I have, for some time, had an interest in Chinese acquisitions of Western firms (see Hurdles to Chinese Investment). I have been following the recent spate of Chinese acquisitions in the auto industry, and especially, the acquisition of Volvo by Geely (see Chinese Acquisitions in the Auto Industry).

With that in mind, I was delighted to see an in-depth look at the Geely-Volvo deal that recently appeared in the Wall Street Journal (see Chinese Begin Volvo Overhaul). The article details the difficulty that Geely has had trying to shift Volvo’s image from a safety-oriented brand an ultra-luxurious brand.

When Volvo Car Corp. debuted its newest design recently, it turned heads with an edgy look that departed from the staid style that has been its hallmark. The upscale sedan has sleek curves and pale purple LEDs in its grille in a bid to plant the Swedish company more firmly in the luxury segment.

The car represents a compromise between competing visions of Volvo’s future. On one side is Volvo’s European chief executive, Stefan Jacoby, and on the other, the company’s hard-charging new Chinese owner, Li Shufu.

In the nearly 10 months since the acquisition was completed, Mr. Jacoby and Mr. Li have worked to reconcile their visions and differing management styles…One central area of contention: Mr. Jacoby wants to focus on safety and fuel-efficiency with smaller cars, while Mr. Li believes Volvo must expand aggressively into luxury cars to compete with BMW, Mercedes and Audi.

“Volvo and Mr. Jacoby can take the moral high ground and stick with the company’s tradition of understated, more modest style,” Mr. Li said in a March interview, but [Mr. Li believes] the brand has no future in China unless it caters to flashier tastes.

I’m not entirely sure I agree with Mr. Li on this one.

Personally, I think it will be very difficult to try to reposition Volvo to compete head to head with BMW, Mercedes, Audi, and Lexus. Not only do the latter brands all share a reputation for the highest quality among the mass market brands, but they have a stranglehold on the market in China (together they account for 90% of the luxury market).

What has traditionally made Volvo unique (from a strategy perspective) is its ability to differentiate as a niche producer of high-end (though not ultra-luxurious) family saloons with a reputation for safety.

Does Volvo’s portfolio need a styling facelift? Absolutely! But trying to overhaul the entire organizational image and reposition the company to compete in the ultra-luxury segment of the market is a high risk proposition. This is especially so because it comes at a time when Volvo’s operations are troubled to begin with, and they operate in a segment of the industry plagued with overcapacity.

In addition to Geely’s plans for Volvo, the WSJ article provides a remarkably candid account of the post-acquisition management clashes in both organizational, and national, culture that typically occur in cross-border deals of this type.

Friction between Geely and Volvo was evident early on, at a meeting in spring of last year at Volvo’s headquarters in Gothenburg, Sweden…About 40 Geely executives were there to get an overview of the Swedish company. One senior Geely executive felt the information Volvo was providing was insultingly simplistic. “Do you think we’re a bunch of amateurs?” he exploded, before storming out of the room, and taking the next available flight back to China, according to a personal familiar with the matter.

…distrust lingered. In September, on the eve of a trip to Sweden for his first Volvo board meeting, Mr. Li told a Journal reporter in Beijing that Geely planned to quickly build as many as three assembly plants in China to jumpstart Volvo sales. At the time only a small number of Volvos were made in China, at a Ford joint-venture plant. By the time Mr. Li arrived in Gothenburg, the resulting article had set Volvo executives and directors on edge, fearing that their new owner was adopting a risky, overly-aggressive approach.

The Volvo executives expressed their concern in a meeting with Mr. Li. Mr. Jacoby, fearing the situation could spin out of control, brought Mr. Li and a translator into his second-floor corner office. Mr. Jacoby pressed the point that Volvo needed to proceed judiciously in building manufacturing capacity in China to preserve its quality and its image. “We solved this very much on a one-on-one basis,” Mr. Jacoby said in a recent interview. “We didn’t want to do this in a big public setting and embarrass one or the other.”

