Mergers and Acquisition
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Mergers and Acquisition
In the environment of harsh competition, consolidating business effort has been a popular way out, especially in the 90’s - Mergers and Acquisition introduction. In the 90’s, larger companies seemed figure that rather than facing endless price wars or numerous fights for new markets and new market segments, it was better to combine their business to some extent, or even completely merged whole businesses into one. A popular industry that displayed this tendency is the global automobile industry. The cases of Daimler-Benz and Chrysler, Ford and Mazda, Nissan and Renault, GM and Suzuki, etc have clearly revealed the high interest to perform mergers and acquisitions within the industry.
Most of the companies above stated that they saw business opportunities that are too large to pass-over. They claim to pursue mergers and acquisitions in the name of cost cuts, obtaining new market platforms, gaining technological advantages, cutting processes, etc. However, analysts often stated that most of these companies did not achieve the value creation they intend to by means of mergers and acquisition. Most of them even lagged behind their average share prices, after the mergers. Nevertheless, other analysts denied that claim by mentioning some notable exceptions like Nissan-Renault, who manage to overcome their huge cultural issues, and Ford-Jaguar, who gains new potential markets in US and European markets. Both companies are examples of corporations that actually gains benefits from each other (Harbour, 2000).
The automobile industry mergers revealed above were generally performed within several common circumstances. First, there was generally a company that experienced difficulties in maintaining profitable operations. Second, there was another company who thinks that the first company actually has what it takes to enhance the business. This is the common form of merger situation. For instance, Nissan was practically new-bankrupt when Renault chose purchase the company at a considerable price. However, Renault sees a chance that Nissan would create new business platforms in markets Renault cannot enter. Thus, It purchased the company, and sent their best manager to Nissan in order to turn things around for them. The result was a satisfying comeback for both companies in less than three years after the merger.
Within this paper, we will discuss the possibility of another kind of merger, which does not involve a superior or inferior company within the frame of the merger. Analysts mentioned that most of the larger automobile companies have taken part in the merger trend of the 1990’s. However, there are some companies who remain fiercely independent throughout the entire period, like Honda, Toyota and Peugeot. Despite the stable growth of these companies, here are intense arguments whether they should or would join the trend in the future.
In this paper, we will discuss the benefits and losses of merging The Honda Motor Corporation and Toyota. The paper will start with a background of each company, continued with their merger possibilities and considerations, and closed with final suggestions and conclusions.
II. Corporate Background
Honda is a Japanese manufacturer of automobile, trucks, motorcycles, scooters and robots. Many identify the company with cars and motorcycles, but looking at its daily operations, Honda is more like an engine company rather than a car company. Honda makes marine engines, watercraft, electric generators, lawn and garden equipment, aeronautical technologies, etc. Honda is the largest engine make in the world by building approximately 14 million internal combustion engines annually. However, the company proved that it continues to make its diversification steps in 2004 by producing diesel motors.
The company headquartered in Tokyo and their shares are traded in Tokyo Stock Exchange and other exchanges in Osaka, Nagoya, Sapporo, Kyoto, etc. The company has a considerable share in America’s automobile industry. It high-end line of cars goes by the Brand Accura in North America. The American Honda Motor is based in California
II.1.2 Strategy and Competitive Advantages
A company in Honda’s caliber has numerous strategies to maintain market share and increase sales. In the case Honda, going global is definitely one of its integral business plans. The company has one of the longest histories of global sales and manufactures. It started right after the British Motorcycle industry gain the world’s attention in the early. Despite the fact that the British are the ones who invented motorcycle, the Japanese managed to take away most of their market share and lead the British Motorcycle Industry to its end. Honda came in to British and American market with its innovative engine designs and futuristic externals that take away consumers’ hearts.
It is arguable, but many stated that Honda’s success started with the motorcycle rather than the automobile segment. Honda’s motorcycles are known for its beautiful designs and powerful engines. Honda’s motorcycles have repeatedly won numerous types and classes of international races. Today however, Yamaha has the lead in the motorcycle segment, but Honda remains with one of the strongest motorcycle markets in the world. From this platform, the company went on to design engines for various purposes.
The company has one of the most advanced marketing campaigns in the world. Their role in many types of international races like motor cross, formula 1 and the grand prix has earn them worldwide recognition. With the official slogan ‘the Power of Dreams’ the company engages in several technological quest that produced Asimo and other robots that caught the world’s attention. Another trait of the company is its ability to tab-into local preferences and designs the locally-desired vehicle. Honda has a vast line of motorcycles that serves to fit its individual geographic segments (‘Honda Announces’, 2000).
II.1.3 Financial Performance
In March 31, the company has 9 trillion yen of total asset, 6 trillion of total debt and income of the year is 486 billion yen. This number represents a high level of gearing, but it is normal in an automobile company that has considerable amount of manufacturing facility. Sales number increases 10 % from last year but net income grew only about 2%. This represents the increasing cost structure due to the increasing prices of fuel and materials. Profit margin is around 5% and its inventory turnover rate is 10 times a year. The company also has a considerably high receivable turnover rate (around times a year), remembering that most of its products are bought in credit terms (Annual Report, 2005).
