Synergies in Mergers and Acquisitions - Ford Acquisition of Mazda - Case Study Example

Synergies in Mergers and Acquisitions: Case Study of Ford Acquisition of Mazda University Affiliation Name Synergies in Mergers and Acquisitions: Case Study of Ford Acquisition of Mazda Technological changes and forces of globalization have contributed to a highly dynamic and competitive world of business that has forced firm to proactively seek different means of remaining competitive while increasing shareholder value, wealth and firms cash flows. The resultant strategies have included increased mergers and acquisitions which are specifically aimed at maximizing shareholders value and acquiring competitive advantage, increase their revenues, volume of sales, and acquire a multinational dimension besides being a mean of rapid expansion (Bruner, 2004). Nonetheless, evidence from empirical studies within the last five decades suggests that only around half of the acquisitions and mergers are successful. Yet more alarming are the findings by Millman and Grey and Sirower indicating that 83% of the mergers had no benefit at all to the shareholders and 60-70% of acquisitions are flops as they fail to produce any positive returns (Buckley and Ghauri, 2009). Such evidence of failure suggests the need for a strategic orientation in management determining the possible viability of a merger or acquisition. Synergy theory while espousing the existence of a value addition in mergers best provides a basis for businesses to profitable get into mergers and acquisitions. Using the synergy theory, the advantages and the synergies between Ford and Mazda, and the rationale behind the acquisition of Mazda (target) by Ford Motors (acquirer) through share acquisition and contract management are expounded in this paper. Synergy theory suggests that firms are often out to look for something that may facilitate the additional creation of shareholders value. Burkley and Ghauri (2009) assert that an assessment of synergies during mergers and acquisitions is crucial considering that a transaction without foreseeable future synergy destroy the firm’s value in the long run. Rationale behind the transaction of Ford and Mazda The decision by Ford Motors to enter into an acquisition transaction with Mazda was guided by the expected increase in total synergy. The total synergies consist of the sum of in-place synergies and real-option synergies (Bruner, 2004). Synergies resulting from activities or those assets that are in place contribute to the first basis for determining synergy. Advantages and synergies resulting from merger and acquisition The acquirer (Ford) aimed at increasing its synergy by the transaction with the target (Mazda). Among the synergies from activities and assets already in place include market synergy, revenue enhancement synergy, management synergy and cost reduction synergies. Revenue enhancement synergies Where a firm enters into a merger or acquisition that results in a firm selling more products than either of the firms would sell independently, the firms are said to acquire a revenue enhancement synergy (Burkley and Ghauri, 2009). For instance, the acquisition of Mazda by Ford resulted to the firms cross selling in either markets, where Ford accessed the Japanese market and Mazda accessed the Northern American market and other markets that Ford had a foothold (Hoyt, 2011). Wayne Booker, Ford vice chairman asserted that the increased integration of Ford and Mazda provides the clients for both companies better choice through enhanced manufacturing, product development and distribution and purchasing capabilities (Hoyt, 2011).The use of the larger marketing force by Ford further provides an opportunity to sell the smaller Mazda vehicles especially with the shift in trends towards low fuel consumption vehicles in Northern America. For instance, in the late 1970s Ford was experiencing high levels of competition especially from the Japanese small cars resulting to reduced market share for the firm. A merger between the subsidiary of Ford and the Mazda manufacturers provided Ford with an opportunity to study the Japanese industrial management which were superior to Fords (Ford Motors). The resultant increase in sales of Mazda in the Northern American market would contribute to increased revenue for the companies. Besides, cross branding as was evidenced in the success of the Australian market where through badge engineering which saw the rebranding of Mazda’s as Fords further resulted to increased revenue for the acquirer (Hitt et al, 2009). Management synergy Ford through its expertise in brand management and marketing and foreign markets expertise would diffuse the expertise to Mazda through the contract management that was part of the share acquisition deal. The use of management expertise that already exists in Ford to drive the revenue generation from the Mazda products further saves costs for the company due to reduced costs of labor. Further, the skills and expertise provide a platform for Mazda to be better managed and experience growth in market share and shareholders value. Other benefits resulting from use of expertise from either company would result to improvement in quality of Ford manufactured vehicles as Ford learns from Mazda, who have a reputation for excellence in engineering. Market synergy Another rationale for the transaction was acquisition of market share. Since Mazda was focused on high quality small car markets that were focused on price while Ford was focused on luxury high end vehicles, Ford could use its existing market to aid the penetration of Mazda cars. This would increase revenue from Mazda line of business since by using the same distribution channel would reduce the effective