Although it seems that Geely and Volvo have been able to work through their differences thus far, I remain somewhat skeptical of the prospects for success of this deal. I therefore continue to stand by my comment from the related blog post (see Chinese Acquisitions in the Auto Industry) where I mused:

…given the auto industry’s ills, I wonder whether these Chinese acquirers will be able to derive value from their tired, beaten, and battered Western subsidiaries

Only time will tell…

Interesting article in the New York Times about the dearth of strategic buyers in the M&A market (see Battling Headwinds).

It’s true that some blockbuster strategic deals have been announced recently, including AT&T’s $39 billion proposed acquisition of T-Mobile from Deutsche Telekom and Nasdaq’s $11.3 billion unsolicited bid for NYSE Euronext.

But these deals belie a strange fact: strategic bidders, or bidders that are operating companies, appear hesitant to re-enter the takeover market.

The article highlights some recent deals in which strategic bidders were conspicuously absent, and then attempts to explain the increasing reticence of strategic acquirers to participate in the M&A market as due to a changing mindset among executives.

Private equity firms have historically been at a disadvantage on how much they can offer. Strategic bidders can often realize greater cost savings and synergies by eliminating duplicative functions and combining and operating the acquired company more efficiently within their other operations.

This advantage was partly eclipsed in the cheap-money years before the financial crisis. But we are supposed to be back in more normal times, so why are strategic buyers hanging back?

The apparent reluctance may be the result of a fundamental reassessment of the value of takeovers, one that was occurring even before the financial crisis. Since then, chief executives and boards have been more concerned with running their businesses and surviving than with chasing expansion through takeovers. This is particularly true when the chance of success is far less certain, as in hostile takeover attempts.

The last 15 years have produced mergers that proved to be spectacular failures. AOL’s merger with Time Warner and Daimler’s acquisition of Chrysler are among the most notable. Together, these deals destroyed more than $150 billion in shareholder value.

During this time, studies have shown that while there are gains to be made, many M&A deals prove unsatisfactory for buyers. McKinsey & Company estimates that only a third of merger deals create value. In a separate study, Prof. Robert F. Bruner, dean of the Darden School of Business at the University of Virginia, found that almost half of deals failed, although these results were skewed by some spectacular miscues.

These studies illustrate that achieving a successful merger is hard work, requiring strategic vision and a focus on integrating the acquired company.

Although that’s a compelling explanation, I’m not sure I’m buying it.

Over the last 50 years or so, it’s been well documented that the overwhelming majority of strategic acquisitions fail to create value for shareholders (see also More Deals Gone Bad, Great Shareholder Ripoff, Why M&A Deals Go Bad, Dumbfounded by the Data, and The Complexity of Strategic Acquisitions). And despite the fact that we’ve known for about half a century that most acquisitions fail, deals consummated over the past 10-20 years haven’t performed appreciably better than those consummated in the 30 years prior (see Are You Paying Too Much for That Acquisition? and The Synergy Trap).

In short, there’s scant evidence that we’ve learned from past M&A mistakes. So what makes us think that anything has changed now?

For this reason, I’m less inclined to believe that the explanation for the dearth of strategic acquirers is that we have finally learned our lesson (…sounds reminiscent of the “This time it’s different” meme). Rather, the reason for the dearth of strategic acquirers (to the extent that there is one) likely has more to do with the residual effects of the financial crisis — an increased focus on core businesses, operating in capital preservation mode, a reticence to take on debt, and/or the lack of adequate capital — than any fundamental change in the mindset of executives towards M&A deals.

Cisco is often held up in Business School classrooms as an example of a company that has been able to successfully lever alliances and acquisitions for growth. Although I do often discuss Cisco in the classroom, that distinction has never quite sat well with me. At some point, incessant dealmaking spreads a firm’s resources thin (for background, see Is Cisco Becoming Too Big?).

The Economist picked up on this theme in a recent article (see Is Cisco Spreading Itself Thin?). According to The Economist:

[Cisco] is trying to make a business out of reinventing itself—so much so that investors wonder if the firm is stretching itself too thinly. Those criticisms are unlikely to go away after the quarterly results Cisco posted on February 9th. Earnings fell by 18% and revenues rose by an unexciting 6% year-on-year. To avoid getting stuck in a market for obsolete products, Cisco is not entering just a couple of big new markets, but more than 30, including “virtual health care”, “cloud computing” and “safety and security”.

