Volvo/ Scania Merger
Introduction
Mergers and acquisitions is a situation where a corporate acquires another corporation, with the resulting outcome being an increase in the size of the corporation as well as earnings enhanced by combination. The merging and acquisition process comes in two broad dimensions: Horizontal acquisitions: this occurs when a corporation acquires the competitor`s combined shareholdings in the same industry and then systematically reduces the costs of the acquired corporation as it integrates its operations into a careers company. Vertical acquisitions: this occurs when corporations acquire their own supply chain. It mostly occurs in business holding companies or enormous trusts. The piece of work would examine the real case of a Volvo / Scania merger, the major objectives behind the intended merger as well as the responsibility of other stakeholders involved in the initiative. There would be the need to address the challenges that emerged during the process as well as the responsibility of the competition authority during the merger process.
Objectives of Mergers and acquisition
The objectives of mergers and acquisitions come in broad perspectives and are not limited to the following, the urge to realize growth more rapidly than by relying on internal effort. Additionally, the need to satisfy market demand where additional services and products are required; The need to spread risks and adverse results due to the static nature of the market; Avoidance of internal start ups as well as expansion. Other objectives include the need to increase earnings per share, the need to acquire market position or share, and the need to increase utilization of present resources. Mergers and acquisition also enhance the power as well as the prestige of the owner or management at large. Further, it leads to the acquisition of outstanding technical personnel or management.
The potential economic benefits associated with mergers are many but to name a few they include the following; scale economics- this is where there is a need to avoid duplication of equipment as well as activities as well as the need to introduce activities which would not, otherwise be justified. Also pecuniary- this involves market power related economies, and economies of scope- a single enterprise can produce a given level of output of individual product line at a lesser cost than of separate firms.
Considerations that should be considered during Mergers and Acquisitions
Some critical issues need to be considered before the merger process is initiated. The consideration of these fundamental issues would minimize conflict of interest among shareholders. Moreover, it would create a conducive environment as well as lay down procedures for the process of merging.
Owners- Owners need to determine merger objectives as the consideration would facilitate the type of merger required and ease implementation of strategy accordingly. Outside specialists-, this would facilitate firm valuation process and auditing purposes. Sell not tell approach- this involves communication programs or practices at pre-through-after the merger announcement. Future management of the newly formed Company- This involves the establishment of the merger integration team to aid in quality delivery of services. Win-win approach best of each- This involves all aspects of cultural compatibility. Teambuilding change techniques creative ideas- This involves the presence of a consultant to oversee the delivery of quality services. The consultant would be vested with the responsibilities of making tough decisions promptly as well as be truthful with people or the society.
The case of Volvo and Scania
The merger between Volvo and Scania was a situation whereby AB Volvo (“Volvo”) had proposed to acquire control of the whole of Scania AB (“Scania”) by way of purchase of shares, within the meaning of Article 3 (1) (b) of the Merger Regulation. Volvo was registered in Sweden. This was through its shareholdings in corporations in the Volvo group; the company participates actively in the manufacture and sale of aerospace components, industrial engines and marine, construction equipment, buses and trucks. The company`s principal business units include the manufacture of heavy trucks as well as medium-heavy trucks, and a range of related financing services. It also participates in the manufacture of buses and bus chassis for intercity, city and tourism purposes. In addition, it manufactures industrial engines and marine, develops, produces, and maintains military aircraft primarily for the Swedish Air Force. Scania was also a Swedish company that, through its shareholdings of shares in corporations in the Scania group, was mainly active in the manufacture as well as sale of industrial engines, marine, buses and heavy trucks. Scania also holds 50% of Svenska Volkswagen AB, which distributes, markets and import light commercial vehicles and passenger cars in Sweden. Scania also owns substantial of the Swedish passenger car dealer Din Bil, estimated to account for 40% of Svenska Volkswagen’s deliveries.
Volvo has published the rationale for the proposed concentration to support Volvo’s efforts to compete in emerging, large markets for buses and heavy trucks in South America, former Soviet Republics, Central Europe, and Asia. From the Volvo point of perspective, substantial investments would be required to take advantage of all opportunities in the regions. Its ability to expand into these emerging markets was stated to be a critical requirement if it was to operate efficiently as well as compete favorably with the world’s leading bus and truck manufacturers, and more so, with Daimler Chrysler as well as the North America large engine producers.
Compatibility with the common market: Relevant product market
The planned operation would eventually affect two significant areas, that is, trucks (comprising of heavy trucks) and buses (touring coaches, intercity buses, and city buses). This came into effect and was confirmed that the planned concentration would not enhance the creation or strengthening of a principal situation in the field of diesel engines (marine and industrial). The marketing of trucks was influenced by the technical differences that were of much significance for the buyer. Consequently, the technical boundary concerning the two product categories corresponds to a commercial distinction that makes it possible to differentiate between the distinct categories of clients. Upper range trucks were not normally considered by clients to be interchangeable with or substitutable for trucks belonging to the lower and intermediate range. The three classes of trucks, therefore, constitute separate appropriate product market. The distinction appeared to reflect the fact that dissimilar production lines were applied to produce trucks belonging to the diverse categories. Moreover, manufacturers would concentrate their production on one series with relatively weaker presence or no presence in another range.
