MAHARASHTRA NATIONAL LAW UNIVERSITY,

MUMBAI

RESEARCH ARTICLE

“MERGERS & ACQUISITIONS IN THE AUTOMOBILE

INDUSTRY IN INDIA”

LL.M

SUBMITTED BY

VARAD VAMAN KANADE

ROLL NO- 043

UNDER THE GUIDANCE OF

DR.DAMODAR HAKE

ACADEMIC YEAR-

2023-24
 TABLE OF CONTENT

SR NO CONTENT PG NO

CHAPTER 1 : INTRODUCTION

1.1 INTRODUCTION

1.2 OBJECTIVES

1.3 METHODOLOGY

CHAPTER 2 : AUTOMOBILE SECTOR

2.1 INTRODUCTION

2.2 INDIAN PERSPECTIVE

2.3 CURRENT AND EMERGING TRENDS AND ISSUES

IN AUTOMOBILE INDUSTRY

CHAPTER 3 : MERGERS & ACQUISITIONS IN AUTOMOBILE

SECTOR

3.1 THE ROAD TO CONSOLIDATION

3.2 REASONS FOR M&A IN AUTOMOBILE SECTOR

3.3 AUTOMOBILE M&A TRENDS

CHAPTER 4 : M&A EXAMPLES IN AUTOMOBILE SECTOR

4.1 STUDEBAKER & PACKARD - 1954

4.2 FORD MOTOR CO. & MAZDA - 1997

4.3 DAIMLER &CHRYSLER - 1998

4.4 RENAULT &NISSAN - 1999

-1-
 4.5 TATA MOTORS – JAGUAR & LAND ROVER – 2008

4.6 PORSCHE & VW – 2008/2012

4.7 CHRYSLER & FIAT – 2009

4.8 MAHINDRA &SSANG YONG – 2010

4.9 MAHINDRA & REVA ELECTRIC CAR CO. – 2010

CHAPTER 5: CONCLUSIONS

REFERENCES

-2-
CHAPTER 1 : INTRODUCTION

1.1 INTRODUCTION

The development of new telecommunication technology has also influenced

M&A. The deregulation of the industry encourages telecom companies to provide
packaged goods and services, especially in light of the ongoing merger of the cable
and telecom industries. For telecom providers, adding more goods and services has
thus shown to be a wise decision. The telecom industry is subject to a number of
industry-specific legislation and statutory requirements, including as the SEBI
Takeover regulation, the Companies Act of 1956, the Income Tax Act of 1961, the
Competition Act of 2002, the MRTP Act, the Indian Telegraph Act, the FEMA Act,
and the regulations thereunder.1

In the telecom sector, the quantity of mergers and acquisitions has been
essentially rising. The telecommunications sector is one of the world's most lucrative
and rapidly expanding industries, and it is considered an essential component of the
utility and services sector as a whole. The management of many forms of
communication media, including Internet and broadband services, mobile phones, and
fixed line phones, is the responsibility of the telecommunications sector.

Currently, there are a lot of mergers and acquisitions taking place in the
telecom sector worldwide. The goal of these mergers is to increase profitability in the
telecommunications industry to a competitive level.

1.2 OBJECTIVES

The objectives of the study are:-

a) To study the growth of automobile sector with special reference to India.

b) To perform a study of the major Mergers & Acquisition in the automobile

sector.

1.3 METHODOLOGY

1
Sanjoy Banka, ‘Mergers and Acquisitions in Telecom Sector: A Study [2006] The Chartered
Accountant 1, 1

-1-
 The study is proposed to be conducted as follows:

a) Studying and analyzing the growth of automobile sector and

identifying current and emerging issues in strategic management in this sector.

b) Studying and analyzing the major Mergers & Acquisitions in the

automobile sector and their outcomes and lessons learned.

CHAPTER 2 : AUTOMOBILE SECTOR

2.1 INTRODUCTION

The auto industry is one of the largest industries. It is one of the key sectors of
the economy. The industry comprises of automobile and the auto component sectors
and encompasses commercial vehicles, multi utility vehicles, passenger cars, two-
wheelers, three-wheelers, tractors and related auto components. The industry
continues to grow, registering a 30 percent increase over the past decade (1995-2005).

History of automobile dates from the 17th century and its evolution took place
across the world. The journey from the military tractor & steam-powered tricycle to
sedan and hatchback took almost 2 and half century and that has been made possible
because of radical transformation in technology from steam engine to gas powered
engine and fuel to electric engine. In 19th century, automobile carried the label of rich
man's toy because its manufacturing was exorbitant that could not be affordable to a
bourgeois community.

In the initial years, US dominated the automobile markets around the globe
with no notable competitors. However, after the end of the Second World War in
1945, the Automobile Industry of other technologically advanced nations such as
Japan and certain European nations gained momentum and within a very short period,
beginning in the early 1980s, the U.S Automobile Industry was flooded with foreign
automobile companies, especially those of Japan and Germany.2

It can be seen that the recent global recession has caused a plateauing of
growth in this sector. Growth has been severely hit especially in the advanced nations.