Toyota is Japanese number one automaker. Globally, it’s the world second largest automaker by sales numbers. The company purchased several significant shares of several other motor companies like Daihatsu Motor Company and Hino. The company has a large market share in the United States, Europe and Africa. Not to mention that the company is the market leader in Australia and have significant market shares in the growing markets of South East Asia. Toyota Financial Services has a considerable role in helping the segments of Toyota in expanding their sales.
Unlike Honda, Toyota started right into the automobile business in 1933. However, the company also produces textiles and makes automatic looms. The company invests a great deal in research and development to find new models and designs. Its latest design is the Toyota Corolla and Yaris who receive increasing attention from customers. The cars are designed with regards to the high fuel prices that lead automakers to focus on the midsize car segment.
II.2.2 Strategy and Competitive Advantages
One of the most notable competitive advantages of the company is the Toyota Production System that boost performance substantially since the mid 80’s. American companies have been actively trying to take benefits from their study of the Toyota Production System. Toyota stated that TPS has a ground of a value-based production system. This means that innovations within the production systems are directed to deliver more value to customers rather than making harassing demands to suppliers in order to cut costs. It involves collaboration with suppliers to deliver highest possible value to customers (Teresko, 2006).
Other notable quality is its marketing strategy and the function of Toyota Financial Services. The company has a considerable share in foreign markets because of its product design and pricing strategy. The company provided developing nations with local automobiles that displays Toyota’s leading brand, but with relatively cheaper prices. Furthermore, Toyota Financial Services helps the company to sell more cars to mid-size customers.
II.2.3 Financial Performance
As of March 31 2005, the company has 24 trillion yen of total asset. Revenue from the consolidated business of the year is 18 trillion yen and net income for the year in 1.7 trillion yen. Sales in Japan dominated the revenue, followed by sales in United States and Europe. Despite having larger amount of assets compare to Honda, the company has significantly smaller inventory turnover, which indicated that growth is not as fast as Honda. However, the company has a significantly lower level of gearing. This indicates that Toyota currently has a stronger financial structure than Honda (Annual Report, 2005).
III.1 Advantages of Merger
After revealing individual traits of both companies, we will discuss the possibilities of their merger. The possibilities of merger for these companies came from several respects:
III.1.1 Similarities of Target Market
Most mergers and acquisitions have a strategy of expanding geographical market share within them. One company would benefit the other by expanding their markets to places they have not yet reach. However, in the case of Honda and Toyota, the companies have product lines to be sold to similar markets. Despite some differences in geographical coverage, the companies generally compete in the same markets. Therefore, there are no advantages of expanding geographical market share. The existing benefit exists from increased product lines, stronger place in the market and less threats of takeovers from other companies.
III.1.2 Similarities of Culture
One of the largest obstacles in performing a merger is the difference of culture. Mergers of multinationals generally lacked behind the value creation they aim because of the culture issue. Mergers could look very profitable in papers but turns out a disaster when applied. This is due to the fact that multinationals gain their success due to the ways they do business, which soon evolved to be a culture of the company. They would not give up their culture so easily in terms of mergers and acquisition. This particular issue is what caused mergers turn from value creators to value destroyers in the 90’s
However, in the particular case of Honda and Toyota, the companies came from similar business environments. Furthermore, they were brought up with similar ways: innovation, globalization and strong local roots. If the two companies are to perform a merger deal, there are bound to be several cultural issues, but with the absence of environmental differences and perspective toward growth and stability, the cultural problems will not be of significance. This could help the company to achieve their target of value creation in case of mergers.
III.1.3 Joined Product Segments.
Despite having similar target markets, some of the companies’ product lines are different. Honda has a considerable strength in the motorcycle market while Toyota relies on its mid-size automobile sale in Japan, and US. Furthermore, Honda has a line of products in the form of engines for various functions. The merger of the companies will create an entity which has significant market share in the motorcycle segment as well as other non-automobile segments.
III.1.3 Merged R&D Efforts
Both companies invest significantly in the effort of producing new innovations and enhancing existing product line. In these efforts, there is a sound logic that each company must maintain separate R&D effort to preserve consumer’s trust toward the brand, in case of a merger. However, there are several projects that could be undertaken as a join effort between the companies. For instance, both companies are currently working on the hybrid technology. The new project has a high level of significance because it could lead to new products with high potentials. If a merger should occur, it would lead to joint efforts on the hybrid technology researches that will increase the speed as well as capacity of the researches (Eisenstein, 2005 & ‘Hybrids’, 2006).
III.1.4 Toyota Production System and Honda’s Marketing Strategy
Toyota is recognized as a larger and more stable company. However, Honda is the one currently experiencing a faster rate of growth. Toyota has the first lead due to its successful production strategy which brought financial strength to the company today. The Toyota Production System has gained recognition from other multinationals hoping to increase its productivity and process efficiency. A merger between Toyota and Honda will bring the production system in to the merged company and bring benefits to both.
