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Transcript of Master Thesis
The rational purpose behind M&A lies in a basic concept:
Case Studies I
Valuation of synergies
M&A synergies in the automotive sector:
Case studies II
Daimler-Chrysler merger in contrast to Fiat-Chrysler acquisition.
Author: Fabrizio Bertoni
Supervisor: Prof. Gianluca Colombo
Second Examiner: Prof. Carmine Garzia
Academic Year: 2013/2014
Merger & Acquisitions
Valuation of Synergies
Economies of scale
"The more you produce, the lower the marginal cost"
Economies of scope
It's a money saving strategy that implies the sharing of key resource for the production of different outcomes.
Market: company A (33%)
company B (33%)
company C (33%)
M&A company AB (66%)
company C (33%)
Chance of growth
A reason to undertake an M&A deal in order to:
Exploit more business opportunities;
Exploit preexisting facilities of the target firm in another market;
Buy a competitor in a new market in order to penetrate in it and overcome barriers to enter.
Combine different skills
Combine cash slack firm with high-return project
"financial synergy resulting from the ability to write up assets of the target company or from the use of net operating losses to shelter income"
The combination of two separately financial asset turn into a:
Greater confidence by banks;
Greater dept capacity;
Openness to new business opportunities;
Decrease possibility of default by increasing its portfolio products or services;
Financial synergies in terms of:
Lower cost of capital;
Higher growth possibilities.
"Perception about a brand as reflected by association held in consumer memory."
When a company became a conglomerates
In the PMI (Post Merger Integration) it's essential to:
Understand cultural differences
Create a corporate culture
Operations: cost cutting strategy co-producing two separated operations;
R&D: joining two previously separated department;
HRM: sharing human resources strategy of management.
Marketing (communication channel, graphic, expertise etc.)
Greater market power;
Greater bargaining power;
Greater pricing power.
Fulfill gaps in each company;
Join specialization in different field;
Combine strengths to avoid weaknesses
Firm with excess of cash
(DePamphilis, Donald M.)
Lower cost of capital
(Lee Hsianh-Ming, 2011)
Operating and financial synergies
Share price traded with a 10/15% discount
perceived as a more riskier company
less work efficiency
loss of staff
1. Evaluate the company independently (using each WACC);
2. Add these values obtaining the value of the firm without synergies;
3. Calculate the expected synergies in terms of growth rate and cash flows and reevaluate the value of the company;
4. The difference is the net value of synergies.
Cash Slack The present value of the project that the company with a shortage of money would not have undertaken without M&A;
Tax Benefit Net present value of the tax saving due to the M&A;
Debt Capacity Difference of the firm's value due to higher Beta in the WACC evaluation.
Both company were well-performing:
Chrysler was the leader in its american SUV market
Daimler was the leader in the European market for its luxury and reliable cars;
Both companies wanted to expand themselves in the partner's market;
Both companies wanted to combine their strengths to be a leader in the global market;
"Merger of Equals"
Chrysler has undertaken this merger in order to recover three different problems that affect the US automotive sector:
2. Retail revolution;
3. Environmental dynamics.
Expected synergies from this merger:
Reinforcement of cars' quality due to German brand image;
Sharing tangible and intangible assets (know-how, distribution network etc.).
Find a soul-mate in the American automotive market in order to penetrate in it;
Exploit Chrysler distribution network and human resources;
Exploit economies of scale in the production in American facilities;
Gain financial liquidity due to the creation of the third largest car maker.
"the Merger of Equals statement was necessary in order to earn the support of Chrysler's workers and the American public, but it was never reality"
The success of a merger stands in the ability of the managers to create a unique company, exploiting good synergies and avoiding bad synergies.
All this was not done in Daimler-Chrysler.
(Daimler CEO, 2000)
German wants to prevail on American:
Major number of seats in the Supervisory Board;
American 44% of share decreased to 25% after two years;
Two separate headquarters were kept;
Replacement of Chrysler's managers with Europeans;
Top executives and engineers left Chrysler.
Integration never happened!
In the PMI there were no initiative to create a corporate culture:
German and American are two populations with great cultural differences, and this were reflected also in the company dynamics;
Germans think to be superior to Americans;
Members of each company discredited products of the other part of the company;
There was an unfair treatment of employees.
"all synergies between the two companies had been realized and since the companies operated in entirely separate segments it was no longer viable to retain Chrysler as part of DaimlerChrysler"
(Dieter Zetsche, 2007)
80% sold in 2007 to Cerberus private fund;
-41% of human resources from 2006 to 2009;
Chapter 11 recovery program.
Saved in 2002 from bankruptcy by a pool of banks;
Three events in 2004
Death of Giovanni and Umberto Agnelli;
Break of the M&A deal with GM;
New CEO Sergio Marchionne to revive the company;
Rise of FIAT 500.
Economic global crisis 2008
Reasons for merging
Receive government loan;
Have fuel-efficient engines' technology;
Have small-medium size cars;
Increase brand strategy;
Expand itself somewhere apart the strong presence in NAFTA.
"Become a global player to survive a global crisis;"
Come back in US with FIAT 500 after 27 years;
Enlarge its portfolio products (SUV);
Be innovative and proactive.
Both needed a partner to survive.