2
PWC Website,
http://www.pwc.com/gx/en/autootive/industry-publications-and- thought-leadership.

-2-
It can also be seen that while there is tremendous potential for growth in the BRIC
nations, China is already far ahead of the other nations in terms of overall sales of
vehicles year on year.

The current trends of the Global Automobile Industry reveal that in the
developed countries the Automobile Industries are stagnating as a result of the
drooping car markets, whereas the Automobile Industry in the developing nations,
such as, India and Brazil, have been consistently registering higher growth rates every
passing year due to their flourishing domestic automobile markets.

The automobile industry is also a major innovator, investing almost €85

billion in research, development and production. The auto industry plays a key role in
the technology level of other industries and of society and is one of the largest
investors in research and development, with several manufacturers leading the Top 10.
Vehicle manufacturing and use are also major contributors to government revenues
around the world, contributing over €430 billion in twenty-six countries alone.

2.2 INDIAN PERSPECTIVE

In India, as in many other countries, the auto industry is one of the largest
industries. The industry has shown great advances since de-licensing and opening up
of the sector to abolition of licensing in 1991, foreign direct investment (FDI) in 1993
and automatic approval permitted up to 51 per cent foreign investment in priority
sectors that included the automotive industry, except passenger car manufacture.
Public policy dispensation requiring new joint venture car manufacturers to commit
certain levels of phased indigenization, minimum investments in manufacturing
facilities, neutralization of foreign exchange on imports with the exports of cars and
components, etc., was withdrawn in September 2001 as a major initiative to bring
policy framework in step with WTO requirements. The quantitative restrictions on
imports were removed with effect from 1st April 2001. The freeing of the industry
from restrictive environment has on the one hand helped it to restructure, absorb
newer technologies, align itself to the global developments and realize its potential;

-3-
on the other hand, this has significantly increased industry’s contribution to overall
industrial growth in the country.3

The arrival of most international automobile giants in India has set the stage
for an exponential growth in the component industry’s levels of technology, quality
and competitiveness. At the same time, the arrival of new and contemporary models
has stimulated demand for vehicles in the market.

A MARKET STRUCTURE

As compared to advanced nations, the automobile market in India is

dominated by two wheelers with passenger cars coming a distant second. Following
figure depicts sales of automobiles for the year 2011-12. It can be seen that while two
wheelers have a market share of 77.32%, passenger cars have a share of only 15.07%.

B DOMESTIC SALES

The growth rate for overall domestic sales for 2011-12 was 12.24 percent
amounting to 17,376,624 vehicles. For the first time in history car sales crossed two
million in a financial year

C EXPORTS

For the first time in history car exports crossed half a million in a financial
year. In March 2012 compared to March 2011, overall automobile exports registered a
growth of 17.81 percent. Following figure depicts the export trends of the automobile
industry for the last seven years.

2.3 CURRENT AND EMERGING TRENDS AND ISSUES IN

AUTOMOBILE INDUSTRY

Globalization is pushing auto majors to consolidate, to upgrade technology,

enlarge product range, access new markets and cut costs. They have resorted to

3
Ernst & Young Website, http://www.ey.com/GL/en/Industries/Automotive

-4-
common platforms, modular assemblies and systems integration of component
suppliers and e- commerce.4

The component industry is undergoing vertical integration resulting into

emergence of ‘systems and assembly suppliers’ rather than individual component
suppliers. Thus, while most component suppliers are integrating into tier 2 and tier 3
suppliers, larger manufacturers and multinational corporations (MNCs) are being
transformed into tier 1 companies. Automobile Companies are thus trying to balance
competing priorities while ensuring that they continue to add value.

The global recession has reset the automobile industry landscape. As the
industry recovers, automobile companies across the value chain must focus on:

• profitability and sustainable growth

• financial and operational flexibility

• investments in new technologies

• seizing opportunities in high-growth markets

Consolidation of the global automobile industry is moving forward at a

breathtaking pace. In 2010, the following top ten groups accounted for almost three
quarters of the world-wide production.

1) Toyota

2) General Motors

3) Volkswagen

4) Renault-Nissan

5) Hyundai-Kia

6) Ford

7) Honda
4
J. Begley & T. Donnelly, The DaimlerChrysler Mitsubishi merger: a study in failure, Int. J.
Automotive Technology and Management, Vol. 11, No. 1, 2011

-5-
 8) Peugeot-Citroën

9) Suzuki-Maruti

10) FIAT

Another interesting fact is that the top 5 players alone made up for almost half
of the global market. Also, an ever-increasing number of vehicles with well-known
brand names are actually manufactured by joint ventures or as license productions in
China, India, and other developing countries. The last decade has seen a large number
of mergers and acquisitions in the automobile sector in US, Europe, Japan, and more
recently, Korea.

After the recession of 2008, by mid-2011 the global auto industry is looking in
much better shape, with a number of radical new trends driving both sales and vehicle
development. The incorporation of new technologies, from composite body materials
to dual-drive power systems (electric plus gasoline), and enhanced safety features are
seen as driving a competitive edge for manufacturers. The upturn has been marked by
a focus on strategic mergers and acquisitions throughout the sector, though these deals
have tended to be about smaller “bolt-on” acquisitions and/or survival-driven deals.

