How did the acquisition take place considering all legal and company restructuring factors?
This article includes the following
Description of Merger
Perfect match
Chinese automobile industry
The Marriage (Acquisition of Volvo by Geely)
Legal Background
Intellectual property issue
Economies of Scale
Articles of Association
Hurdles faced by Geely
Geely’s success strategy
Economical part
Volvo’s financial situation before the merger
Finance and performance
Introduction
The beginning of the 21st century was marked by technological, social and economic changes. Needless to mention, the Chinese economy is a landmark example of nation that flourished economically due to its export of low-cost less technology intensive products. This, primarily thanks to an international mergers and acquisition (M&A) wave that swept the global market by storm at the brink of the 21st century. Statistics from the Chinese Ministry of Commerce in Foreign Investment and the Economic Cooperation Department showed that Chinese investors made direct investment overseas in 4425 enterprises in 141 countries and regions with the amount of US$ 77 billion, up by 29% year-on-year in 2012 (MOFCOM statistic, 2013). An example of a Chinese automotive company taking advantage of the economic boom in China is Geely’s parent company, Zhejiang Geely Holdings which acquired the iconic Swedish automaker Volvo (personvaganar AB) from Ford Motor company in 2011 for a surprisingly low monentary figure of 1.8 billion.. Obviously, the acquisition of Volvo by Geely was met with extensive critique since the merger of the two corporations was likely to conflict and the fact that Chinese automobiles experience ‘weaknesses in operations, design, safety, quality, and brand-building. Hence, it was predicted that the few production or marketing-related synergies will conflict, “Geely, a low-cost, low-end producer, will gain access to a premium brand and sophisticated technologies […] it isn’t clear what it brings to Volvo. […] the two have different platforms and quality standards.”
Geely paid $1.6 billion compared to the $6.5 billion that Ford had paid to Volvo in 1999, for a 100% equity stake, $200 million for a credit note and $900 million to keep Volvo running.Geely secured $2.1 billion of loans from Bank of China, China Construction Bank, Export-Import Bank of China, Geely Automobile Holdings, and the government of Gothenburg, where Volvo is headquartered, to finance the deal. In response, Geely promised to return Volvo, who was indebted to its financers and made a $934 million loss last year to make profits in the coming year. Will Volvo’s recent takeover by Geely (Mandarin for lucky) prove to be lucky for both companies? It has come to show that, in fact, Geely saved the high quality brand Volvo from sinking.
There are various reports that explain the intentions of this acquisition. The most relevant to the case are the following:
Description of merger
Without this acquisition, it would take much more time for Geely to bring its brand to such an advanced level. A proof of that is the fact Geely automobile, after the acquisition of Volvo, has maintained a rapid development speed, and managed to maintain maintained a high growth rate, which means that the performance of Geely automobile has considerably developed.
A Perfect match
According to Li Shufu, Geely’s chairman, the acquisition between the Chinese and Swedish company can benefit Volvo as well. This means that Volvo can better get acquainted with the Chinese market and this might lead the Swedish company to grow significantly fast in it. This process can help Volvo reduce the cost by establishing its Chinese local supply chain. All these will definitely improve Volvo’s position in China and in the world as well.
Chinese automobile industry.
In the last thirty years, the economic reform reached the Chinese industry at an advanced level. It is notable the development of the automobile industry, the upgrade of the entire supply chain, starting from textiles, plastics, metal, metallurgy, iron to electronic appliances, computer, chip, logistics, information industry, etc. The automobile industry focuses on both, the domestic market and international one. Since the government is interested in overseas expansion, it took part in the acquisition of Volvo by Geely. This event is of major importance in bringing the Chinese automobile industry to a new level on the international stage. Without the implication of the government, Geely could not finance this acquisition. So, China’s government actively supported the acquisition between the Swedish Volvo by Chinese Geely.
This acquisition has caught a lot of media attentions for the fact that an unknown small Chinese company bought such a worldwide famous automobile manufacturer. In fact, Geely became the first Chinese company that has managed to gain complete control over one of the world's leading automakers. The long-awaited Volvo acquisition is very important for the company, which has built its business with little government support.
The marriage (Geely’s Acquisition of Volvo)
Geely managed to spot that Volvo was soon to turn to high profitability again before everyone else could. That was mainly due to new car models coming up in line for production and an increased business expansion in China. That, combined with equity markets being at their local minimum, led to a very attractive premium for an acquisition and as a consequence, an enormous return on investment for Geely.
