M&A: Neither a Buyer nor a Seller Be

The history of the domestic automobile industry is a history of mergers and acquisitions. When times are good, the big fish eat the small fish. When times are tough, the big fish go to school. Witness Ford’s SUV-financed spending spree (Jaguar, Land Rover, Aston and Mazda) and the Daimler/Chrysler and Renault/Nissan mergers. At best, the long-term track record for acquisitions has been spotty, and alliances are equally likely to end in tears. So why do automakers persist?

Acquisitions possess a seductive logic: the “no fear” factors. Factor one: taxes. When a big automaker is doing well they have piles of money lying around. Buying up the competition keeps the taxable profit lower. Factor two: the art of the deal. Many auto industry executives hail from the world of finance. (GM CEO Rick Wagoner is a Harvard MBA.) Pulling off a big acquisition or orchestrating a huge merger is their “project car.” Factor three: capacity. Buying someone else’s production– and, hopefully, customer base– is cheaper and more efficient than building your own from scratch. Yes but…

Troubled automakers are almost always not what they seem. BMW bought Rover thinking it was securing an outlet to the UK’s mid-market. Unfortunately, by the time the Bavarians assumed control, Rover had lost most of its capacity and moved up-market to try to stay afloat. Instead of gaining entry into the middle of the market, the Germans bought the original “English Patient.” GM bought Saab in 1990 to grow a global luxury brand. After spending $1.5b and pouring a couple more billion down a Swedish sinkhole, The General discovered the brand’s glass ceiling: a limited appeal to a limited market willing to pay a limited price.

And speaking of cross-cultural coyote dates, voracious multinationals seem to forget that acquisitions come with their own traditions (i.e. entrenched bureaucracy and petty fiefdoms) and factories (usually old and in the wrong place). Isuzu, Suzuki or Mitsubishi are gold diggers on the prowl: top-heavy companies offering corporate suitors little more than engineering skills and expensive Japanese factories located in a mature market. For these reasons and more, most acquisitions fail miserably and hang around interminably– or at least until the execs responsible leave the company.

Mergers don’t fare much better. Chrysler accounts for the US auto industry’s two most recent mergers (absorbing AMC and being absorbed by Daimler). Fortunately, in both cases, one company was clearly stronger than the other, avoiding many of the problems inherent in any attempt to combine two corporate cultures. Even so, the first merger helped drag the company into bankruptcy, while the second only threatens to do the same.

History tells us Chrysler’s flirtation with oblivion is no exception. When Austin and Morris merged in 1952 to form BMC, the merged corporations maintained separate dealer networks, factories and management identities. As things went downhill, more companies were added to the mix. When Rover finally rolled over and died, it took with it the remains of over a half-dozen carmakers, all united by failure. The modern equivalent could yet be Hyundai merging with Kia: two rival companies with nearly identical product lines and deep-rooted management cultures.

Brand overlap is yet another merger-related nightmare. All car manufacturers’ line-ups span a number of price points and sizes. Adding in a former competitor necessitates realignment and pruning which, again, creates tremendous internal friction. And that’s on top of the fact that the whole point of buying a new brand is to grow sales, and those sales have to come from somewhere, and that somewhere is the industry equivalent of the horror movie's “he’s in the house!” Not to put too fine a point on it, the end result is often a major clusteryouknowwhat.

For example, while Ford has had success with keeping Mazda healthy (if static) and growing Volvo, you could easily argue that this progress has come at the cost of losing sales from (or simply neglecting) Mercury and Lincoln. Meantime Jaguar tried and failed to go down-market (more trouble for Lincoln). GM has had it even worse with Saab, especially since they started moving Caddy into the “sporty” side of luxury.

Common sense says it’s always best to stay focused, be your own man, hunker down and do a few things well– rather than gobble up a competitor and squander your resources on ill-advised brand extensions. Unfortunately, the auto industry tends to attracts egomaniacal leaders who see danger as an opportunity, rather than danger. When they're flush with cash, Empire building sings its siren song. As Ford eyes-up Renault, and other automakers eye Ford’s cast-offs, a word of unsolicited advise: look after your own house before coveting thy neighbor's.