In 2011, the trend of shifting the entire automotive sector towards more
environmentally friendly vehicles and sustainable lifecycle manufacturing, with an
emphasis on reuse and recycling of materials continues to strengthen. Environmental
and safety concerns are leading to higher safety and emission norms. Environmental
pollution and the need to conserve existing supply of fossil fuels have led to search
for alternative fuels.5

Two exciting new directions for the auto sector are moves to build ever-
cheaper and more-affordable small cars (to bring car purchases within the reach of
greater numbers of emerging-market consumers), and a determined focus in some
markets, such as the European Union, on achieving ever-greater fuel efficiency.

5
S. Ray, Assessing Corporate Financial Distress in Automobile Industry of India: An Application of
Altman’s Model, Research Journal of Finance and Accounting ISSN 2222-1697 (Paper) ISSN 2222-
2847 (Online) Vol 2, No 3, 2011 155

-6-
According to experts, the automotive industry is expected to witness a flurry of
mergers and acquisitions in the coming decade. This will primarily be in the
commercial vehicle and two-wheeler sectors. The automobile companies are expected
to make large acquisitions to access markets and gain technical wherewithal.

Rising customer expectations of new technology are putting pressure on

manufacturers to keep coming up with affordable innovations. Changing
demographics and continuing urbanisation are altering the mobility needs of the
customers. Convergence can help in the development of new and innovative products
and services, and thus with fulfilling the consistently high expectations made of
automobiles6

CHAPTER 3 : MERGERS & ACQUISITIONS IN AUTOMOBILE SECTOR

3.1 THE ROAD TO CONSOLIDATION

The early days of the auto industry were similar to the Internet early years.
Both had thousands of start-ups that didn’t last more than a few years. And many
start-ups that did last weren’t car companies to begin with. From 1900 to 1925 over
3,300 organizations were formed to produce automobiles in the United States. In 1910
alone 400 new start-ups entered the industry. Most attempts lasted less than two years.
While car sales exploded (from 1910 to 2010 US sales rose from 200,000 to 11.5
million cars) the strongest entrepreneurs bought out rivals and combined forces. For
the auto industry, the 1920s and 30s were key decades. During this time the merging
and folding of firms accelerated while car sales greatly increased. The history of
consolidation of automobile companies across the complete time span of the
automobile industry is given in the table below:

1896 The British Motor Industry is born when Harry J. Lawson launches the
Daimler Motor Company in Coventry.

American pioneers Henry Ford, Charles Brady King, Ransome Eli Olds and

Alexander Winton all complete and test their first cars.

6
Kang, N. and S. Johansson (2000), “Cross-Border Mergers and Acquisitions: Their Role in Industrial
Globalisation”, OECD Science, Technology and Industry Working Papers, 2000/01, OECD Publishing

-7-
1908 Based on a previous, failed attempt to bring together America’s top four car
manufacturers William Crapo Durant incorporates General Motors of New
Jersey (GM) with a capital of $2,000. Within 12 days the company has
raised $12,000,000 cash, enough to buy Buick and Oldsmobile in quick
succession.

1909 The General Motors Company acquires Cadillac and Oakland.

1919 Henry Ford pays out $l00 million to buy-out all the other stockholders in
the Ford Motor Company.

S. F. Edge returns to the British motor industry by taking over AC cars.

1920 The merger of Sunbeam and Talbot-Darracq creates the STD group.

1922 Ford buys financially troubled Lincoln.

1926 In Germany, Daimler Benz AG is formed by the long-planned (since 1911)

merger between Benz and Daimler companies

1927 William Morris acquires the failed Wolseley company.

1928 By now Britain’s largest car distributors, William and Reginald Rootes
begin to acquire manufacturers, starting with Humber, Hillman and
Commer.

Dodge is acquired by Chrysler for $I75,000,000.

1931 Bentley Motors goes into liquidation. Napier are interested in buying, but
are outbid by Rolls Royce who form Bentley Motors (1931) Limited.

Daimler acquire Lanchester Britain’s oldest motor manufacturer.

1935 STD Motors are unable to sustain repayments of the large loan taken out in

1925 and are forced into receivership. The Rootes brothers outbid the
smaller SS Cars Limited

-8-
1947 BMW engine and car designs are ‘acquired’ by Bristol and Frazer-Nash as

‘War reparations.

1960 The UK Daimler Company becomes part of Jaguar Cars.

1961 Commercial vehicle producers Leyland Motors acquire Standard Triumph

and AEC.

1966 British Motor Holdings is created by merging The Jaguar Group (Jaguar,
Daimler, Guy, Coventry Climax, Henry Meadows) with BMC.

Jaguar Cars Limited and the British Motor Corporation Limited announce
the merger of the two companies

1967 Rover and Alvis are absorbed into the Leyland Motor Corporation.

1974 Peugeot takes over Citroen to form PSA

1975 Volvo takes a majority shareholding in Holland’s DAF car and truck
manufacturer.

1979 Rolls Royce Motor Company is sold to Vickers for £38m as part of the
Rolls-Royce engineering group.

Rover begins collaboration with Honda.