Legal Background
Volvo Cars is an MNE which has many subsidiaries registered in various countries and also a public company. Mergers can be categorized as conglomerate, vertical or horizontal. However, the Volvo-Geely merger can be seen as an unconventional form of a horizontal merger, or more so ‘un unconventional joint venture.’ This is due to the Chinese governments unwillingness to approve the existence of a foreign MNE in China. Volvo is an MNE, operating in various countries, yet it is still incorporated in Sweden and thus incorporation is only allowed under one national law, which is the Swedish law. Volvo cars in 2010 became a wholly owned subsidiary of Geely. Geely’s owner, Li Shufu thought at this point that Volvo cars was Chinese, however the Chinese government did not allow this as they refused to acknowledge the existence of a multinational corporation operating in in China. Volvo cars is registered in Sweden and headquarted in Gothenburg, Sweden. To avoid the governments ruling to not set up an MNE in China, Geely is set up as a Joint Venture with Volvo Cars. Since Li is also a board of director for Volvo Cars and chairman of the board for Geely, he ended up signing both sides of the JV contract i.e. he represented both the Swedish firm and the Chinese firm (!)
The Chinese government approved the newly formed Joint Venture, in which Volvo cars owned 30% of the equity. This is because Geely mainly sought to improve its corporate reputation worldwide. M&A is an important strategy which can aid companies to obtain competitive advantages in the global business environment Many multinational companies utilise cross-border M&A to achieve global resource allocation. ‘geely-Volvo demonstrates that cultural differences offer a great chance to learn from each other, which may lead to superior performance’
Chinese and Swedish automakers have signed an agreement, according to which Geely will get the right to use some Volvo’s technologies. In particular, the Chinese company will be able to use Volvo’s developments in the fields of car’s security and comfort and also the mid-size platform for the creation of the cars. It is noteworthy that the question of delivery of the technologies were the subject of arisen disputes between the former head of the Swedish company Stefan Jacoby and the head of Geely - Li Shufu. However, Jacoby suffered a stroke in 2012 and was dismissed.
The agreement between Volvo and Geely provides for the preservation of the independence of Volvo and for the continued implementation of its commercial plans and further development. Being accomplished the transaction, the headquarters of the company still remain in Gothenburg and Geely saved the right to have its factories of Volvo in Sweden and Belgium. The agreement states that Geely will maintain good relations with workers and employees of Volvo, its trade unions, agencies for implementation, and especially with consumers. As the Chairman of Geely assured, Volvo would still be managed by the management of Volvo and the company would provide independence in the long term. Furthermore, the document includes agreements on intellectual property rights, logistics and engineering between Ford, Volvo and Geely. Ford will continue to supply parts for Volvo, including powertrains, stamped parts etc. The company also agreed to provide the Swedish mark engineering support for an indefinite period of time.
Nevertheless, if Volvo’s deficit worsens, Volvo’s management team will have to concede to Geely’s integration strategies. Volvo’s financial difficulties have already increased its dependence on Geely, therefore, Geely will be able to find middle ground without having to reestablish Volvo’s management team.
Intellectual property rights
Technically, Geely acquired 100% stake in Volvo and related intellectual property rights, merger and acquisition of Volvo has belongs to own car manufacturing technical reserves, talent reserves and automobile research and development laboratory.
Horizontal overlaps were found between the activities of the companies were very because Geely has almost no passenger car sales in Europe. Furthermore, Volvo's very limited presence in the field of supply of diverse car components would not allow the merged entity to close off other market players. Hence we can conclude that both companies merged so as to add synergy value i.e. potential financial benefit achieved through the combining of companies. The European commission cleared the acquisition of Volvo by Geely despite this. The transaction did not initially qualify for the EU's one-stop shop review because the acquirers Geely did not meet the turnover threshold. However, the acquisition was notifiable in at least three EU Member States, which also agreed the transaction.