Entering greater than 30 new markets?? Wow!

As I mentioned in my previous post (see Is Cisco Becoming Too Big?):

…one of the basic tenets of transaction cost economics…is that although acquisitions might make sense when there is market failure [and/or substantial operating synergies], at some point the benefits of bringing transactions within a firm (e.g., through acquisition) wear off. Size eventually yields inefficiency.

I fear that this is precisely what is happening to Cisco.

However, as The Economist notes, John Chambers (Cisco’s CEO) seems to be aware of the issue.

…he [Chambers] seems to have tapped on the brake. He no longer talks about increasing the number of new markets the firm enters to 50 and beyond. And no additional ones have been announced for some time.

Let’s hope that this represents a first step toward reevaluating their corporate strategy, …and righting the ship.

As I’ve mentioned before, although the auto industry seems to have stabilized in the wake of the financial crisis (and I see that as a good thing), overcapacity continues to be the major, long-term problem facing automakers (see Auto Industry’s Big Little Problem).

An article in last week’s issue of the Economist reiterated that concern (see Danger Ahead).

According to the Economist:

THE mood at the Detroit motor show this year was very different from the dark days of 2009. Then, bosses of American car companies wondered if their firms would survive. Now, thanks to $60 billion of federal finance and the cold shower of bankruptcy to wash away their debts, General Motors (GM) and Chrysler are still alive, while Ford’s canny financial manoeuvring before the crisis allowed it to clean up its act and roar back to record profits.

Yet the industry’s problems are not behind it. The American rescues averted catastrophe, but they—along with continued European subsidies—have exacerbated the overcapacity that has dogged the sector for years. The car industry can produce 94m cars a year, against global demand of 64m. Unless that changes, it will never return to health.

I agree. Unless massive productive capacity is eliminated from the industry or demand explodes by 50% (not very likely), there will need to be another shake out in the industry.

The interesting thing about the article is that for many years we’ve been told by industry participants and observers that growth in China would help ameliorate the overcapacity concerns. However, as the Economist article astutely points out, it’s not clear that demand growth in China and/or other emerging markets will finally rid the industry of its overcapacity problems. This is because upstarts in those emerging markets continue to add capacity to the industry, and it’s unclear that demand growth in the emerging world will continue at its torrid pace.

Developments in China are likely to make things worse still for rich-world companies. China too has a surplus of car manufacturers, excess capacity and a problem with demand. Annual sales growth is forecast to fall from 30% to around 10%…

And the issues are not limited to the U.S., China, or India. Europe’s automakers face similar overcapacity and productivity problems.

…tough labour laws and government stakes in some firms—a German Land, Lower Saxony, owns 20% of VW, for instance, and the French government owns 15% of Renault—discourage them from shedding workers. As a result, despite the biggest crisis in living memory in the industry, firms are failing to rationalise.

The question then remains: What gives? Where will the much needed capacity rationalization come from??

This has all the makings of a multi-country “my industrial national champion is more important than your industrial national champion” kind of a spat.

Two separate articles in the New York Times suggest that M&A activity will increase into the $2.7-$3 trillion range in 2011 (see Deal Makers Cautiously Return and M&A Ready to Soar).

From the former:

As the dark clouds of economic uncertainty lift, the environment for corporate deal-making is looking brighter.

With record cash on their balance sheets, United States companies are once again willing to invest in growth, according to McKinsey & Company’s quarterly report on economic conditions.

William Huyett, a director at McKinsey, said companies were cautiously optimistic, a positive sign for deal-making activity in 2011.

“First and foremost, there is confidence that the real markets are starting to grow again, unemployment is starting to drop and capital markets are starting to stabilize,” Mr. Huyett said. “Boards of directors are less skittish in pursuing transactions. We’re far from out of the woods, but the period of absolute uncertainty has passed.”

Thomson Reuters and Freeman Consulting Services recently predicted a 36 percent rise in global deal activity to $3 trillion in 2011. PricewaterhouseCoopers announced this month that “key conditions are in place for a resurgence in deal-making in 2011.”