1985 Chrysler buys AMC and takes over production of the Jeep range.

1986 Volkswagen takes a 51% share in Spanish car makers SEAT.

1987 The Ford Motor Company acquires a 75% shareholding in Aston Martin
Lagonda.

1988 Fiat acquires additional shares in Ferrari, taking its total shareholding to
90%.

British Aerospace buys Rover Group.

-9-
1989 General Motors takes a 50% stake in Saab of Sweden.

Ford takes over Jaguar Cars, promising to build on the unique identity and
brand values of the Jaguar name.

1990 Vickers Rolls Royce and BMW announce a joint venture company to build
aero-engines - BMW Rolls-Royce GmbH

1993 Maserati is bought outright by Fiat.

1994 BMW buys Rover Cars from British Aerospace.

The Ford Motor Company acquires the outstanding 25% interest Aston
Martin Lagonda to gain complete control

1997 Vickers put Rolls-Royce Motor Cars up for sale to the highest bidder.

1998 Ferrari takes control of Maserati, and closes the factory for a complete refit
and modernization.

Rolls Royce is sold after an acrimonious bidding war between Volkswagen

and BMW. The final outcome is that, while VW wins the production plant
at Crewe and the Bentley brand name, BMW buys the rights to use the
Rolls Royce name and announces its plan to develop a new generation of
cars which will be built at its own British factory from 2003.

Chrysler and Daimler Benz merge to form Daimler-Chrysler. Initial

indications are that the two businesses will remain autonomous.

1999 Volvo sells its car-making division to Ford Motor Company but continues
to

manufacture trucks.

2000 Having invested considerably in the Rover Group and struggled

unsuccessfully to make it pay, BMW withdraws and ‘sells’ Rover and MG
to The Phoenix Group for a token £1.00. BMW retains the rights to brands

- 10 -
 Mini, Triumph, Riley and Land Rover, the last of which it then sells to
Ford.

2003 Matra’s production-line closes at Romorontin, following commercial failure

of Renault’s Avantime and their decision to take Espace production in-
house. Matra and its facilities are sold to Italian styling house and niche
production specialists PininfarinaSpA, who rename the company Matra

Automobile Engineering.

2005 MG Rover -the last "traditional" British mid-sized car manufacturer goes
into administration with the key assets finally being purchased by China
based Nanjing Automobie Group. Thousands of jobs are lost although there
is hope that small scale car manufacturing could return to the same

Long bridge plant sometime in the future.

2008 Ford accepts an offer by the rapidly expanding Tata Motors of India for the
purchase of Land Rover and Jaguar. In the US, General Motors announces
annual losses for 2007 of $39 billion -the largest ever loss by a US car
manufacturer and a further sign that many of the older established car

makers are struggling to compete with the surge of production from Asia

2009 Chrysler and Fiat entered into an alliance to build the fuel-efficient cars

2010 Mahindra & Mahindra acquired financially troubled Ssang Yong

Mahindra & Mahindra bought a majority stake in electric car company

Reva making a big bet on alternative fuel technology.

The genealogy of automobile companies designed and created by Larry

Gormle uncovers and explains how the industry was created and how it arrived at its
present form. At the core is a full genealogy of over 100 companies from the Big Five
to the small defunct companies. Folded into the genealogy is the relative market share
of US sales for each company. It can be accessed at the following link

- 11 -
3.2 REASONS FOR M&A IN AUTOMOBILE SECTOR

This sector remodeling is due to the fact that manufacturers have to produce
vehicles that are better equipped, less expensive and respecting numerous norms.7

The following factors have led to the Merger & Acquisitions and alliances among the
automobile makers:

1. ACHIEVING COST EFFICIENCIES: By the M&A, automobile

manufacturers are able to benefit from economies of scale. Moreover as consumers
are increasingly looking for better equipped and environment norm compliant cars,
considerable investments are required in already expensive R&D programs. The
world's largest automobile manufacturers continue to invest into production facilities
in emerging markets in order to reduce production costs. These emerging markets
include Latin America, China, Malaysia and other markets in Southeast Asia.

2. ENGAGE NEW MARKETS BY ESTABLISHMENT OF GLOBAL

ALLIANCES: U.S. automakers, "The Big Three" (GM, Ford and Chrysler) have
merged with, and in some cases established commercial strategic partnerships with
other European and Japanese automobile manufacturers. Some mergers, such as the
Chrysler Daimler-Benz merger, were initiated by the European automaker in a
strategy to strengthen its position in the market. Overall, there has been a trend by the
world automakers to expand in overseas markets.

3. INDUSTRY CONSOLIDATION: Increasing global competition amongst the

global manufacturers and positioning within foreign markets has divided the world's
automakers into three tiers, the first tier being GM, Ford, Toyota, Honda and
Volkswagen, and the two remaining tier manufacturers attempting to consolidate or
merge with other lower tier automakers to compete with the first-tier companies.

