Mergers & acquisitions (M&A) are brought about to increase the wealth of the shareholder mainly for three reasons – to increase tax value, to gain synergy, to take advantage of the market bargains. Synergy examples include economies of scope, economies of scale, research and development, technology and eliminating the duplicate efforts put in management. Decrease in the payment of tax to the government improves the value in acquisitions and mergers.
Tax efficiency is obtained as a result of a profitable firm buying out an unprofitable firm and using its net operating loss carry forwards. Cross border acquisitions and mergers provide the opportunity to reside in the state with lower tax out of the two merging companies. Bargain can take place in a situation where a firm is bought for less than the inherent value of the firm. This takes place when market prices the firm wrongly or due to the mismanagement of the firm. Relative currency also plays a role in the case of a cross border M&A transaction and can result in mispricing chances. Strategic factors are mainly responsible for activity related to M&A which may not be employed for immediate gains but focus on leaning towards the acquisitions for the cash requirements in order to obtain a better position than the competitors in the market or to venture into new markets. Concept of cross border M&A The operations and assets of the two merging companies that belong to different countries join together to form a brand new legal unit in case of a cross border merger.
The assets and operations control shifts from the local to the foreign firm with the local firm becoming an associate of the other. Chinese automobile industry The auto sector in China is a major factor in the modernization and industrialization of the nation which has helped in rapid development from the 1990’s. China has turned out to be one of the fastest growing automotive manufacturers in recent years. The yearly output has risen from below two million vehicles in the later part of the 1990’s to nine and a half million in the year 2008. China has surpassed countries like France, Korea, United States and Germany in the production volume in the year 2008 falling behind only Japan.
The 1990’s saw a disproportionate vehicle production in China. There has been an increase in the passenger car production since the year 2000 and makes for sixty five percent of the overall vehicle production. The growth in the auto industry of China has been consistent in spite of the downturn of the global economy. China saw the sale of more than ten million vehicles from the period of January to October in the year 2009. This continuous growth could make China the biggest auto market in the world. The automotive manufacturing industry is considered as one of the six main strategic industries by China towards the growth in technology in the manufacturing field (Clark, 1997). There are many reasons for the export and domestic growth of this industry in China although the focus is solely on the domestic market by the SGMC. High demand for the Sedan product is not expected due to the weak market in Asia.
The focus is maintained on the domestic market for reasons of encouraging the domestic consumption and poor condition of economy of the trading partners of China in Asia. Background of the company GM Ford and General Motors (GM) are long known transnational automobile manufacturers and are familiar with the market in China since the early period of the 20th century. Both the companies stopped their investment and export of cars after the communist revolution occurred. It was not before the mid 1990’s that the automakers from U.S took part in joint ventures in China. Ford obtained a local stake as it joined forces with Jiangling Motors Corporation in the year 1995. The larges car maker in the world, GM stepped in the Chinese market in the year 1997 by entering into a joint venture with SAIC which had a joint venture with VW as well. SAIC had already established itself as a profitable automobile company on accord of the joint venture with SVW. GM began investing in the Chinese market by forming three joint ventures through the 1990’s. The government of China needed GM to form a technical centre with SAIC. As a result the Pan Asia Technical Center or PATAC was formed by GM which was the first overseas firm to form such a centre. The main objective of PATAC was to redesign the models of GM to suit the market in China that played a big role in improving the local design skill set. Shanghai GM which is the flagship of GM began producing Buick with forty seven percent of the parts coming from local suppliers in China (Gallagher, 2003: 71). GM has shown signs of modifying and upgrading in order to manufacture better high performance cars by barging in modern technology than the other investors from U.S. The aggressive approach of the firm can be understood by the lessons learnt by the other foreign entrant sin the auto industry of China as the same models were being produced by VW. The localization rate was increased to sixty percent by GM in the by the year 2000 for the Buick Sedan.
More Sedans were sold in China than in the U.S by the year 2006 by GM. The total vehicle sales of GM in China in year touched the figure of 1.03 million making it the top ranked vehicle sales company in China. GM made a research institute for research and development purposes with Shanghai Jiao Tong University. The major mergers and acquisitions of GM GM sold eight and a half million trucks and cars world wide during the year 20008 in the form of its twelve brands namely Cadillac, Buick, GMC, Chevrolet, GM Daewoo, Vauxhall, Opel, Pontiac, Holden, Saab, Hummer and Saturn. Te major assets focused mainly on the four brands namely Cadillac, Chevrolet, Buick and GMC. To maintain the bankruptcy protection filing, these four assets were used. GM China has 5 brands namely Cadillac, Opel, Chevrolet, Buick, Saab and Wuling with more than thirty models with a sales forecast of almost 864,000 vehicles in the current year. GM owns 8 vehicle assembly plants, and engineering design centre and three power train facilities, automotive finance arm and supplier operations like Allison transmission and AC Delco. More than twenty thousand people are employed by GM in China. The Hummer sale The M&A activity can be highly projected by the acquisition of GM’s Hummer brand by Sichuan Tengzhong Heavy Industrial Machinery in May. Hummer had several financial problems and hence the takeover was not considered as a wise move by many experts although the acquisition is a landmark in the exploration of the global market with the help of existing sales network of the partner and internalization. Sichuan Tengzhong Heavy Industrial Machinery was a small auto company before the announcement f the Hummer acquisition with the focus of the company being on the production of tow trucks and cement mixtures. Te Hummer acquisition provided the company a quick way to present itself in the global market and expand the operations to the manufacture of passenger cars. The sales network in the U.S acquired by the firm was of great significance. The reasons provided by the GM to sell off its Hummer brand was the best and most comprehensive conditions offered by Sichuan Tengzhong in the bidding for the brand. The Chinese company did not seek short term returns and looked to increase the investment for improving the fuel efficiency in the Hummer models.