From the latter:

Investment bankers should prepare for a surge in mergers and acquisitions. If deal activity follows a pattern similar to previous cycles, 2011 ought to be a considerably better year.

…the omens are favorable. In previous periods of depressed merger activity, there has been a clear bounce back by the end of the second year after the trough. For example, deal volume in 1991 was down 41 percent from its peak in 1989, according to Thomson Reuters data. By 1993, it was up by a third.

After two awful years in 2001 and 2002, when global merger deals plummeted from $3.4 trillion to $1.2 trillion, there was a 56 percent surge from trough levels in 2004.

In the current downturn, the 2009 nadir was a 52 percent decline from the peak in 2007. If there is a rebound, and the pace of recovery relative to the pace of decline is roughly the same as in previous cycles, then there should be about $2.7 trillion worth of acquisitions in 2011.

That may feel like a bonanza given the current climate. But in reality, it would only take deal activity back to the 2005 level.

I am inclined to agree that M&A activity will increase somewhat in 2011 from 2010; however, I am a bit more cautious than some of the forecasters. I believe that the $2.7-$3 trillion range is attainable, …provided that the global economy doesn’t experience a severe hiccup emanating from one of the larger European sovereigns (e.g., Spain and/or Italy).

In contrast with Pepsi, which deepened its involvement in Russia by acquiring Wimm-Bill-Dann (see Pepsistroika), Wal*Mart has decided to forego opportunities in Russia for the time being (see Wal*Mart Closes Russian Office, ht Sid).

U.S. retail group Wal-Mart Stores Inc will close its Moscow office amid a lack of acquisition opportunities, abandoning for now its long-running quest to enter the Russian market.

“We continue to be excited about our international business, including markets where we already operate, such as Brazil, China and India, where we have tremendous growth opportunity,” McMillon [EVP at Wal*Mart] said in the statement.

…overseas retailers have found it tough to succeed in Russia…with Sweden’s IKEA at times complaining openly about corruption and a surplus of red tape.

This represents a wise exercise of restraint on Wal*Mart’s part. It is, indeed, incredibly difficult for foreign retailers to succeed in Russia, one of the riskier emerging markets (see Doing Business in a Developing Country or Russia and the BRICs).

And when comparing Pepsi’s decision to acquire Wimm-Bill-Dann with Wal*Mart’s decision not to acquire a Russian retailer, the difference in operational experience makes all the difference. Pepsi has 30+ plus years worth of experience operating in Russia that predates its Wimm-Bill-Dann acquisition. Wal*Mart, by contrast, has very little experience operating in Russia to draw on.

What’s more, Wal*Mart’s performance in other foreign markets, most notably in China, have not suggested that it has a consistent track record of operating profitably in the developing world.

My kudos then to Wal*Mart on their wise non-entry decision.

For those of you who have read my blog, you know that I am generally skeptical of of acquisitions (see Great Shareholder Ripoff and Why M&A Deals Go Bad), and even more so when it comes to foreign acquisitions in developing markets like Russia (see Doing Business in a Developing Country or Russia and the BRICs).

Given that background, you probably might have guessed that my initial reaction to Pepsi’s recently announced acquisition of Wimm-Bill-Dann would have been that it was a terrible idea (see Pepsi’s Russian Challenge). However, if you thought that about this acquisition, you’d have been mistaken…

Pepsico’s special relationship with Russia began in 1959. Richard Nixon was showing Nikita Khrushchev around the American National Exhibition in Moscow. He made him stop at a kiosk hawking Pepsi-Cola. A young executive named Donald Kendall thrust a cup of dark fizz into the Soviet leader’s hands…

Half a century later, Mr Kendall, who later became Pepsi’s chief executive, flew back to Moscow with Indra Nooyi, who has the job today, to receive Vladimir Putin’s blessing for Pepsi’s takeover of Wimm-Bill-Dann, Russia’s biggest food company. They won the Russian president over by talking about the billions of dollars Pepsi has invested in Russia. It was the first American consumer-goods maker to enter the Russian market, 15 years after Khrushchev first sipped its wares. On December 2nd Pepsi announced that it would buy 66% of Wimm-Bill-Dann for $3.8 billion and launch a mandatory tender offer for the rest of the company.

