Introduction
Merger and acquisition technique plays a significant role in increasing economic potential and gaining competitive advantages in the constantly changing environment of the global market. Furthermore, cross-border merger and acquisition activities are the main approaches to the international strategies of many organizations, which results in company participation in foreign direct investment. The purpose of this paper is to analyze two companies selected from one industry and evaluate their merger and acquisition strategy, the impact of five forces of competition, and corporate governance mechanisms based on the conducted research. For this assignment, General Motors and Elio Motors, which are two companies from the automotive industry, were selected.
Merger and Acquisition Strategy
Merging usually refers to the negotiation of two or more businesses to form a new corporation while acquisition involves two companies in the process of swallowing a small business by the bigger one. Therefore, mergers and acquisitions can be defined as the integration of companies with different business values into one organization. In economics, it is possible to distinguish horizontal and vertical mergers. Horizontal mergers include companies from one industry, while vertical ones include businesses from different areas.
General Motors Company became a big Delaware corporation in 2009. This company design manufactures and sells cars and automobile parts at the global level. It also provides financial services through General Motors Financial Company (“General Motors Company: Annual Report Under Section 13 or 15(D) of the Securities Exchange Act of 1934″, 2018). The history of the development of this corporation includes numerous acquisitions of automotive companies with recognizable brands such as Buick Motor Company, Cadillac, Pontiac, Elmore, and others. Despite the crisis in the automotive industry, the corporation managed to survive and continues to produce vehicles with advanced technologies.
It is a general opinion that the strategy applied by General Motors Company over the decades of its existence involves gradual expansion through acquiring new assets which might be useful for company success and gaining competitive advantage. Some researchers state that this strategy helps to “increase markups on average across U.S. manufacturing industries, but find little evidence for channels often mentioned as potential sources of productivity and efficiency gains” (Blonigen & Pierce, 2016, p. 5). Therefore, the company selected wise strategy and increased its profits by purchasing companies with famous brands, which made it possible to increase markups on other products produced by the company and expand the number of manufactured brands.
This strategy might have helped it to survive in the crisis in the automotive industry. It is also possible to say that General Motors is experienced in utilizing a competent approach to the acquisition process by developing integration plans, which allowed easily adapt the new assets to the overall company values and manufacturing strategies. At present, the company applies a customer-oriented approach and provides multiple services to its clients.
Elio Motors is a relatively small business that now plans to manufacture low-price three-wheeled vehicles that can be customized according to the clients’ requirements and are claimed to be comfortable and innovative by design (“Elio Motors: Corporate Presentation,” 2016). This company is not international and is present only in the U.S. market at present. It is a general opinion that their idea of a three-wheeled car to provide cheap variants for mobility to the population might be interesting not only to the customers but also to the bigger actors in the automotive industry.
Some companies might be interested in merging with Elio Motors. One of the most profitable candidates that might be interested in acquiring this company is Tesla company which produces electric cars. Two companies might combine approaches to design and innovations to manufacture the new type of electric car which is cheap and easy to control in the city and rural zones. Tesla might also provide additional investments to Elio motors to complete the mission they began and secure its success. Some researchers note that “it is very important that company share the future roadmap with the existing customer and promise to the customer they will continue providing service, personnel support and salespeople will continue to serve as they were doing earlier” (Kansal & Chandani, 2014, p. 214). Therefore, if Tesla merges with Elio Motors at this stage when they still need investment but have potential and a waiting list of clients, it will be beneficial to share the future strategy with clients and listen to their ideas to improve the product.
Impact of Five Forces of Competition
Porter’s five forces approach is utilized to analyze the business competition. These five forces include a threat to new actors in the industry, a threat of the companies that might become substitutes, the bargaining power of clients and suppliers, and rivals in the industry. It is stated that some companies in the same industry might have similar strategies but different performances (Pisano, 2017).
General Motors seems to face a challenge since such new entrants as Tesla appeared in the automotive industry. The electric car seems to be cheaper in-vehicle operation due to the high cost of petrol for an ordinary car. Although an electric car is a relatively new product in the global market, constantly developing technologies might make Tesla a powerful competitor. Although General Motors cannot be substituted by some other company due to a big number of assets and car brands at the international level, the bargaining power of clients and suppliers determines its business strategy both at the international and domestic levels.
