TACC613 Mergers and Acquisitions

Introduction

AP Eagers, a well-established player in the automotive industry which operates out of its primary locations of Adelaide, Queensland, Sydney and Darwin, announced their decision to push for a merger and acquisition with the company AHG. AP Eagers already possessed a significant stake AHG and this decision was regarding the purchase of the ordinary shares that were not owned by AP Eagers. In 2019, the merger was projected to be one of the, if not the most powerful automotive retail group in the whole expanse of Australia. The purpose of this analysis is to evaluate the factors that guide the run-up to a Merger and Acquisition and to assess the viability of the proposed merger.

Industry analysis

The industry that both these companies operate in is the automotive business. Whereas the currently 107 years old AP Eagers which was in its 105th year of operation in 2019 operates a business that consists of vehicle dealerships throughout the country, AHG has its business established in the field of sale of pre-used automobiles, along with having additional businesses that include refrigerated transportation. To assess the viability of this merger, it is essential hence, to analyse the state of the industry that it is operating in. The model of choice used to analyse the industry of operation of the acquirer is “Porter’s five force analysis” (Brujil, 2018):

Porter’s Five Forces:

1. Threat of new entrants: Automotive industry is an investment-expensive field of business especially when the business is to set up chains of vehicle dealerships. The investment required along with the infrastructure and human resources can be considered to be significant barriers for new entrants in this field of business (Lansbury et al., 2017). Hence, given the scale of operations of AP Eagers in 2019, it can be ascertained that it faces low threats from entry of new players.
2. Threat of substitute product: The threat of a substitute in terms of the acquirer’s business could have been possibly seen if the acquirer lacked a certain type of vehicles but given that AP Eagers is a dealership that deals in all kinds of vehicles, the emergence of substitute vehicle types like electric cars and hybrid powertrain cars would only lead to their addition into the acquirer’s catalogue, hence the threat of substitute product can be considered low (Perkins and Murmann, 2018).
3. Threat of existing rival firms: Competition in the automotive retail industry can be considered very high given the availability of other prominent dealers with several firms ramping up the dedication of their resources towards the market (Wells et al., 2020). Hence, there is a high risk of threat from existing rival firms.
4. Supplier’s bargaining power (Vertical competition): The bargaining power that rests with the suppliers can be high as the supplier plays an instrumental part in ensuring the chain of supply according to demand and hence the fundamental factor that affects customer experience and direct revenues (Yang et al., 2018).
5. Buyer’s bargaining power (Vertical competition): Again, buyers hold a similar power to suppliers in the case of automotive retail as the decision of the buyers affects the revenues of any retail business directly (Detwinkel-Kalt and Wey, 2020). And given the availability of alternatives, this threat is to be considered high.

Industry trends

A few observations that can be made with regards to the industry that the acquirer is operating in through the use of available data:

1. There is an identifiable trend that shows an increase in consumer interest towards electric and autonomous vehicles of the sort that are being offered by TESLA, as the consumer grows increasingly environmentally aware (Ahmad and Khan, 2019). Such a shift in interest can drastically affect the sales of internal combustion engine (ICE) cars which requires the addition of such alternatives into the acquirer’s catalogue in order to maintain competitiveness.
2. A review of sales figures shows a considerable decline in the sales of cars in Australia (Webb, 2019). Although a direct cause cannot be established, it can be surmised that a trend has formed with the decreasing sales.

Company analysis

Financial analysis

AP Eagers holds the accolades for being a very old player in the markets of Australia. Its 107 years of history have been marked by remarkable growth and market consolidation which is reflected in the growth of its revenues in the first decade of the 21st century. In the advent of the 21st century AP Eager was known to have a total net profit after tax deduction of “$4.3 million which by the year preceding the year of the acquisition had grown to $101.2 million” (eagersautomotive, n.d.). But it has to be acknowledged that there has been a certain decrease in the revenues in the last years and the trend has been continuous and there has been a constant loss in revenues since the 2016-17 (Beer, 2018).