Sichuan Tengzhong would retain the Hummer brand along with the sales network in the U.S and the production sites. This was an important factor in sealing the deal as GM wanted to safeguard the jobs of the three thousand workers and more than hundred Hummer dealers in the United States. The deal also contracted GM to supply the H3 and H2 models to Sichuan Tengzhong as it planned to build its own production lines in China in the near future. In the 1990’s, Hummer was launched as a military vehicle and did not get the expected response from the general public owing to its large size and high gas requirements. The poor response however did not hinder Sichuan Tengzhong from getting a direct entry into the passenger car industry on accord of the technology gained from GM and thus became the first automaker of China to have a strong base of sales network in the United States. Cars with high fuel efficiency General motors made an announcement about its tie up with Bright Automotive today after two months of establishing a new venture capital subsidiary. Bright has developed the idea of a plug in hybrid van but has trouble in the production of the vehicle. The aim of GM is to make investment in the start up of companies that are equipped with the technology that will enable GM to develop an advantage over its competitors in the auto market. The idea by Bright regarding the hybrid van claims that it has a forty mile electric range.
The rear wheels are driven an electric motor and the front wheels are powered by a gasoline engine. Bright will gain access to transmissions and engines of the Gm through this association while Gm will get the information of the hybrid developments of Bright. GM has started to fund the Bright Automotive and details will be figured out during the course of the next few months. China Wuling Merger GM was involved in a three directional merger with Wuling and SAIC that has proved to be very beneficial for the firm.
The sales have amplified by double figure annually as it is the top ranked venture in the mini trucks market with an annual production of over four hundred thousand vehicles. A van like vehicle called the Wuling Sunshine is the top seller with a price of less than 5000 U.S dollars. The yearly capacity of the SMGW facility is more than 100,000 vehicles as it has undertaken the Global Manufacturing System and follows quality standards. A joint venture between the three companies of Wuling Motors, SAIC and GM was created in the year 2002 and is known as SGMW which is situated in Liuzhou in the Guangxi Zhuang Autonomous Region. A range of Wuling minivans and mini trucks are produced by SGMW along with the Chevrolet Le Chi. Analysis What are the reasons behind this strategy adopted by GM? What are the estimated benefits of the company from the alliances formed with the small scale firms? Some of the benefits have been listed below – Cost saving from production of new models and engines jointly. Economies of scale in production, managerial function, technical aspect. Quick development time period. This strategy has been adopted by other large scale car manufacturers. Some of the examples of these companies are – Nissan and Renault merger in the year 1999 and the buying of Samsung in the year 2001. Ford is the owner of Land Rover and Volvo cars. Daimler-Benz took control of Suzuki and Mitsubishi and Chrysler. These instances are all cases of complete mergers or takeovers that incur great commitment and costs from the buying company. GM policy is based on gaining the parts of the small scale competitors in order to developing a better understanding with the smaller firms. The mergers enable the buying firm to widen it product base in order to gain a foothold by making cars catering to every segment, market and customer type.
The products created may be given the brand of the company formed by the merger to gain a reputation in quality and status in market and appeal to the target audience. The agreements for the sale of Opel, Saab and Hummer have been decided though there has been a big dip in the price of the sales. The irrational acquisition policy is to be blamed for the shortcomings in profit from the sale. Merger objectives of GM An auto revival plan was published in China in March that aims at the 3 main aims of fuel efficiency, small cars and industrial consolidation. The third objective will be obtained by the incentives provided by the government in China for development of mergers between the auto makers. The Chinese auto sector now controls the General Motors Company. A strategy was in place which was launched over 20 years ago in order to capture the auto industry in China that led to the bankruptcy and sell off core of the assets of GM like Saab, Opel, Saturn, Pontiac, GMAC and Hummer. Strategies were put in place similarly by the markets in South Korea, Europe and Japan in a less harmful manner. The execution of the strategy was put in the hands of irresponsible and short sighted people within the government, industry and academia. Recommendation of Volvo and Saab to be nationalized quickly for the prevention of complete capture by the Chinese auto sector has been represented by the top companies at various occasions. Commends the countries in Europe like Spain, U.K, Belgium and Flemish government as they worked commonly for the prevention of the Opel selloff as it would lead to negative outcomes economically if it was carried out as per the original plans. Stokes has also stated that a different way of considering the strategy is to think of someone as shooting at you from close range and then making an offer to control the bleeding. The activities of China in 200-8 included the shore up of the breaking economies in the western countries by making heavy purchases of products including Jaguar and BMW vehicles. Ethics of Business The code of business ethics includes giving [priority to the note value of ethics for the guarantee of behaviours and work that coordinated with the values. At the same time, it is not easy to follow the business or moral ethics as there are plenty of myths regarding the moral philosophy of business.