The current international business-level and corporate-level strategies of the company include earning customers for life by providing various services related to car maintenance. This strategy is applied in all the subsidiaries of the corporation including international ones located in other regions and time-zones. It would be also advisable for a company to obtain cost advantage for electric cars in the global market because the vehicles produced by General Motors remain rather expensive and the customers might want to use cheaper variants, especially if electric cars become a mass production in the nearest future.
Elio Motors seems to have no rivals or competitors in the U.S. market at present. The idea of a three-wheeled cheap car seems to be innovative and attractive to potential customers. Customizing vehicles at stores might be beneficial for company promotion. If the company merges with Tesla, it might use electric facilities for customizing its vehicles by customer’s requirements as a part of the business strategy. The corporate-level strategy might include promoting three-wheeled vehicles at the international level. This idea might be interesting for the countries with developing economics as it provides a cheap variant of the vehicle that can be customized. The further implementation of the client-oriented approach might be also useful both for business-level and corporate-level strategies to provide the customers with the services they need and demand.
Corporate Governance Mechanisms
Corporate governance mechanisms are believed to secure the alignment of the interests of the CEOs and the shareholders. It includes internal monitoring applied by external monitoring by shareholders and the board of directors. It is a general opinion that the effectiveness of these mechanisms is arguable. An Independent audit might also be used as an additional mechanism of corporate control.
Elio Motors includes representatives of the transportation industry into the board of directors, which helps to follow their strategy in developing a new vision of a modern vehicle. Its governance mechanisms are not very extended and include internal audit and transparency in business decisions. The company needs investors and merging with some bigger company will be beneficial for it. After merging, it would be beneficial for the company to use equity principles as the main strategy for building governance mechanisms.
General Motors is a corporation that declares the principle of equity among all its subsidiaries. It utilizes the board of directors as a structure and independent internal audits in the frames of internal mechanisms. This mechanism is effective in monitoring various assets of the company and securing the distribution of governance and rights between the managers of different levels. The external mechanisms include regulatory guidelines presented by the stakeholders as the company has many subsidiaries in various countries of the world. These corporate governance mechanisms are used to monitor the actions, policies, and practices applied by the stakeholders.
It is a general opinion that most of the corporate conflicts begin with the conflict of interests between the stakeholders that might be represented by the board of directors and suppliers, and shareholders. The division of management and owners might lead to some serious problems in the corporation. Some researchers state that “The two primary mechanisms theorized to align top managers with shareholder interests are pay tournaments and managers’ equity holdings” (Misangyi & Acharya, 2014, p. 1684). This approach should be improved in General Motors’ company to avoid any conflict of interest in the future. Therefore, CEO equity ownership is regarded to be beneficial for building an effective management approach in the global corporation. Independence and alignment of the outside directors are believed to be important mechanisms for effective monitoring.
It is possible to say that General Motors is a responsible corporate citizen because they proportionally share the earnings of each asset, which is reflected in the principle of equity income. This corporation also makes timely investments in the assets that require such actions. They take into account the interests of their assets situated in various countries.
The given research dealt with the evaluation of two companies that belong to the automotive industry. One of the companies chosen for evaluation was General Motors which is considered to be a powerful global corporation presented at the international market. The other company was Elio Motors which is a representative of a domestic U.S. market but is regarded to have the potential to become a strong actor in the automotive industry due to its innovative ideas and car design. The evaluation of the companies included the analysis of merge and acquisition strategy, five forces of competition, and corporate governance mechanisms. It was revealed that General Motors needs some transformations in its cost policy to compete with the rivals who produce electric cars as they might be popular in the nearest future. It was also stated that Elio Company would obtain market competition and additional investments after merging with other successful companies like Tesla. The principles of corporate governance mechanisms were described for the companies.
References
Blonigen, B. A., & Pierce, J. R. (2016). Evidence for the effects of mergers on market power and efficiency: Finance and economics discussion series 2016-082. Washington, DC: Board of Governors of the Federal Reserve System.
Elio Motors: Corporate Presentation. (2016). Web.
Kansal, S., & Chandani, A. (2014). Effective management of change during merger and acquisition. Procedia Economics and Finance, 11(1), 208-217.
Misangyi, V. F., & Acharya, A. G. (2014). Substitutes or complements? A configurational examination of corporate governance mechanisms. Academy of Management Journal, 57(6), 1681-1705.
Pisano, G. P. (2017). Toward a prescriptive theory of dynamic capabilities: Connecting strategic choice, learning, and competition. Industrial and Corporate Change, 26(5), 747-762.