total costs that would be incurred by either as the brands would share the costs. Therefore it would be cheaper for the acquirer and the target market resulting to costs savings. Wayne Booker, Ford Motor company vice chairman affirmed that the increased integration of Ford and Mazda had resulted to increased competitiveness for both companies (Hoyt, 2009). Wallace, Mazda president asserted that the benefits accrued to both companies are evident from the basis of the synergy between Fords superior capabilities in marketing and sales and in high volume manufacturing and Mazda’s superiority in production engineering and product engineering of variety of products but in small volumes making each a better company (Hoyt, 2011). Cost reduction synergy Another rationale for the Ford to acquire Mazda was to increase its synergies by sharing investments and costs. The merger was expected to result to reduced cost and increased investments. Since revenue synergy is one of the main rationales for the Ford share acquisition of Mazda, reduced costs accompanying the merger would contribute from shared costs and shared investments. For instance, use of the same plants in the companies South African markets thus reducing the need for each company to construct new plants thereby saving costs (Ford Company, 2010). This is attributed to higher capacity utilization of existing equipment’s and plants. Also, due to the increased quantity of purchases the firm may develop greater purchasing power over suppliers compared to competitors. Similar costs savings could be evident from the target company acquiring knowledge on Fords unique cost control measures. Product development synergies Mazda president, Wallace, in a media briefing pointed out the benefits that have accrued to the two companies following their integration. He claimed that in the product development, the companies established synchronized systems, which enabled them to share engineering expertise, base-line design, thus freeing resources that were used for creating differentiated products for the clients (Hoyt, 2011). Additionally, Mazda president pointed out that through a plan for commonising powertrains and platforms thus reducing number of platforms for both companies while still increasing differentiation of products (Hoyt, 2011). This was accompanied by opening of new communication channels that allowed for increase in efficiency which has enabled an increase in sharing best practices and benchmarking. Fords decision to move much of its design work to Mazda has been touted by auto industry experts as a decision that has bore fruits as evidenced by Fords production of some of its most successful models from the offshore plants (Wilkins, 2011). Various recently successful Ford models such as Edge are products of the combination of characteristics of Mazda and ford vehicle designs. Wilkins (2011) has concluded that the decision of Ford to move its design to Mazda has paid off as evidenced in the great success of its new Ford models designed in Mazda’s team in the offshore facilities. The payoff from the decision is touted as one of the contributing factors to the recent profitability thus has enabled Ford to pay off most of its loans early. Other benefits in regard to cost may stem from elimination of intermediaries, improved distribution logistics and technology transfer from one firm to the other (Bruner, 2004). The payoffs in this case are predictable and are evaluated using discounted cash flow evaluation methods resulting to an increase in weighted average cost of capital, which is the blended opportunity cost of all investors (Burkley and Ghauri, 2009). Such cost savings increase the free cash flows for the firms thereby increasing the capital and providing for an avenue for reducing the opportunity costs for both the target and the acquirer. For instance, Mazda president posited that the relationship between Ford and Mazda had strengthened its distribution network and directly contributed to reduced costs of distribution (Hoyt, 2011). Another aspect may be asset reduction and maximization synergies. This is where Ford may dispose of idle assets such as unused plants, vacant real estate, inventories, cash balances and receivables while at the same time utilizing its resources such as plants optimally (Bruner, 2004). For instance Ford and Mazda maximize use of resources such as use of the Auto Alliance International (AAI) plant in Michigan, and Auto alliance Thailand (AAT) Flat Rocky, Rayong peninsula in Thailand to produce parts for Ford and Mazda products thus saving cost of new plants and increasing revenue for the both the acquirer and the target (Hoyt, 2011). Mergers and acquisitions may thus clearly portend various advantages to organizations. As evidenced from the successful transaction between Mazda and Ford, the extent to which the organizations share various synergies determine the probability of success. Its evident that synergy is a crucial component in the success of any merger or acquisition. References Bruner, R. (2004). Applied mergers and acquisitions. New jersey: Wiley Interscience. Buckley, P., & Ghauri, P. (2009). International mergers and acquisitions: A reader.Cengage. Ford Company (2010). Retrieved from http://www.fundinguniverse.com/company- histories/Ford-Motor-Company-Company-History.html Hitt, A.M., & Duane,.R.,& Robert, E. (2009). Strategic management: Competitiveness and globalization: Concepts and Cases. Cengage Learning.. Hoyt, T. (2011). Ford/mazda relationship proving successful. Retrieved from http://www2.prnewswire.com/cgibin/stories.pl?ACCT=104&STORY=/www/story/91584&EDATE Wilkins, J. (2011). Ford uses mazda designs for successful models. Daily autonews. April 10, 2011. Retrieved from Read More