Potential Buyer: Strategic Investor

95 technological development ³⁰. Thus, the benefits to increased corporate governance and expertise contribution from a financial buyer is limited, if not, redundant.

In terms of efficiency enhancement opportunities and lowering costs, the company is still in an expansionary stage of their strategy, thus stepping in as an owner to decrease organisational slack is arguably the wrong focus and might harm the company’s future prospects. With respect to recent and future growth, the transition into the premium segment fit the current consumer trends well. Increasing demand for larger and more secure vehicles, at the same time as environmental issues and concerns is very present, the company’s product portfolio display promising signs.

In conclusion, financial buyers value the business based on the current and future expectations of cash flows of the company, as they perceive it at the time of an acquisition. Critical is the ability to heavily leverage the business. With a standard practice of buying businesses, which is then steered through a transition that aim to rapidly improve performance and sold within a short to medium-term period, there is is likely more to wish for. Volvo’s volatility in cash flow and uncertain market position, as well as large investment needs, decreases the attractiveness of leveraging the firm even though it operates in an otherwise and mature industry. Additionally, there are limited operational benefits to a transaction. As a result, Volvo is not considered an attractive LBO candidate, thus, a financial buyer is deemed an unlikely exit strategy and will not be developed further.

96 Theoretical Investment Rationale

The theoretical literature on strategic M&A’s is vast and numerous investment rationales explains why deals are made as well as best practice rationales and pitfalls (Grant 2013; Kollet et al., 2005). Mellen and Evans (2010) state a range of common buyer motives, which can broadly be categorised into strategic, financial and management problems. Empirical findings by Bower (2001) support the strategic rationale and argue that acquisitions occur due to five reasons; to deal with overcapacity in mature industries; to grow in geographically fragmented industries; to extend the product offering or enter new markets; to substitute R&D efforts; or to invent a new industry by exploiting eroding industry barriers. Additionally, Grant (2013) discuss the topic of strategic rationalising and generalises the former mentioned motives into more broadly applicable terms:

▪ Acquisition of resources and capabilities o Costly and slow to develop internally

▪ Cost economies and market power

o Drop duplicate functions, increase production and increase bargaining power

▪ Geographic expansion

o Market entry strategy decreasing the difficulties of being a foreign player

▪ Diversification efforts

o Fast way of establishing presence in a new sector

The underlying reasoning of these motives is the potential of creating substantial synergies between the companies. Further, Vild & Zeisberger (2014) argue that “sophisticated” strategic buyers focus the valuation exercise on preparing a DCF analysis, including both the target’s stand-alone value and an DCF analysis of the target assuming various synergies. As such, contingent on whether a strategic buyer is identified, the topic of synergistic benefits will be elaborated upon and a DCF analysis is performed.

The Case – Volvo

Having identified Volvo’s brand identity, brand management, as well as R&D capabilities as key to Volvo’s future success, the company is in possession of key resources and capabilities. As shown in the internal analysis, the future emphasis on safety and environmental issues is playing in Volvo’s favour, which likely increase the attractiveness of tying the Volvo brand to a brand portfolio. With respect to brand segments, it is common among industry participants to own brands operating in different segments.

Therefore, including Volvo in a portfolio where the brand does not cannibalise on existing brands make the company a good strategic fit. Further, as no information on Volvo’s electrification and autonomous drive technology is available to the general public, it is not possible to base the M&A analysis on the basis of intangible assets.

97 Cost economies and market power is possibly a significant motive as it could increase the value of both the acquirer and Volvo. One of Volvo’s key weaknesses has been identified as its relatively small size, and therefore, its limited R&D budget and CAPEX. Though there is not a one-to-one relationship between R&D expenses and innovation, substantial economies of scale are present, as cost could be spread over a larger cost base and technology and other innovations could be used in more vehicles. Economies of scale is identified as many of the overhead functions such as distribution, dealership network, marketing and finance functions could be used across brands and companies.

From a market power perspective, Volvo could also be an attractive target for a medium sized player with its €20 billion in sales. Though the company has a global presence and the main source of growth is expected to come from the Asian-Pacific region, the company has its strongest market position in Western Europe.

Thus, a company seeking to increase its market presence in the region, acquiring Volvo could be a way of increasing this presence. Additionally, considering that the Volvo has enhanced its presence in China through an increased manufacturing capacity, this increases the attractiveness to a strategic buyer with less presence in the country as the proximity to the market shortens. However, only horizontal M&A is considered in this case, an acquisition by a strategic buyer would have marginal impact on industry rivalry as Volvo only accounts for a fraction of the total market share.

In sum, the most evident source of synergies is through cost economies, or put differently, synergistic sources that are readily available. Economies of scale can be realised through the reduction of duplicate functions, increased production capacity and increased bargaining power. Further, based on the Volvo’s strengths in R&D, this increases the attractiveness of acquiring the company. The attractiveness is also likely enhanced if a buyer is seeking geographical expansion or expansion into other price segments.

Conclusively, it is concluded that Volvo make an attractive case for a strategic buyer, thus the next step is identifying a buyer.

Identifying the buyer

Considering that Ford sold Volvo to Geely, and GM recently sold Opel to PSA, North American AMs seems to have a hard time navigating the European market (Volo’s main market). GM’s recent divesture rationale was changing geopolitical and regulatory climate requires additional investment reduce the attractiveness of a presence. Additionally, the company expressed a need for an increased focus on emerging economies and the North American market. (Bunkley, 2017). As such, a North American acquirer is deemed unlikely.

Based on the previous analysis of Volvo as an investment case, Renault is identified as having the largest potential gain from an M&A with Volvo. The company generated approximately €51 million in sales 2016, roughly 2,7 times the size of Volvo, which make the company one of the smaller global players. Renault is currently operating three brands: Renault, Dacia and the South Korean Renault Samsung Motors. None of

98 the these can be classified as operating in the premium segment, and therefore, Volvo make a good complement. Further, Renault has expressed both an increased strategic focus on the Chinese market and an aim of becoming the number two company in Europe in terms of sales (Renault, 2015). Thus, an acquisition of Volvo yields positive effects in terms of both market share and market presence, in line with Renault’s strategy. This is especially the case in China, where Volvo would add four manufacturing plants to the group in addition to the one that Renault recently set up (Renault, 2015).

Interestingly, this deal was attempted in the opposite direction back in 1993 when Volvo was part of the much larger and diversified enterprise Volvo Group AB³¹ that wanted to acquire Renault (Volvo AB, 1997).

The merger failed before it was signed mostly due to heavy resistance from Volvo’s owners because the French government had the power to stop privatization of the company by limiting the voting rights of any other shareholder to 20%. Additionally, corporate culture was highlighted as another friction between the parties (Dwyer, 1993). Now, 25 years later, Volvo is a privately owned company with a less complex company structure, as it only manufactures automobiles, thus removing some of the friction from the previous deal.

Important to note is that there are much likely other companies that would benefit from an acquiring Volvo.

Renault is identified as the most likely due to the company’s expressed desired of both increased revenue source (market share) and geographical diversification (market presence) strategy. As a result, the authors argue Renault has the greatest potential of realising the largest synergistic benefits, yielding a higher willingness to pay because of the value generated post-acquisition. The following sections will be devoted to defining, estimating and validating the synergies in this transaction.

14 M&A Valuation