1st Tier Company Mergers - Volkswagen-Lamborgini; BMW-Rolls Royce 2nd Tier

Company Mergers - Chrysler-Mercedes Benz; Renault-Nissan-Fiat 3rd Tier Company
Mergers - Mazda-Mitsubishi; Kia-Volvo

7
F. Becker-Ritter space, Gert Bruche, Capability creation and internationalization with business
group embeddedness – the case of Tata Motors in passenger cars, European Management Journal
(2012) 30, 232– 247

- 12 -
4. BOLSTERING CORE COMPETENCIES: The important features of the
automotive industry are the ever-changing technology and its rapid upgrade. The
organizations need to resort to M&A to strengthen their core competencies, otherwise
they will be eliminated from the stage of international development.

5. NEW TECHNOLOGIES: Traditions of the automotive world are changing

as newer technologies propagate through the industry, especially in infotainment and
propulsion. This expansion also is changing the definition of automotive M&A as
automaker and supplier investments in assets increase across sectors such as rare earth
metals, electronics, and software. M&A in these newer areas will result in higher
multiples, straddling the gap between the higher multiples typical of technology
companies and the lower multiples traditionally associated with the automotive sector

6. GEOGRAPHIC OUTLOOK: Asia is likely to persevere and boost its share

of global cross- border M&A. With some of the fastest-growing automotive markets,
the region is attracting heavy investment by many developed market automakers and
suppliers. Increasing competition from foreign companies is driving locals to pursue
M&A as strategic alternatives to development of in-house technology. Key
technologies in propulsion, safety, advanced electronics, and materials will likely
experience the greatest interest among emerging Asian players.

7. DIVESTING NON-CORE ASSETS: manufacturers also divest the non-core

business to focus on their core business.

3.3 AUTOMOBILE M&A TRENDS

Deal value trends over the past few years are skewed by 2009. The year was
characterized by unusually high disclosed deal values as a result of government-
driven bailouts and the completion of three mega deals. Government investment (US
Treasury and sovereign wealth funds) made up more than $82.4 billion of the $121.9
billion in disclosed deal value during 2009, while the VW-Porsche transactions and
Schaeffler- Continental deal made up $20.1 billion.

In 2010, 520 deals were closed with a total disclosed value of $25 billion. For
2011, 594 deals were completed with a disclosed value of $45 billion. Despite the
brisk start to deal activity in 2011, numerous events rapidly applied the brakes to the

- 13 -
automotive M&A market. Economic forecasts for the majority of developed countries
were revised downward as the year progressed. These forecasts exacerbated the
European debt crisis as debt ratings for an increasing number of countries were
reviewed and/or downgraded, alarming the investor community and consumers alike.
The European debt crisis also affected the global debt markets by tightening the
availability of financing for M&A buyers. Then Japan suffered one of its worst natural
disasters toward the end of the first quarter of 2011, distressing the manufacturing and
domestic economic recovery.

There is also a regional change in Acquirers. They were more sensitive to the
European debt crisis during 2011, shifting away from targets in the European Union
and focusing instead on US targets. 8

After the sharp spike in vehicle manufacturers deal activity during 2010, deal
volumes declined slightly in 2011. Vehicle assembly trends since mid-2010 were the
most likely contributor because expected growth didn’t materialize. Coming out of the
global recession of 2008 and 2009, global assembly volumes across developed
markets were anticipated to continue recovering. However, with all the
macroeconomic development across the European Union, US, China, and India,
coupled with the natural disasters in Japan and Thailand, vehicle volumes stagnated.

2010 showed a distinct eastern trend as deal volumes and disclosed deal values
for Asian targets increased significantly over 2009. In 2011, this trend reversed with
disclosed deal volumes for targets in Asia showing decrease and trending toward pre-
recession levels. Concurrently, share of disclosed deal values for European and US
targets increased from 55% in 2010 to 72% in 2011. Europe led the trend with the
largest share at 39% of disclosed deal value compared with 24% in 2010. Deal
volume was also focused on the European Union with a 43% share in 2011.

With the exception of 2009 with its high US government investment, the
historical trend of Europe as the largest regional acquirer continued. In the first half of
2011, the European Union was the largest regional acquirer in terms of disclosed deal
value and deal volume. During 2011, the continued sovereign debt crisis reduced the

8
Development of the automotive sector in selected countries of the ESCAP REGION, Proceedings and
country papers presented at the Regional Consultative Meeting on Promotion of Intraregional Trade
and Economic Cooperation in the Automotive Sector.

- 14 -
EU buyers’ share of global deal volumes from 45% in the first half to 38% in the
second half. The US, being the target nation for three of the top 10 global
transactions, was the only region to have a net investment inflow from foreign regions
during 2011. Asia, a big beneficiary of cross-border investments in 2010, experienced
a significant decline in inbound investments and instead witnessed a net outflow
based on disclosed deal values. 9

A IMPORTANCE OF THE BRIC COUNTRIES IN AUTOMOBILE M&A

BRIC countries have received much attention for their economic development
and market growth potential. Viewed by many as a symbol of the shift in economic
power to developing nations, analysts often assert that M&A activity will follow.
China is fast becoming an automotive colossus to be viewed in its own right. Brazil,
with the world's 4th largest economy and expertise with non-traditional fuels, has
potential, but thus far has been focused on domestic deal activity. Russia generates
interest from acquirers but is generally not viewed as a major player in the sector.
India has historically been looked at as a labour arbitrage opportunity and will
continue to play an important role in the global automotive market as its domestic
market grows and infrastructure investments continue.

