Development of takeovers

A takeover occurs when one company makes a successful bid to assume

control of or acquire another. Takeovers can be done by purchasing a
majority stake in the target firm. Takeovers are also commonly done through
in the merger acquisition process. In a takeover, the company making the
bid is the acquirer and the company it wishes to take control of is called the
target.

Takeovers are typically initiated by a larger company seeking to take over a

smaller one. They can be voluntary, meaning they are the result of a mutual
decision between the two companies. In other cases, they may be
unwelcomed, in which case the acquirer goes after the target without its
knowledge or sometimes without its full agreement.
In corporate finance, there can be a variety of ways for structuring a
takeover. An acquirer may choose to take over controlling interest of the
company’s outstanding shares, buy the entire company outright, merge an
acquired company to create new synergies, or acquire the company as a
subsidiary.

KEY TAKEAWAYS

 A takeover occurs when an acquiring company successfully closes on a

bid to assume control of or acquire a target company.
 Takeovers are typically initiated by a larger company seeking to take over
a smaller one.
 Takeovers can be welcome and friendly, or they may unwelcome and
hostile.
 Companies may initiate takeovers because they find value in a target
company, they want to initiate change, or they may want to eliminate the
competition.

Types of Takeovers 

Takeovers can take many different forms. A welcome or friendly

takeover will usually be structured as a merger or acquisition. These
generally go smoothly because the boards of directors for both companies
usually consider it a positive situation. Voting must still take place in a
friendly takeover.

Usually, in these cases of mergers or acquisitions, shares will be combined

under one symbol. This can be done by exchanging shares from the target’s
shareholders to shares of the combined entity.

An unwelcome or hostile takeover can be quite aggressive as one party is

not a willing participant. The acquiring firm can use unfavorable tactics such
as a dawn raid, where it buys a substantial stake in the target company as
soon as the markets open, causing the target to lose control before it
realizes what is happening.

The target firm’s management and board of directors may strongly resist
takeover attempts by implementing tactics such as a poison pill, which
allows the target’s shareholders to purchase more shares at a discount to
dilute the potential acquirer’s holdings and voting rights.

A reverse takeover happens when a private company takes over a public

one. The acquiring company must have enough capital to fund the takeover.
Reverse takeovers provide a way for a private company to go public without
having to take on the risk or added expense of going through an initial public
offering (IPO).

A creeping takeover occurs when one company slowly increases its share
ownership in another. Once the share ownership gets to 50% or more, the
acquiring company is required to account for the target’s business
through consolidated financial statement reporting.
 Study Case Takeovers

The case discusses the transformation of Swedish-run luxury

car brand, Volvo Car Corporation (Volvo), under its owner,
Chinese multinational automotive company, Zhejiang Geely
Holding Group (Geely). Ever since Geely takeovers Volvo from
the American automaker, Ford Motor Company (Ford) in 2010
for US$ 1.8 billion, the company had been tackling the
challenge of reviving Volvo. The Swedish company had
recorded pre tax losses of US$ 934 million for the year 2009,
attributable to the global economic downturn. To revive
Volvo’s fortunes, Li Shufu (Li), chairman of Geely, devised a
turnaround plan under which he proposed to make Volvo
profitable by expanding its sales in China to nearly 1 million
vehicles a year, set up a low-cost manufacturing plant in China
with an annual capacity of 300,000 vehicles banking on China’s
inexpensive labor and market potential, and produce more cars
out of Volvo’s European factories. In addition to this, Geely’s
Hong Kong listed unit, Geely Automobile Holdings Ltd., planned
to add two or more luxurious car brands in a bid to boost
Volvo’s global sales. Industry analysts expressed skepticism
over Geely’s ability to turn around the loss-making Volvo as the
ailing brand had a very niche market. Moreover, they felt that
Geely had no experience in selling luxury car brands and was
known for manufacturing cheap cars with a short history and
questionable quality and poor safety while Volvo had a long
history of being recognized as a luxury car brand and was
known for its quality and safety standards. Some critics also
pointed out that several Chinese companies had a relatively
poor record in integrating their foreign takeovers and Geely
could also face issues related to cross-cultural management.
 Introduction

