Friday, May 08, 2009

Renault-Volvo Strategic Alliance

Written with Mahendra Madhavan for a case study in our Global Financial Management course.


Disproportional control of the resulting Renault-Volvo RVA by the French Government was not a merger; it was an acquisition. Volvo investors lost all control of their organization, while assuming the risk of Renault. Volvo’s Executive Chairman, Peter Gyllenhammar, attempted to perform a unilateral cram-down by requiring quick decisions and giving sparse information. After pulling the company from its core competencies, Gyllenhammar resigned. Volvo leadership leveraged those failures to return the company to its core strengths.

Why was the merger proposal rejected? The economic rationale for the merger seemed unassailable. What other considerations proved significant?

The reason investors reject the merger is inadequate information from Volvo management. When Volvo’s Executive Chairman, Peter Gyllenhammar, champions the merger, he gives an incoherent retort emphasizing a quick merger, and non-business arguments such as: “You cannot go back to something you have just mentally left” (7). Volvo’s senior management loses confidence and trust of the investors by requiring a short timeline, and excluding them in the latest development; exceptional information must be provided for corporate changing events, like mergers. Volvo management performs improperly--only sparse information is provided, which creates uncertainty among the investors.

In addition, merger terms are not fair for all of Volvo investors. The French government retains a powerful right, termed a Golden Share, which prevents an investor from acquiring or voting more than 17.85% of direct interest in the merged company Renault Volvo Alliance (RVA). In concessions, the French Prime Minister raises the figure to 35%, matching Volvo’s actual percentage of equity at closing. Control of the special voting rights gives Volvo little control in the strategic direction of RVA.

Volvo investors are concerned about protectionist actions of the French government in other industries. French government intervention in internal RVA affairs and the powerful Golden Share ensures the French government retains control over corporate decision making. When Gyllenhammar tries to reinsure Volvo investors about French control, he vaguely states an attempt to get “interpretation or assurances” (7). A yet undefined timeline on the privatization of Renault creates anxiety among Volvo’s investors. Among the concerns, France’s Minister of Economics, Edmond Alphandery, has stated full privatization would not occur.

As a public company, Volvo’s market value is explicit. Yet, as a private company, Renault’s enterprise valuation contains assumptions on discounted cash flows, projections, and market multipliers. Since a privately held organization does not file financial statements to financial regulators, investors rely on biased information provided by merger proponents. Such valuations are subjective judgments of the valuation analysts. Resulting losses by Renault during the valuation and the proprietary details of the valuation analysis cause considerable concern among investors. Given this situation, investors question the fairness of 65% weight for Renault ownership in RVA.

Who figured prominently in the rejection? Did the opponents have one common objection, or did groups of them oppose different aspects? Either way, was Gyllenhammar’s approach appropriate?

Several groups oppose the merger. Volvo’s institutional investors leveraged the media for opposition. The Swedish news papers Expressen, Dagens Industri, and Svenska Dagbladet, all opposed the merger. Volvo senior and middle managers wrote letters to Soren Gyll, CEO, indicating disapproval of Gyllenhammar’s merger proposal. Merger opponents commonly object the lack of clarity and the uncertainties over the values implied in the merger agreement. Comments provided by the institutional investors in Exhibit 5 state such shortcomings. From Volvo’s Annual Report for 1993, Gyll wrote in an annual letter to the shareholders:

It is important to convey knowledge and understanding of the company’s current orientation and status to all interested parties. Candidness and clarity must characterize our operations. . .

Gyll understands the importance of shareholder information, and the lack of which caused the RVA debacle.

Gyllenhammar, the Volvo’s chief architect of the Renault-Volvo merger, began with intentions to make RVA a leading global auto manufacturing company. Three arguments for the merger are (1) competitive efficiencies, (2) operating efficiencies and (3) financial strength. Proponents envision this in phases: the 1991 strategic alliance leads to combined company in 1994. Through the process, Gyllenhammar invested personal amount of time and energy to create the alliance. However, he deviated from fundamental steps required for the complex merger of public and private entities. 164,000 institutional and private investors own Volvo, and the majority is required to approve the merger. Stakeholder buy-in requires earning the trust and confidence of most parties. Gyllenhammar releases three documents a span of two months; the first two contained soft information with no financial forecast. Since synergy is cited as the primary advantage, a lack of financial support for synergy eroded investor confidence. When disclosed, details of the Golden Share surprise Volvo’s board of directors. The details of which are hashed together only two days before the announcement. Such actions constitute calculating intentions or brash foolishness by Gyllenhammar. Although the board iterated support several times, investors felt the Gyllenhammar’s submission to the French government gives Volvo away cheaply. Criticism of Gyll by Gyllenhammar for his half-hearted leadership of his management team indicates the merger proposal is an ego clash.