Some of these myths show a universal disapproval of the belief of motive of ethics. Oversimplified or constrictive opinion of moral difficulties can further lead to the growth of myths. Business moral philosophy Two definitions of the business moral philosophy have been presented that are to be followed. Manuel Velasquez states that the business concern moral principle area is a specific canvass of ethical wrong and right that is painted in colours of business functions and operations (Velasquez, 2004). Richard George limits the area as the basic interaction of business organisation and moral principle as an abstract but the application takes interoperable results (DeGeorge, 2001). GM Business ethics – Poletown Dilemmas of business ethics Tianamne square investment of China and GM U.S Vice President Dole visited China in late March in the year 1997 and appreciated the deal between the Chinese government and Boeing Co. That amounted to 680 million dollars which was a landmark. The Great Hall of the People in China was the venue for the signing ceremony as Dole and Li Peng, the former prime minister of China recalled the scenario of Li Peng and Kohl, former Prime minister signed on the VW agreement in the year 1984. This issue was taken seriously by the media in Japan. U.S assigned to huge project eight years post this incidence and showed that the policy of the U.S had been modified from one based on human rights to that of being more business oriented. Research and development centre between GM and Shanghai Jiao Tonq University GM created a joint research institute for the objective of research and development and technical training. Oil consumption Twenty percent of the global CO2 emission originated from the automobile industry according to statistics. Forty five percent was accounted by vehicles in U.S while 31 percent was attributed to the GM vehicles in total CO2 emission of the U.S. The global oil crisis shifted the focus of rivals of GM in South Korea, Japan and Europe in the year 1978 to the development of smaller cars with higher oil efficiency in the face of the challenges posed by the energy crisis. GM was relentless in the expansion of fuel heavy SUV’s and pick ups.
The U.S market hare of the GM fell to twenty percent from the fifty percent due to the eco friendly imports from Korea and Japan. GM made an investment of one billion dollars in the late 1990’s for the production EV1, an electric car. The production was stopped in the year 200 in spite of the popularity in the domestic market and was not be seen anywhere in U.S by 2004. Toyota developed the hybrid vehicle called Prius. Interference of Government in China Protective power Domestic firms required an entry barrier on the foreign counterparts in order to explore the scales of economy in the developing countries. A protection period is essential to enable the local car manufacturers to develop cars in order to compete with the better technologically equipped and well financed MNE’s in future. Trade barriers Before 1996, automobiles were laid with a tariff rate of 180 to 220 percent. The non tariff barriers included restring the licenses of import to a certain number of product categories that included, crane lories, motorcycles, motor vehicles, key parts of motor cycles and key parts of motor vehicles. Other trade barriers are state monopoly of domestic marketing and trading companies, regulation of technical and quality standard, foreign exchange control ( Chen, 2002: Depner and Bathelt, 2005). Screening Foreign investments are monitored by authorities at various levels. National plan is formed by the State Planning Commission and controls the types and units of vehicles that can be produced by joint ventures. It approves the newly created joint ventures that depend on the Commission to ensure the approval of a reliable and constant supply of energy sources and raw materials (Harwit, 1995). Foreign equity limits MNE’s involved in the car assembly projects have a share holding limit in the joint ventures.
This limit was however unable to gain the aim of technology enhancement and management control on the will of the policy makers. Most foreign investors are secretive about their joint venture operations although they hold equity shares in minority. Local R&D and content needs Local technology and content requirements are set to achieve self reliance and complex industrial development.
Along with the tariff rates, these requirements help the local content of assembled vehicles to increase. The tariff rate on imported components with local content of more than 80% was set at 40% while local content with below 60% percent had a rate of 75% and local content between 60 and 80% had a rate of 60%. Strength The auto industry in China has been gained a lot of attention from academic and strategic sectors. The Chinese market has been touted to deal in exports to the North American region under five years time (Mixed outlook for auto exports, 2005) although some say that China is not yet prepared for export and main sources of cost benefits, competitiveness and consumer market are present in the domestic market (Mackey, 2005).
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