B JOINT VENTURES — WESTERN WAY FOR ACCESSING NEW

MARKETS

While the occasional full-blown acquisition often steals headlines, western nations
prefer joint ventures for accessing new markets. Approximately 50% of all cross-
border automotive joint ventures involve targets in Asia Pacific countries.
Furthermore, almost 35% of all cross-border automotive joint ventures occurred in
Russia, China and India. Clearly there must be a perceived benefit to retaining a
partner that understands local government, labour, supplier, and customer
relationships. While this is not a new structuring concept, the way that joint ventures
are being used also is changing. Given current market dynamics, key considerations
for a successful joint venture arrangement typically involve:10

9
N.H. Kang, S. Johansson, Technology and Industry Working Papers 2000/01, Cross-Border Mergers
and Acquisitions: THEIR ROLE IN INDUSTRIAL GLOBALISATION, OECD Science
10
http://www.oica.net

- 15 -
 • Agreements used to form a joint venture entity to help promote sales of
products

• Agreements that don’t stifle other competitive arrangements

CHAPTER 4 : M&A EXAMPLES IN AUTOMOBILE SECTOR

4.1 STUDEBAKER & PACKARD - 1954

Studebaker was looking for some gains after insurmountable losses struck
during the 1950s. They allowed themselves to be acquired by Packard Motor Car
Company of Detroit in 1954 and became Studebaker-Packard Corporation.
Studebaker’s funds were in worse shape which led the company to bankruptcy in
1956. In order to balance out this downturn, Packard became the American importer
for Mercedes-Benz, Auto Union, and DKW automobiles. Studebaker-Packard also
began diversifying its production in the late 1950s. The company built not only cars
but planes, as well as becoming a parts supplier. Eventually they made millions due to
diversification.

4.2 FORD MOTOR CO. & MAZDA - 1997

Mazda's financial difficulties during the 1960s led to the investment by Ford
Motor Company in Mazda. Starting in 1979 with a 7%, Ford began a partnership with
Mazda resulting in various joint projects. During the 1980s, Ford increased the
financial stake to 20%. The 1997 Asian financial crisis led to further financial
difficulties at Mazda causing Ford to increase its stake to a 33.4 % with a controlling
interest in May 1996.

Ford Motor Company then set about restructuring Mazda and setting it on a
new strategic direction. Amidst the world financial crisis in the fall of 2008, reports
emerged that Ford was contemplating a sale of its stake in Mazda as a way of
streamlining its asset base. BusinessWeek explained the alliance between Ford and
Mazda has been a very successful one, with Mazda saving perhaps $90 million a year
in development costs and Ford "several times" that, and that a sale of its stake in
Mazda would be a desperate measure. On November 18, 2008, Ford announced that it
would be selling a 20% stake in Mazda, bringing its stake to 13.4%, and surrendering

- 16 -
control of the company. The following day, Mazda announced that, as part of the deal,
it was buying back 6.8% of its shares from Ford. On November 18, 2010, Ford
reduced its stake further to 3%, citing the reduction of ownership would allow greater
flexibility to pursue growth in emerging markets. Ford and Mazda remain strategic
partners through joint ventures and exchanges of technological information.11

4.3 DAIMLER &CHRYSLER - 1998

In 1998 a “merger of equals” was hatched between Daimler-Benz and

Chrysler to become DaimlerChrysler Motors Company LLC. It soon became apparent
that Daimler was the dominant partner. Chrysler went into a financial tailspin soon
after this merger. Plymouth’s brand was phased out in 2001, and plans for cost cutting
by sharing of platforms and components began. The Chrysler Crossfire, a Mercedes-
based vehicle, was one of their first results of this idea. In 2004, a new line of full-size
cars, with the Chrysler 300 as its flagship, used Mercedes-Benz technology and a
HEMI V8 engine to spark popularity in the old Chrysler brand. As more financial
strains began to close in Daimler sold its share of Chrysler off to Cerebus in 2007.

4.4 RENAULT &NISSAN - 1999

Renault, the French carmaker, was facing some problems in the 1990s,
partially due to its focus on the European domestic market in the time of
globalization. At the same time Nissan was also losing its market share and under-
utilized its capacity leading to high per unit costs. Renault needed to expand globally
in association with a partner. They tied up with Nissan. The intent was to create a
powerful automotive group by boosting the performance of both Renault and Nissan
through wide ranging cooperation, while preserving the two companies’ distinct
identities. Today, the combined production of Renault and Nissan, at more than five
million vehicles a year, represents more than nine percent of the global market. The
Alliance is one of the top five car makers in the world. After its merger with Nissan,
Renault-Nissan launched a range of joint initiatives to generate benefits through
substantial savings and growth. Some of the important joint initiatives were:

a) a common platform with Nissan for small cars

11
http://www.automotiveworld.com/news/oems-and-markets/79140-auto-industry- mergers-bigger-is-
not-always-better

- 17 -
b) Joint research projects and exchange of components (leading to standardization of
these products)

c) The decision to return to the Mexican market, using Nissan’s powerful industrial
and commercial presence

d) Further expansion in Europe and growth in Asia

e) To draw on the strengths of complementary expertise in sales and technology, and

to reduce costs and enhance performance.