Pursuant to Article 4 of the Council Regulation (EC) No 139/2004 Zhejiang Geely Holding Company ("Geely", China) and Daqing State Asset Operation Co ("Daqing", China) are permitted to acquire joint control of the whole of the undertakings of Volvo Car Corporation (Sweden) and Volvo Cars of North America LLC (USA) (together "Volvo Cars") by way of purchase of shares within the meaning of Article 3(1)(b) of the Merger Regulation. The European Commission decided that the transaction falls within the scope of the Merger Regulation and of paragraph 5(c) Council Regulation (EC) No 139/2004. The decision is now adopted in application of Article 6(1)(b) of the Merger Regulation stating ‘Where it finds that the concentration notified, although falling within the scope of this Regulation, does not raise serious doubts as to its compatibility with the common market, it shall decide not to oppose it and shall declare that it is compatible with the common market.’ The business activities of the of Geely comprise of manufacturing and sale of cars, motorcycles and scooters in China; investment and management of state-owned assets; manufacturing, distribution and sale of Volvo passenger cars.
Economies of scale
The motive behind all acquisitions is to achieve synergy. During the due dilligence process and in the post-acquisition period, cost reduction is an investor’s priority, which was the case with Volvo. Cost reduction achieved earlier on in the transaction contributes to so called “early victories” which must be promoted between the stakeholders, investors and creditors. Reason as to why cost reductions occurs in the car industry is the overcapacity. Hence investors, after the acquisition tend to eliminate surplus capacities such as fixed costs, and consequently decrease pressure on prices and increase profit margins (Sudarsanam, 2003, p. 106). Acquisitions in car industry often include these measures, primarily closing production facilities in countries with expensive labour force. Elimination of overcapacity is associated with ‘economy of scale’. In car industries it eliminates the high fixed costs. Building competitive advantage only through economies of scale is a high-risk strategy in the society of competition and constant technology innovations. Economies of scope can contribute to cost reduction to which is the use of available resources not only in current business operations but also in similar business operations. In auto industry economy of scope can be achieved through usage of a flexible production line, expected to be the most effective.
Articles of Association
Pursuant to § 2 of the articles of association Volvo will issue two classes of shares, namely series A and series B. Class A shares carry one vote at a General meeting series B carry one-tenth of a vote. Series A and Series B shares carry equal rights to share in the assets and earnings of the company. §5 states that the board of directors must comprise of a minimum of 6 persons and a maximum of 12 persons. The shares are publicly traded and shall be registered at the Central Securities Depository Register pursuant to Financial Insturments Accounts Act 1998:1479.
Hurdles faced by Geely
Geely will need to improve its management skills so as to integrate a large company like Volvo despite them being very different.
The Chinese automobile-maker lacks global exposure and has to invest a lot to improve their global image (partly of which they have done thanks to Volvo selling them their brand).
Differences in hierarchical decision-making will lead to conflicts of interest. . .
This is because Volvo cars are known for their safety features and high-end quality components, which characterises the ‘VOLVO’ high quality Volvobrand. On the other hand, Geely is portrayed for using ‘low-end brand strategy in the past’ with an ‘okay’ brand image designed for the ‘common people to afford a good car’. Post-merger, commenting on Volvo's future, Stefan Jacoby CEO of Volvo, along with Li Shufu said: "I am honoured to join a company with the prestige and growth potential of Volvo. Our employees, suppliers, dealers - and above all our customers - can be confident that Volvo will preserve its special status as the industry leader in vehicle safety and innovation - even as it pursues new market opportunities." Now, Volvo retains its headquarters and manufacturing facilities in Sweden and Belgium as Sweden uses the incorporation theory. Ford will also continue to supply components to Volvo, including engines. Li Shufu made clear that: "This famous Swedish premium brand will remain true to its core values of safety, quality, environmental care and modern Scandinavian design as it strengthens the existing European and North American markets and expands its presence in China and other emerging markets." Further adding, "To buy the company and keep the same structure and not make any changes -- well, you're going to have to change something in the equation to get the results you want."
Since the acquisition, Geely has become a global player, rather than the previous homegrown brand with cheapness as its competitive strength. In less than a year, Geely has pulled Volvo out of where it had been losing money and we see this pattern of profit til date, as the financial statements suggest.
Geely’s success strategy
Geely’s turnaround plan for Volvo is briefly headed under three reformist strategies.
Volvo will retain its independence. Non-interference by Geely in Volvo’s day-to-day management and Volvo’s decision making. This entails that Volvo will continue manufacturing Volvo cars in Europe. The management and board will remain the same followed by the dictum. ‘Don't Integrate Your Acquisitions, Partner with Them’.
Geely will pay Volvo for the latter’s patented technologies into its vehicles for which it will pay the latter and purchase most of its intellectual property rights.