Volvo’s latest financial reports show a surge in profits (SKr 1.03 billion) for trucks and cars for the first nine months of the year contrasting a loss (SKr 707 million) in the corresponding period the previous year. This begins the company’s emergence to profitable, and Renault reports losses tied to the recession in the European automotive industry. Analysts questioned if Volvo needed Renault. Gyllenhammar should use the latest financial results to renegotiate ownership balance in RVA and possible removal of Golden share arrangement.

In his three page resignation document, Gyllenhammar lists the efforts undertaken by Volvo under his leadership for merger with Renault. He criticized the shareholders for rejecting the merger proposal; yet, not a single sentence spoke regards the Golden Share agreement, which was concern for all Volvo investors. Initial intentions of a merger were geared to make RVA dominant in the 21st century auto industry. Gyllenhammar created a divisive situation and failed to act in the best interests of the Volvo’s share holders.

What was the “process” by which the proposal failed? Since no vote was taken, had the proposal really failed?

Once the proposal shows cracks, the growing opposition from media, investors and employees overwhelms any progress. For Gyllenhammar, the process failed. For Volvo, the process is an inactionable proposal. Gyllenhammar communicates poorly and lacks sufficient information to make the proposal actionable. He admits lack of clarity: “If we can address these other concerns – give more clarification, perhaps get positive news on privatization – then we think the chance is very good.” To win the process, he should provide infinite documents creating an overload of transparency.

Once concerns fuel nationalistic, conservative editorials, Swedish Small Shareholders Association announces the evaluation is impossible on the basis of meager information. This was in response to an eight-page brochure summarizing the terms and rationale for the merger. The document stated synergies would save up to Fr 30 billion (both Volvo and Renault) by the end of 2000; however, no financial forecasts validated the estimate. Volvo published a 2nd document at the request of shareholders; again it contained no financial forecast and little detail. This document only expanded on allocation of the synergies: 60% from car and 40% in truck and bus operations. Finally, Volvo released a third document containing supplemental information, a valuation discussion and fairness opinion from Credit Suisse First Boston, and copies of letters from the French government. The letters contained assurances regarding use of the golden share and privatization. This document addressed the concern of an institutional investor questioning fair value of Renault’s shares. By this time institutional investors had decided not to support the merger proposal. Volvo employees with 5000 white-collar workers announced its members would vote their shares against the merger proposal. Volvo dealers in North America expressed strong concerns that the merger would dilute Volvo’s strong brand franchise because Volvo was viewed comparatively poor there. Lastly, 900 company civil engineers called for postponement. Push against the merger rises quickly after one dissenter.

The proposal failed when Volvo’s board decided to withdraw in December 1993 based on the recommendation by Soren Gyll. He based the recommendation on a special meeting with Volvo’s senior divisional managers, and a letter from 25 senior managers expressing disapproval. Under the alliance, control of joint activities had been 50/50. With the merger, managers believed that control would tilt 65/35 to Renault and Volvo.

What were the implications of this episode for analysts and executives in strategic alliances?

Executives pursing a strategic alliance should allay stakeholder questions by providing timely, accurate, grounded, and factual information. An emphasis on trust and confidence creates a buy-in atmosphere for all parties; strong-arm tactics and limited timelines create questions and divisions. Executives involved in strategic alliances should frequently seek third party analysis looking at the rational for the agreement. Gain pre-approval from employees, senior, and middle management prior to corporate changing actions. As basic business practices, executives must communicate benefits from corporate decisions to internal and external stakeholders.

Strategic alliances looking toward an eventual merger require continuous monitoring to ensure the decision is the company’s best interest. Environmental and economic factors change and strategic alliance should be analyzed within that context. Communication between companies should remain open, and any attempts to renegotiate must be viewed amicably. Executives should never view the merger as a foregone conclusion of a strategic alliance.

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