Just to prove that I don’t think all acquisitions in developing markets are a bad idea, I really do believe that this one stands a chance.

Provided that Pepsi did not overpay for Wimm-Bill-Dann, Pepsico should be able to profitably leverage its 30+ years of operational experience in Russia, along with its strong global distribution network to increase Wimm-Bill-Dann’s sales. In addition, it should be able to derive value from Wimm-Bill-Dann by combining it with Nidan Lebedyansky (its previous acquisition in Russia) to capitalize on the fast-growing Russian alternative/nutritional beverage market.

My call then: Better than 50/50 odds of success.

Courtesy of Retail Roadshow, you can see, and evaluate, GM’s IPO roadshow. This is the pitch that they’ll be taking to investors to drum up interest in the public offering. Click on the links below to take a look for yourself.

1. GM’s detailed roadshow
2. GM roadshow supporting documentation

As a US taxpayer, and by default partial owner of GM, you can see whether there is a value proposition in their pitch. Your return on investment depends on it.

For further detail, see the NY Times background article or their SEC regulatory filing.

Is GM’s pitch a good one? Do you buy the underlying thesis? Do you think an investment in GM in the $26-29 per share range is worth the risk? You be the judge…

Although this news is a bit dated by now (originally published on August 3rd), I still think the message is relevant, …and telling (see Houlihan Lokey Declined to Endorse Tribune LBO).

Apparently, Houlihan Lokey had been approached by Sam Zell to render a solvency opinion of his planned LBO in March of 2007. Houlihan declined. According to Reuters:

Investment bank Houlihan Lokey had declined to endorse Sam Zell’s $8.2 billion leveraged buyout of Tribune Co, citing the deal would saddle the media conglomerate with too much debt, the Wall Street Journal said, citing people familiar with the matter.

Houlihan Lokey rejected overtures from Tribune around March 2007 to provide a solvency opinion labelling Zell’s takeover financially sound, the people told the paper.

Houlihan believed the deal would saddle the newspaper and television company with too much debt, the Journal said.

For those of you who follow this blog, you know my general opinion of the deals that were consummated during the go-go M&A wave between 2005 and 2007. In short, I thought many of the deals were overpriced and over-leveraged (see The Future of Corporate Performance, Dumbfounded by the Data, and Stupid Money Chasing Stupid Deals for background).

In one of those posts, I singled out the Tribune Company as an example of a misguided, over-leveraged deal (see also Tribune Company Bankruptcy). In June of 2007 I wrote:

…I’ll be interested to see how a firm like The Tribune Company, under the leadership of Sam Zell, will be able to pay off its debt – at 10.7 times earnings – in a business (newspapers) where cash flows have been steadily declining.

Nice to learn I wasn’t the only one worried about the solvency of that deal deal, …although I’m sure that’s no comfort Tribune’s creditors, who probably would have liked to have known about Houlihan’s abstention in the matter.

Interesting article at Bloomberg today about the recent vintage of under-performing M&A deals (see M&A Losers, ht Donald).

More than half of the 100 biggest takeovers made during the last mergers-and-acquisitions boom have something in common: By one measure, they never should have happened.

The stocks of 53 companies that made the biggest purchases from 2005 to 2008 lagged behind industry peers two years later, according to data compiled by Bloomberg’s ranking group. Among the worst performers were McClatchy Co., Boston Scientific Corp., and Sprint Nextel Corp., all three of which are now valued at less than the price they paid for their acquisitions.

Companies struck $10 trillion of deals during the last merger binge, even after more than a decade of research showing deals often don’t pay off for the buyers. The average stock price of all the top acquirers trailed benchmark indexes by an average of about 3 percentage points.

I’ve written a fair amount about how difficult it is to acquire successfully (see Great Shareholder Ripoff, Why M&A Deals Go Bad, Dumbfounded by the Data, and The Complexity of Strategic Acquisitions). That notwithstanding, what never ceases to amaze me is that although we know, and have known for quite some time, that deals generally under perform and that most fail, we continue to repeat our mistakes.

Are managers incapable of learning, …or are the incentives to acquire so perverse that they just cannot resist??