Geely will maximise Volvo’s sales in China Volvo by setting up manufacturing facilities there.
Economical part
The M&A between Geely and Volvo has brought benefits and better development for both companies, which is regarded as a great success in cross-board merger. In a lot of M&A cases, acquiring companies are typically larger than selling companies. However, Geely & Volvo is not the case. Volvo has world-leading safety technology and environmental innovation, which has an obviously competitive advantage over Geely who is just an unknown car manufacturer, while these advantages of Volvo Cars did not be fully brought into play under control by Ford Motor Company. During 2008 economic crisis, sales of Volvo Cars decreased by 18.3% (from 458,323 in 2007 to 374,297 in 2008), and continued declining to 334,808 in 2009. Influenced by the economic crisis, after selling Jaguar Land Rover to Indian TataMotors, Ford was about to continue selling Volvo Cars to cope with the shrink of automobile industry. On the other side, an increasing demand for cars in China keeps the domestic automobile market booming. Geely as the first carmaker to develop engines by itself in China has got a lot of policy support from the government, which provided a good premise for Geely’s developIment. Besides, Geely’s chairman Li Shufu already had the intension to buy Volvo to get its intellectual property, techniques as well as personnel to help improve Geely’s products and promote Geely to overseas. After two-year negotiation, Geely and Volvo Cars finally signed the M&A agreement in March 2010, which has been proved to be a win-win deal for both sides based on their performance in the following years after merger. This part will examine the success of the M&A regarding changes of both companies’ financial situation and performance.
Volvo’s financial situation before the merger
The merger of Geely & Volvo did not look good at the beginning as Geely was not thought to have enough ability to improve Volvo’s bad financial situation — the total sales and revenue of Volvo saw a dramatic decrease during 2008 and 2009 economic crisis before the merger (Figure 1 and 2). Actually, Volvo has suffered continuous losses and this was especially severe in 2008 and 2009. (Figure 3) On the other hand, Geely was a small company whose total value (9.894 billion RMB) was even less than the cost (1.8 billion dollar approximately 12.0 billion RMB in 2009) to buy Volvo; Volvo’s loss (4.4 billion RMB) was nearly triple than Geely’s profit (1.5 billion RMB); thus it is hard to convince that Geely such a small company can run Volvo well, which also led to the decline of Geely’s share price in early months after merger.
Finance and performance changes of Volvo & Geely
However, based on Volvo’s financial data from 2007 to 2016, the sales, net revenue as well as operating profits were on the rebound between 2010 and 2016, which means the merger did actually work to some extent (Figure 4). The data from Geely can also prove the situation has become better (Figure 5). The total assets and net revenue increased much more rapidly after 2010 than before. Moreover, the increasing rate of total liability slowed down and the ratio of assets and liability accordingly dropped, which means Geely’s operating situation become better. The changes of Geely and Volvo before and after merger can also be revealed by its respective turnover graph ( both Geely and Volvo Cars saw a stable increase in sales after the merger. Volvo has gained a great part in Chinese automobile industry with the share increased by 36%. There was a same trend in the global market with a 20% growth. Before 2010, Volvo had sustained losses over four years, whereas this situation has been reversed -- the volume of sales went up in the first year after the acquisition (27% higher than 2009); the total revenue also saw an obvious growth (43% higher than 2009). On the other hand, as for Geely, its revenue and sales also increased after the merger, which promises a good prospect of its operation. Besides, the rise of working capital (900 million higher in 2010) and bigger prepayment to raw-material suppliers ensure the enough funds for the future production. Generally, above-mentioned figures and analysis prove the marriage of Volvo and Geely was a success.
Conclusion
Volvo is famous for one of the most advanced technologies in the automobile industry. The luxury brand is most recognized in the safety design and in the environment technology. Furthermore, it has an advanced product development process and a world – wide customer management. Since Geely did not have these technologies, it would have been a huge advantage to obtain it. By acquiring Volvo, Geely got access to these technologies and will develop its products. Thanks to the acquisition of Volvo, the unknown Chinese company Geely enhanced its brand in China and abroad. The acquisition of Volvo improved the image of Geely in China and made it much more popular among the Chinese potential customers. Furthermore, the business acquisition gained a lot of worldwide attention and people in the west are more familiar with the brand of Geely. Without any doubt, this benefits Geely’s worldwide expansion in the future.
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