Sale of New cars in Australia in 2018 (Refer to Appendix I)

The sale of new cars in the territory of Australia in the year preceding the year of acquisition proposal amounted to a total of 153,153,111 units throughout all territories and this number is the result of decline of 3% on car sales, this is an indicator of prevalent slowdown of demand for automobiles. This gives an insight into the general trend which guided the industry prior to the execution of the acquisition.

Sale of New cars in Australia (Refer to Appendix II)

As a comparison to the figure described above, there is further analysis on the number of cars that AP Eagers was able to sell in the same year and that number amounts to 59,663 units which accounted for around 5.2% of the total number of sales executed in all of Australia in 2018 (eagersautomotive, n.d.). This again showcases the slowdowns suffered by the Australian automotive retail industry in the years of 2018 and in the years prior to that. It continues a trend of gradual slowdown with a decrease of 1% in number of units AP Eagers sold in 2018 compared to that in 2017.

Sale of used cars in Australia (Refer to Appendix III)

The sale of used cars also occupies a substantial share of the automotive market in Australia and both AP Eagers and Automotive Holding Group sell pre-used cars as part of their portfolio. The total number of units that AP Eagers was able to sell in the year of 2018 was 24,118. This was its only segment that saw growth, even if marginal, compared to the previous year as AP Eager recorded a marginal growth in sales of 0.4% (eagersautomotive, n.d.). This indicates the only positive trend in the recent years in terms of market sales, but this does not take away the fact that AP Eager is one of the biggest major players with an individual market share of 7.2%.

The acquirer, in the year 2019, enjoyed a substantially strong position in the industry it operated out of, but nonetheless it had a few shortcomings. These shortcoming, along with its strengths will be analysed through a SWOT analysis (Gürel and Tat, 2017):

1. Strengths
   1. Well established brand image
   2. Already established substantial flow of revenues
   3. Strong and wide network of dealerships
2. Weaknesses
   1. Company displays lack of proper financial management
   2. Low to negligible investments are made towards R&D
   3. Profitability in consecutive years grows increasingly weaker
3. Opportunities
   1. Emergence of online retail and finance opportunities
   2. Ever Present requirement of cars
4. Threats
   1. Sanctions as a result of increasing concern towards environment
   2. Presence of large competitors within industry.

Analysis of Company’s business plan and strategy

The most common purpose towards any merger and acquisition within the market is primarily economic gain and market share consolidation. The company identifies the strengths of another company that can add towards its own organisational goals and thereby works towards an acquisition (ÄŒirjevskis, 2019). AP Eager similarly intends to reinforce its already established foothold in the automotive market by acquiring Automotive Holding Group. AP Eager already owns significant shares of AHG and through this acquisition it will buy all ordinary shares that it does not own in the company. This will enable its aging model of operation to innovate through the addition of channels that are possessed by AHG along with adding a few new portfolios which would include refrigerated transportation throughout Australia.

Analysis of merger strategy

Automotive Holding Group posed as one of the bigger competition that AP Eager had to face in the automotive retail industry of Australia. And given the competitiveness of the Australian car dealership market, the merger on one hand allows the AP Eager to consolidate its market share while on the other hand it allows the acquirer to eliminate one channel of competition, while reinforcing its market presence through the addition of the properties and holding of AHG (Ahmed et al. 2018).

Deal Rationale

1. What are the sources of synergy and value creation?

The merger is proposed to aid AP Eager in making positive changes to its revenues as the merger is projected to provide the company with additional streams of incoming revenue. Furthermore, the automotive retail industry has a considerably meagre market concentration which is given by the fact that AP Eagers and Automotive Holding group alone generate approximately 10% of the revenue of the entire automotive retail industry. This ensures that through the merger it can become the largest single entity in the motor vehicle dealer market of Australia.

