dissertation submitted in part fulfillment of the degree of <MSc> in

<Management with Business Finance>

The York Management School

At the beginning, I would like to express my sincere appreciation to my supervisor Mr.

3.31 SWOT Analysis ................................................................................................... 26

appropriate for further research.

1.11 Acquisition process of Volvo by Geely

1.12 Geely Background

Geely Automobile Holding Group was founded by Mr Lishufu in Taizhou of Zhejiang

Table 1: the top 15 Auto Enterprises in China of 2011

Figure 1: net sales of Volvo in the last five years

Figure 2: operating income of Volvo for the last five years

1.13 The reasons why Geely acquired Volvo

1.3 Summary and Plan of Presentation

The dissertation consists of seven chapters, which is organized as follows: Chapter 1

Chapter 2 Literature Review

2.1 M&A definition

According to Machiraju (2003), merger is the combination of two or more companies

2.2 M&A Classification

2.21 Classification based on relations between participating firm and market

2.22 Classification based on the attitude of participants

2.22 Hostile M&A

2.3 The motives of M&A

2.31 Economic motives

2.32 Strategic motives

2.33 Managerial motives

2.4 Reasons of failure M&A

into acquiring company, overestimation of synergies, lack of communication,

2.5 M&A History in China

The performance of Chinese cross-border M&A had been examined by some

2.6 Active M&A Behavior in China

are immature and unsound. (Wang Zhile, 2006)

2.7 Ratio analysis as an indicator in M&A

What is the concept of M&A and post merger acquisition?

What is the reason that Geely wants to acquire Volvo?

What is the strength and weakness of Geely after acquisition?

Does the acquisition causes increased innovation in either or both participants?

This research focuses on the Chinese firm—Geely‟s cross-border acquisition. It was

Although Greely‟s cross-border acquisition has attracted worldwide attention, it is a

3.1 Research design

This study adopts a qualitative and quantitative analytical method. Qualitative

3.2 Data collection

3.3 Data analysis

So as to observe the situations of the resource redistribution and adjustment of the

3.31 SWOT Analysis

3.32 Ratio Analysis

They were defined as follows:

EPS = Earnings available to ordinary shareholders / Number of ordinary shares in

The equations were defined as:

Growth of equity = Equity of current year / Equity of last year

(ROA) to measure its post-acquisition performance. Besides, operating profit margin

The ratios are calculated as follows:

Current ratio = Current assets / Current liabilities

3.33 Questionnaire Analysis

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

Chapter 4 Data Analysis and Discussion

4.1 SWOT Analysis of Geely after acquisition

 Firstly, the M&A of Geely is the pursuit of strategic transaction to advanced