They also continued to advance in all fronts, notably in the fields of distribution
system and integration of e-commerce within the business strategy, both of which are
seen as strategic challenges for the group.12

4.5 TATA MOTORS – JAGUAR & LAND ROVER – 2008

In June 2008, Tata Motors Ltd completed the acquisition of two iconic British
brands- Jaguar and Land Rover from the US based Ford Motors for USD 2.3 billion.
The deal included the purchase of JLR’s manufacturing plants, two advanced design
centers in the UK, national sales companies across the world and also the license of
all intellectual property rights. There was widespread skepticism in the market over an
Indian company owning the luxury brands and also paying a high price for the same.

Nevertheless, Tata motors stood to gain on several fronts from the biggest
deal. First, the acquisition helped the company acquire a global footprint and enter the
high-end premier segment of the global automobile market.

Second, Tata also got two advanced design studio and technology as a part of
the deal that would provide Tata Motors access to latest technology thereby allowing
to improve their core product in India. Moreover, this deal also provided Tata instant
recognition and credibility across the world which would otherwise have taken years.
Third, the cost competitive advantage as Corus was the main supplier of automotive
high-grade steel to JLR and other automobile industry in Europe and US market
would have provided a synergy for Tata Group as a whole.

12
http://www.reportsure.com/automotive-reports/automotive-mergers- acquisitions.aspx

- 18 -
 Last but not least, in the long run, Tata motors will surely diversify its present
dependence on Indian market(which contributed to around 90% of Tata’s revenue).
Moreover, Tata’s footprint in South East Asia will help JLR do diversify its
geographical dependence from US (30% of volumes) and Western Europe (55% of
volumes).

4.6 PORSCHE & VW – 2008/2012

Under a so-called “Volkswagen Law” no shareholder in VW can exercise

more than 20% of the firm’s voting rights. However, the European Union moved
against this rule that protected VW from takeovers, and Porsche took a holding of
30.9% over the company. Initially, Porsche announced it did not intend to take over
Volkswagen. But surprisingly, on March 3 2008, Porsche announced that it would
increase its VW stake up to 51 per cent, making them the top dog over at Volkswagen.

However, Porsche’s takeover attempt nearly bankrupted the company,

triggering lawsuits running to billions of euros from angry investors who claim that
Porsche misled the market. These accusations were rejected by Porsche.

In 2012, Volkswagen signed a deal to buy the half of Porsche’s car

manufacturing operations that it does not already own for €4.46bn (£3.6bn) and one
VW ordinary share for the 50.1pc of Porsche’s car making activities that it does not
already own. The companies said that the integration would generate €320m in net
synergies. The deal marks the culmination of drawn-out efforts to bring the two
companies together. A proposed merger of VW and Porsche hit the skids in September
last year because the pair was unable to quantify the risks relating to Porsche’s failed
attempt to buy its much larger rival in 2008.

4.7 CHRYSLER & FIAT – 2009

In January 2009, Fiat and Chrysler LLC announced that they were going to
form a global alliance. Under the terms of the agreement, Fiat would take a 35% stake
in Chrysler and gain access to a North American dealer network in exchange for
providing Chrysler with the platform to build smaller, fuel-efficient vehicles. The
partnership would provide each company with economies of scale and geographical

- 19 -
reach at a time when both are struggling to compete with larger rivals such as Toyota,
Volkswagen, Renault and Nissan. On April 30, 2009 the deal became official.

4.8 MAHINDRA &SSANG YONG – 2010

The acquisition of the South Korean car company SsangYong in end 2010
doesn't just give Mahindra & Mahindra access to higher-end SUVs, R&D capabilities
and a multination dealer network - it also helps derive savings from joint sourcing and
joint product development. This could be ascertained from the fact that Mahindra &
Mahindra has already announced the launch of SsangYong’s flagship brands Rexton
and Corando series of SUVs in India.13

4.9 MAHINDRA & REVA ELECTRIC CAR CO. – 2010

Mahindra & Mahindra has bought a majority stake in electric car company
Reva, making a big bet on an alternative fuel technology that is yet to prove its
viability despite widespread focus and the millions spent by global automobile firms.
M&M, the country's largest utility vehicle company, acquired 55.2% stake in Reva,
adding passenger cars to the auto major's electric vehicle portfolio that includes
Bijlee, a three-wheel vehicle, and Maxximo, an electric-powered mini-truck due for
launch later this year. Reva's promoters, the Maini family, holds 31% stake in
Mahindra Reva Electric Vehicle Company while Lon Bell, the co-founder holds 11%
and remaining stock lies with the employees with stock options.