2. What other objectives are behind this deal?

The other objective that is intended to be accomplished through the execution of this merger is the complete elimination of any other large players from the market which directly leads to an increase in channels for sales which further leads to an increased reach to a greater number of consumers which in turn results in the generation of higher revenues. And being the largest major player in the industry by projected revenue share, the newly formed entity can exercise greater control over the market.

3. Are there wrong reasons for this deal?

The reasons that may prove to be contrary to the claims made in the proposal made for the Merger and Acquisition are concerning the estimated value that AP Eager assigns to Automotive Holding Group as the valuation may prove to be inappropriate. And in such a case the post-merger process of business integration might prove to have a higher cost than it was originally estimated to cost and this can be further exacerbated by the prevalent financial challenges of 2019.

4. Was the deal correctly priced and was the timing correct?

The market value of an AHG share according to the closing price on 4th of April, 2019 stood at $1.78 and the implied value of each share was presented in the offer consideration at $1.91. Market value was assessed over different measures of volume weighted average price which included its calculation over two days, ten days, thirty days and one hundred and twenty days which had implied values at premiums of 6.91%, 9.57%, 1.06%, 4.02% respectively. In the offer consideration of the deal AHG shareholders were promised to receive one AP Eagers share in exchange of every 3.8 AHG shares owned by them. This pricing is inappropriate as AHG lacked assets in the forms of fully owned properties but mostly operated out of leased properties while AP Eagers owned vast property assets which makes the valuation unreasonable. And additionally, with 2019 displaying a continuation of the negative impact on the growth rate of the market, it can be suggested that the deal is inappropriately timed.

 

Works Cited

Ahmad, S., & Khan, M. (2019). Tesla: Disruptor or Sustaining Innovator. Journal of Case Research, 10(1).

Ahmed, F., Manwani, A., & Ahmed, S. (2018). Merger & acquisition strategy for growth, improved performance and survival in the financial sector. Jurnal Perspektif Pembiayaan Dan Pembangunan Daerah, 5(4), 196-214.

Beer, A. (2018). The closure of the Australian car manufacturing industry: Redundancy, policy and community impacts. Australian geographer, 49(3), 419-438.

Bruijl, G. H. T. (2018). The relevance of Porter's five forces in today's innovative and changing business environment. Available at SSRN 3192207.

ÄŒirjevskis, A. (2019). The role of dynamic capabilities as drivers of business model innovation in mergers and acquisitions of technology-advanced firms. Journal of Open Innovation: Technology, Market, and Complexity, 5(1), 12.

Dertwinkel-Kalt, M., & Wey, C. (2020). Multi-product bargaining, bundling, and buyer power. Economics Letters, 188, 108936.

Driven together timeline. (n.d.). Eagers Automotive. Retrieved from:https://www.eagersautomotive.com.au/timeline/ 

Gürel, E., & Tat, M. (2017). SWOT analysis: a theoretical review. Journal of International Social Research, 10(51).

Lansbury, R. D., Wright, C. F., & Clibborn, S. (2017). Who Will Make Our Cars? Global Lessons from the Demise of Australia’s Auto Industry. LERA For Libraries, 21.

Perkins, G., & Murmann, J. P. (2018). What does the success of Tesla mean for the future dynamics in the global automobile sector?. Management and Organization Review, 14(3), 471-480.

Webb, J. (2019). The future of transport: Literature review and overview. Economic Analysis and Policy, 61, 1-6.

Wells, P., Wang, X., Wang, L., Liu, H., & Orsato, R. (2020). More friends than foes? The impact of automobility-as-a-service on the incumbent automotive industry. Technological Forecasting and Social Change, 154, 119975.

Yang, H., Luo, J., & Zhang, Q. (2018). Supplier encroachment under nonlinear pricing with imperfect substitutes: Bargaining power versus revenue-sharing. European Journal of Operational Research, 267(3), 1089-1101.

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