In January 2016, soon after posting record unit sales, Volvo Car Corporation
(Volvo), the Swedish-run luxury car brand owned by Chinese multinational
automotive company, Zhejiang Geely Holding Group (Geely), announced that
it was gearing up to become a major international player. The company
reported that for the year 2015, it had sold 503,127 cars. This was the highest
in its 89-year-old history and represented an increase of 8 percent compared
to 2014. According to Volvo, the sales data marked the end of the first stage
of the company’s recovery which began after it emerged from a loss-making
period in 2013. Commenting on the sales, Håkan Samuelsson (Samuelsson),
chief executive, Volvo, said, “I am delighted to report that 2015 was a year of
record sales. Now, with a successful 2015 behind us, Volvo is about to enter
the second phase of its global transformation. Once completed, Volvo will
have ceased being a minor automotive player and taken its position as a truly
global premium car company.
 Analysis of the case

Volvo’s road to recovery was far from smooth. In 2013, it reported

that for the year 2012 it had recorded a drop of 6 percent in vehicle
sales due to intense competition in the auto industry. Analysts
pointed out that Volvo had struggled to gain momentum for a
revamp aimed at targeting customers in the hugely competitive
Chinese auto market and keeping up with bigger competitors. The
company’s sales in China in 2012 declined by 11 percent to 41,989
cars from 2011.

In August 2014, Volvo unveiled its first car under Geely’s ownership
the XC90. Commenting on the launch, Bin Zhu, China forecast-team
manager at consultancy, LMC Automotive, said, “If Volvo is
successful, it will have a great significance on Chinese automakers.
It could boost their confidence and set an example for the whole
industry.” It was observed that more number of cars were
produced and sold in China but the domestic brands in the country
had failed to make an impact in international markets. Even in
China, most of the consumers drove cars made by foreign
automakers rather than ones produced by domestic car makers.

While Volvo was reviving its operations and planning to make a

mark in the US market, the slowdown of the Chinese economy
added to its troubles. However, defying the slowdown, Volvo
boosted its earnings goal for 2015 stating that the sales in the
European market would outweigh the slowdown in China.
According to Samuelsson, “The price situation in China is getting
tougher. The important thing is to see the strength of having Volvo
global. We can balance out softer development in China.
Conclusions

Through the study the following conclusions can be reached:

The acquisition of the Swedish Volvo by the Chinese Geely is a direct result of
one of the worst recessions trigged by the finance crisis. However, it is in fact
the result of the new world
economy balance between China and the western industrial countries.
Benefited from the globalization, China will be the next superpower in the
world economy. It is believed that this
acquisition is just a beginning of the Chinese economy expansion overseas.

Although Volvo did not like to be brought by a Chinese company like Geely, it
probably had no choice because it was owned by the American Ford
previously. However for Geely, there are many reasons why it was interested
in buying Volvo: a direct access to the absolute world-class technologies in
automobiles, the possibility of rapid expansion in the Chinese automobile
market for Volvo, increase the value of the Geely brand significantly
domestically
and overseas, maybe overseas distribution channel for Geely in the future,
etc. Moreover, the price of the acquisition is really low, thanks to the fact
that Ford wanted to get rid of Volvo and
get the needed cash.

It is concluded that there are a lot of challenges lying ahead for Geely and
Volvo. The main challenges include: to defend the brand and customer
loyalty of Volvo, to overcome the culture
difference between two companies or two countries, to manage the multi-
national organization, etc. Due to the huge difference in two companies,
there is no immediate cost saving or synergy
available in the near future. Therefore, the challenges themselves indicate
that the risk of failure of this acquisition is relatively big.