FIAT gets 20% of Chrysler's share WITHOUT any outlay of money; in turn, FIAT has to share its technological know how for small fuel-efficient engines.
FIAT can increase its share by three step of 5%:
+5% if Chrysler, thanks to FIAT technology, will get the approval to produce at small car engine into its American plants;
+5% if Chrysler, thanks to FIAT, could export its products in emerging markets gaining $ 1.5 billion outside NAFTA;
+5% if Chrysler would be able to produce fuel efficient vehicles (must not exceed 40mpg ) in its American plants based on FIAT platform.
55% to UAW though VEBA funds;
8% to US Governments;
2% to Canadian Governments.
In three years FIAT had been able to reach its goals and repaid the governments' loans, so gained 53.5% of Chrysler's shares.
FIAT gave to VEBA $ 3.65 billion ( 1.9 billion from Chrysler's special dividend + 1.75 billion from FIAT)
$ 175 million x 4 year
FIAT became 100% owner of Chrysler for a total of $ 4.35 billion
FCA Synergies Outcomes
Premium Brand Strategy: 75.000 Maserati sold by 2018 + revive the spirit of Alfa Romeo in US as premium brand (5 new models);
Mass Market in EU: Focus on CUV + expansion in LATAM and Asia;
Jeep: larger investment in localized production + enlarger portfolio products with smaller SUV for EU = 1.9 million Jeep sold by 2018;
Total Volume in 2018: target= sell 7 million FCA cars;
Financial Level: to be virtually debt-free by 2018 with and EBIT tripled.
Creation of Synergies
"Synergy is the increase in competitiveness and resulting cash flows beyond what the companies are expected to accomplish independently"
Depends also from the tax pressure of the country where the company operates
Cornerstone of Synergy
Four elements needed to exploit synergies:
Negative affect in value decreasing for a company
The value chain of these companies are shared:
Economies of scale;
Economies of scope(know-how on fuel-efficient engine and SUV)
Market power: FCA is one of the top player in the global automotive market;
Shared distribution network (789 US dealers);
Shared platform: decrease by 60% by 2020 and launch 18 new models.
Growth opportunities in emerging markets (LATAM, Asia etc)
FCA shared value chain
The same product is sold all over the world with a different brand:
Chrysler 300 (US)- Lancia Thema (EU)
Lancia Ypsilon (EU)- Chrysler Ypsilon (UK)
Registered legal office in Netherlands;
Tax headquarters in London;
Payment of labor taxes in the country were the work takes place;
Listed on MSE and NYSE.
FIAT gets 35% of Chrysler share without any outlay of money.
FCA Net Profit
Cultural integration in the PMI
Share common goals
Ability to predict market changes
Cash paid for Chrysler according to shares
Thank You for Your attention!
• DePamphilis, Donald M. “Mergers, acquisitions, and other restructuring activities.” Academic Press, 2008.
• Sirower, Mark L. “The synergy trap: How companies lose the acquisition game”. Simon and Schuster, 1997.
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• Lewellen, W.G., 1971, A Pure Financial Rationale for the Conglomerate Merger, Journal of Finance, v26, 521-537.
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• Stapleton, R.C., 1985, A Note on Default Risk, Leverage and the MM Theorem, Journal of Financial Economics, v2, 377-381.
• M. Blasko et al. / International Review of Financial Analysis 9 (2000) p.7
• Grässlin, Jürgen. Jürgen Schrempp and the Making of an Auto Dynasty. New York: McGraw-Hill, 2000, p. 155.
• “DaimlerChrysler will seine Autos gunstiger verkaufen”, Handelsbatt. Frankfurt, Germany, (30/10/00), p. 3.
• Interview with Robert Lutz, Former Vice-Chairman, Chrysler, and Exec VP, GM, and President of the North American Division, Ford, February 23, 2001.
• Oldag, Andreas. "Spiel mit dem Feuer," Sueddeutsche Zeitung. Munich (3/17/2001), p. 12.
• “DaimlerChrysler Execs Trade Barbs," Detroit Free Press. Detroit (3/19/2001), p. 5.
• Olsen, Brøste, Roy-Bonde Carina, and Alexander Peter. "The impact of corporate culture on international M&As." (2009): 82.
• CNN Financial News Broadcast: February 2, 1999. Transcript available at: http://cnnfn.cnn.com/1999/02/01/europe/daimler/
• Calabrese, Giuseppe. "Towards a new carmaker: Fiat-Chrysler”, July 2012
• “Fiat conquista il 100% di Chrysler”, Il sole 24ore, Finanza e Mercati, 02/01/2014.
• “Fiat-Chrysler, sede in Olanda e tasse in UK: Stemperare legami col passato”, Il Fatto Quotidiano, Economia&Lobby, 29/01/2014.
• “Fiat-Chrysler, l’azionariato dei dipendenti nelle fusioni societarie”, Conquiste del Lavoro, 30/05/2014.
• “Industrial Relations and Transnational Entrepreneurial Strategies: The Case FIAT-Chrysler”, Iacopo Senatori, University of Modena and Reggio Emilia, (July 2012)
Sergio Marchionne ending comments of Investors’ Day 6th-7th May 201
Annual Financial Report 2013
Annual Financial Report 2012
Annual Financial Report 2011
Annual Financial Report 2010
Annual Financial Report 2009
3-2=Value of synergies.