The electric vehicle category is considered by experts to hold a lot of potential

given the global clamor to reduce pollution and promote clean air technology. But it
has some strong critics.

The deal is definitely good for both. While Mahindra and Mahindra gets hold
of a better platform on the technological aspects for Electric Vehicles since they also
had plans to roll out their mini-trucks Maximo on an EV platform. Reva on the other
hand benefits from Mahindra's strength in network, sales and marketing.

13
http://www.qfinance.com/sector-profiles/automobiles

- 20 -
 However, the announcement of this deal has led General Motors to scrap an
existing licensing agreement with Reva to develop an electric-powered version of
Spark.

CHAPTER 5: CONCLUSIONS

1) For automobile sector, corporate acquisitions are an effective means to become

larger and more competitive. However, they require exacting strategic
management and integration strategies and are not without risk.

2) Suppliers are coming under increasing pressure to enter into national and
international mergers and acquisitions to adjust to changing regulations in the
worldwide automobile market.

3) Along with a strategically chosen target company and clear strategies, effective
post-merger integration is a major prerequisite to achieve maximum success with
the transaction.

4) Tier 1 suppliers in automobile sector are pursuing M&A to keep pace with a
changing client structure. Globalization has caused the ranks of internationally
active auto manufacturers to shrink from 32 in 1980 to just 14 in 2007.

5) The automotive industry continues to face environmental challenges, growing

urbanization and shifting customer behaviour, which calls for radical new
approaches to future mobility. And these issues are becoming universal and
emerging and mature markets are expected to converge by 2025

6) The automobile manufacturers are aligning procurement as well as investment and

personnel policy more closely with global benchmarks and cutting their direct
supplier lists down to a select few systems suppliers. These suppliers must deliver
ever-more-complex systems and modules and cover all applicable production
facilities for their customers worldwide.

7) One of the biggest reasons for the failure of automobile mergers is lack of due
diligence, clash of cultures & priorities and failure to integrate into one
organization.

- 21 -
8) The trade liberalization and the rise of the Chinese economy have created a new
competitive environment in the automobile sector. There are too many brands and
too much capacity in the Chinese automotive market, which will inevitably result
in consolidation and increased M&A activity in China. At the same time, Chinese
companies are also looking to mature markets seeking acquisitions that provide
access to new technologies and consumer markets. The Chinese government are
likely to play a role and influence the timing and strength of these activities.

9) One of the factors increasing competitive pressures in the automotive industry is

the longer-term challenge of competing technical innovations and societal
preferences. For example, developing the next generation of cars, especially
environmentally clean cars, is likely to add substantially to the costs and risks
companies have to bear. As a result, companies are seeking partners to amass
sufficient financial resources and spread risks.

REFERENCES

1) Ernst & Young Website, http://www.ey.com/GL/en/Industries/Automotive

2) KPMG Website, http://www.qfinance.com/sector-profiles/automobiles

3) PWC Website , http://www.pwc.com/gx/en/automotive/industry-publications-and-

thought-leadership. HTML

4) S. Ray, Assessing Corporate Financial Distress in Automobile Industry of India:

An Application of Altman’s Model, Research Journal of Finance and Accounting
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol 2, No 3, 2011 155

5) S. Ray, Economic performance of Indian automobile industry: an econometric

appraisal, Business Intelligence Journal January 2012

6) J. Begley & T. Donnelly , The DaimlerChrysler Mitsubishi merger: a study in

failure , Int. J. Automotive Technology and Management, Vol. 11, No. 1, 2011

7) T.J. Sturgeon, Global value chains in the automotive industry: an enhanced role
for developing countries?, Int. J. Technological Learning, Innovation and
Development, Vol. 4, Nos. 1/2/3, 2011 181

- 22 -
8) Kang, N. and S. Johansson (2000), “Cross-Border Mergers and Acquisitions:
Their Role in Industrial Globalization”, OECD Science, Technology and Industry
Working Papers, 2000/01, OECD Publishing

9) F. Becker-Ritter space, Gert Bruche, Capability creation and internationalization

with business group embeddedness – the case of Tata Motors in passenger cars,
European Management Journal (2012) 30, 232– 247

10) Development of the automotive sector in selected countries of the ESCAP

REGION, Proceedings and country papers presented at the Regional Consultative
Meeting on Promotion of Intraregional Trade and Economic Cooperation in the
Automotive Sector.

11) N.H. Kang, S. Johansson, Technology and Industry Working Papers 2000/01,
Cross-Border Mergers and Acquisitions: THEIR ROLE IN INDUSTRIAL
GLOBALISATION, , OECD Science

12) http://www.oica.net

13) http://www.automotiveworld.com/news/oems-and-markets/79140-auto-industry-
mergers-bigger-is-not-always-better

14) http://www.reportsure.com/automotive-reports/automotive-mergers-
acquisitions.aspx

15) http://www.qfinance.com/sector-profiles/automobiles

- 23 -