Based on their transportation requirements as well as personal preferences, clients would choose a rigid truck or tractor. Additionally, the geographic location of the client would strongly influence the choice for a rigid type of truck or a tractor type. The supply point of view would appear that any chief European truck manufacturer was in a position to offer a complete series of diverse kinds of heavy trucks. This would incline a supplementary cost for such manufacturers. The resultant cost would then be compared to the attractiveness of the market under consideration.
Relevant geographical market
There was substantial evidence was recognized that purchasers of tourism buses were private operators that were price sensitive as well as had little regard for deliberations of brand loyalty to national manufacturers. Volvo had produced an analysis that applied to tourism coaches being equally applicable to heavy trucks. The manufacturers of seven largest heavy truck s, that is, DAF/Paccar, Iveco, RVI, MAN, Scania, Volvo and DaimlerChrysler which approximately accounts for 97% of the European market were present in almost all Member States as well as all made substantial export sales. For Scania and Volvo, sales made outside Sweden accounted for 80% and 90% of their total turnover respectively.
Competition Authorities
Like in the case of the Merger between Scania and Volvo, the competition authorities primarily tend to stem a number of underlined issues, which are held to be critical in the world of manufacturing heavy trucks. The problem of price discrimination across the markets did not seem to be a critical concern to the manufacturers. They did not account for non-price factors in their notification for the definition of the geographic market. The companies only believed that the assessment was only supposed to be on the suppliers’ ability. The evidence compiled indicated that manufacturers had applied significantly different prices as well as margins for comparable products in diverse Member States. The need for the established Council Directive 85/3/EEC had clearly stipulated as well as harmonized weight requirements and dimensions for international traffic within the Union. There also exist other technical requirements concerning heavy trucks that vary from country to country which the authority was required to effect on such heavy machines. Likewise, there had been reliable sources indicating that a majority of heavy truck purchasers in the Nordic states tend to be small as well as medium-size companies tend to buy nationally and as such normally do not consider capitalizing on the price differences in view of the need for after-sales as well as service support. The dealers view the sale of a new truck as a source of future income from spare parts sales and service, on which the dealer typically had significantly higher margins than on the sale of the new truck. The need for regulation is critical.
In a market inclined with fragmented demand structure, it is the work of the competitive authority to foresee it as unreasonable to expect that a considerable number of customers would be in a sound position to present a sophisticated legal analysis of the proposed merger. This implies that it would not be possible as Volvo suggested to consider who, specifically for unknown reasons, had not actively engaged in the proceedings are all unconcerned. As an alternative, the responsibility of the competition authority to carefully the impacts of mergers and acquisition is strongly recommended.
Other related cases of Mergers
In the 2000s, Wall Street had declined because of lower asset values as well as increase in government regulations. This facilitated strategic horizontal mergers of various firms and companies that so far have been common. For instance, strong banks have been absorbing weak ones. Commodities, Pharmaceutical and Chemical firms have been merging in order to increase global reach as well as reduce relevant cost per unit of production. Leveraged buyout corporations (presently private equity firms) have decreased their activity because of losses from fiscal 2007/2008 vintage investments as well as reduction in debt availability.
In addition, it holds to be very critical for each side to contribute along the following dimensions; Strategic issues- the need to identify each firm’s area of distinct competency, it is very essential to estimate the cash flow after merger, address issues relating to expected earnings after merger, and lastly, establish the financial stand for the mother company of each. The managerial issues- audit and examine the level of experience accumulated for individual entity and lastly, comprehensively analyze the existing human resources in the respective side of the business line up for merger. Operational issues- matters of marketing capabilities should be addressed, the trend in sales should be pointed out both in locations, and number, as well as the company’s manufacturing capabilities should be identified if it holds to be a manufacturing company. Financial issues- Proper audit of the assets of the intended merging business line should be done, as well as the financial strength of the intended business line should be addressed.
Conclusion
Although the process of merger and acquisition holds to be critical in the daily conduct of the business, some fundamental aspects need to be addressed accordingly as a matter of protecting the interests of the final consumer. In the case of the merger between Volvo and Scania, the competition Authority (Commission) has established that the notified concentration is incompatible with the functioning of the body agreement as well as common market, despite assuming full compliance with the proposed undertakings. Consequently, it would still create dominant positions in the markets for heavy trucks in Ireland, Finland, Norway, and Sweden. The proposed concentration would contribute to the creation of a dominant position on the markets for tourism coaches in both Finland and the United Kingdom as well as on the markets for intercity buses and city in Denmark, Norway, Finland, and Sweden as well as on the Irish city bus market.
References
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