On the other hand, Honda has the upper hand in terms of marketing strategy and popularity. The marketing campaign includes sports events, large technology exhibitions and aggressive use of TV commercials. Common people without the knowledge of Honda and Toyota’s financial statements could easily mistaken Honda as the larger company compare to Toyota. This marketing strategy has proven to be a positive factor that helps increases corporate income for the last decade. A merger of both companies will bring this marketing edge to the benefit of the new merged company.
III.2 Disadvantages of Merger
Despite the benefits mentioned above there are also several considerations that pose against merger actions between Honda and Toyota. Some of them are:
III.2.1 Antimonopoly Regulations
The merger trend in the 90’s has kept the FTC (Federal Trade Commission) and other international trade committees on their toes within the last several years. Some people believed that several mergers performed during the 1990’s period pose as great threats of monopoly to several segments of the international automotive industry. However, they have seemed to escape FTC’s evaluations. Therefore, the FTC, along with other international trade committee has increased their standards in examining merger proposals to prevent anymore threats of monopoly to take place within the industry (Winter, 1988).
III.2.2 Discouraging Odds
Studies indicated that more than 70% of companies performing mergers and acquisition fail to deliver their promises to corporate stakeholders. Observers revealed the tremendous amount of things that could go wrong without management could have ever predicted it. The chain of failures generally starts by lack of socialization among low level employees. This could then lead to lack of working motivation which causes the best employees to leave and left the company with the worst performers. The larger the company, the more probability something could go out of management’s attention. Thus, there is considerable logic in expecting things to go wrong in such a grand step like combining Honda and Toyota.
III.2.3 Costs and Benefits
An article by John McElroy stated that within a merger, the company who becomes the purchaser generally never gets back what they pay for, back in the process of the merger. The purchaser might gain new market platform, new technology, or other benefits from the purchased company, but they will not add up to the sum of money that is allocated for the initial investment.
Most often, they will be a nice addition that never carriers their own weight. There is still a question of whether Ford will ever get back from Mazda what its spent for the company. There is also a present question of whether General Motors will ever gain back the money spent for Suzuki, Subaru, Fiat or Daewoo.
III.3 Financial Estimations
The total asset of Toyota is approximately 24 trillion yen. On the other hand, the total asset of Honda is 9 trillion yen. The data reveals that Toyota might have the capacity to purchase Honda.
However, total asset does not reveal the value of the company as a whole. There is a question of goodwill within the decision of sales price. Some acquisitions required the purchaser to pay twice the value of a company’s assets and some even less the asset value. Therefore, the minimum payment price of he is 9 trillion yen and the maximum price is up to 18 trillion yen. That is about US $ 83 billion dollar and US $ 166 billion.
After considering the aspects mentioned above, there is a sound logic both in performing the acquisition or canceling it. However, the risks within the merger seem to be larger than the benefits they might acquire. As mentioned before, most companies lack behind the value they aim once they undertake the merger. Analyst claimed that the reason Toyota, Honda and Peugeot remains at the top of the game is because they maintain a considerable extent of independence within their business. Due to the risk involved within the activity, analysts stated that mergers should only be performed if other choices to save the company are insufficient (McElroy, 2002).
Thus, I believe that this paper lead to a conclusion that despite the positive factors mentioned above, Toyota and Honda should not perform a merger with each other, with the exception of corporate survival.
Financial Ratios Summary
Liquidity & Coverage
debt to total asset ratio
‘Annual Report, 2005’. Toyota. Retrieved August 7, 2006 from http://www.toyota.com/search
Eisenstein, Paul A. 2005. ‘Toyota Rethinks Hybrid Strategy’. Retrieved August 7, 2006 from http://www.thecarconnection.com/index.asp?DID=RSS&n=175&sid=175&article=8928
Harbour, Ron. July 2000. ‘Making Sense Of Mergers – in the automobile industry – Brief Article’. Automotive Industries
‘Honda Announces New global Strategy’. 2000. Autoweb. Retrieved August 7, 2006 from http://autoweb.drive.com.au/cms/A_52534/newsarticle.html
‘Hybrids’. 2006. Honda. Retrieved August 7, 2006 from http://world.honda.com/search
McElroy, John. Nov 2002. ‘No More Mergers, Please – auto industry acquisitions not a good idea’. Ward’s Auto World
‘Semi Annual Report-2005. Honda. Retrieved August 7, 2006 from http://world.honda.com/profile/governance/
Teresko, John. 2006. ‘Learning from Toyota-Again’. Industryweek. Retrieved August 7, 2006 from http://www.industryweek.com/ReadArticle.aspx?ArticleID=11301&SectionID=1
Winter, Drew. Nov 1988. ‘Regulatory swan song: FTC turns up heat on mergers, acquisitions – focus on automobile industry suppliers’. Wards Auto World.