Union UK Ltd.’s Merger With HK Carz Report (Assessment)

Abstract

The presented paper focuses on investigating the case study of Union UK Ltd and its potential purchase of HK Carz. The study focuses on analyzing the available options, such as complete acquisition or creation of a joint venture. For this reason, it offers the peculiarities of each choice, the benefits associated with one or another decision. At the same time, the work outlines actions that should be made if 100% acquisition is performed and Union becomes the owner of HK. There is a discussion of potential risks, critical elements of the process, creation of the corporate identity, and how the given deal will lead to the change in Union’s current position. Financial, reputational, branding, and legal issues are also discussed. At the end of the paper, a conclusion is offered to summarize the information and discuss all questions relevant to the case.

Introduction

Business decisions require long-term strategic planning and critical decision-making when it comes to making choices for the future of the company. Executives must holistically approach decisions, weighing financial, operational, legal, and many other factors. Union UK Ltd (referred to as Union) is a British car manufacturer exploring the possibility of a merger with Hong Kong-based manufacturer HK Carz (HK). This report will examine the opportunities, compare and contrast the options of joint venture versus full takeover. Furthermore, the acquisition process will be examined from a legal and commercial standpoint. Finally, the formation of the new joint Purchasing Department will be discussed.

Compare and Contrast – Acquisition and Joint Venture

The acquisition of one firm by another, also known as a buyout, is a permanent action made in order to take control of the acquired company’s assets and build upon their existing platform for the benefit of the owner firm. Sometimes the enterprise is left virtually untouched simply to operate under a new brand and bring profits, while in other cases, the company is fully dismantled with its assets, technologies, and supply chains being either sold or put to use for the buyer. One of the primary advantages of the acquisition of a company is reducing barriers to entry to a specific market as new capabilities, resources, capital, patents, and experts become accessible (DePamphilis, 2019). At the same time, more control over the critical procedures is acquired.

Meanwhile, joint ventures are a cooperation of two entities in which each agrees to share profits, losses, and costs. Joint ventures are often entered into for a limited and predetermined period of time for a specific purpose that usually benefits both firms. The joint venture has the benefit of sharing risk, acquiring know-how, and potentially proprietary methods and processes, it may lead to some capital gain for one of the firms. Joint ventures also require just an agreement without the need to create a separate legal entity. Joint ventures are typically short-term to achieve a strategic objective and cannot be kept for prolonged periods as businesses pursue their growth trajectories (DePamphilis, 2019). However, regarding the Union’s desire to empower its positions in the region, the acquisition seems a preferable option as it ensures the ability to control all critical procedures and improve decision-making processes.

Financial

Financial issues play a central role in determining the possible course of action. Forming a joint venture might be less expensive; however, it also presupposes a specific accounting strategy. Partners have to share profits, losses and control a new entity, which might be complicated in some cases and demand additional investment (DePamphilis, 2019). At the same time, the full acquisition demands significant investment at the start to make a purchase, while after a buyout, the acquiring company has the authority to control all financial issues. It allows better planning, analysis of available resources and reduces the level of dependency on a partner. For this reason, these matters should be considered regarding the current situation and parties’ interests.

Branding

A joint venture presupposes that both companies preserve their own approaches to branding. For Union and HK, it means that they will remain the same brands with no significant alterations. At the same time, complete acquisition offers a newly formed group more branding opportunities. It can employ brand extension because of the more powerful resources available at the moment and empower its presence in the selected market. Moreover, the acquiring company can improve brand positioning by emphasizing its desire to increase its presence in the market through the deal. In such a way, the buyout helps the company to get additional tools to reconsider its branding and make it more effective. At the same time, it might decide to preserve the already existing approach, ensuring a new subsidiary follows it to attain the existing goals. For this reason, the choice between two available options should also consider the desired branding strategies.

Reputational

Reputation is another vital issue that should be considered during the potential deal. It influences clients’ loyalty and readiness to continue using the company’s products and services. Thus, creating a joint venture means a new formation will be perceived regarding the current reputation of two brands, HK and Union. From one perspective, it might ensure the growing clients’ interest and preservation of the client base. However, there is a risk of the unit’s image deterioration if one of the partners fails to support its image (Sherman, 2018). At the same time, the complete buyout means that the reputation of the acquiring company becomes the dominant one and impacts clients’ decision-making and intentions to use products and services (Sherman, 2018). It can be a beneficial option for brands with a stable and high reputation. It will help to ensure potential clients in the appropriate quality of goods and services, which is vital for entering a new market.

Risk of Unfriendly Takeover

The acquisition of one company by another also implies the risk of an unfriendly takeover. It states for the intention to buy a firm against its will, replace management, or directly influence shareholders to ensure they are ready to take part in the deal (Sherman, 2018). This sort of risk is usually regulated by using specific regulations and laws protecting the rights of companies and guaranteeing their right to select the option for the future partnership. However, the risk might remain high, especially if the target company is might guarantee a significant competitive advantage for an acquiring brand (Sherman, 2018). At the same time, joint venture excludes such risks and creates the basis for establishing partnership and trustful relations between future cooperators. For this case, the risk of an unfriendly takeover is minimal because of the brand’s reputation and readiness to cooperate. Moreover, Union wants to ensure HK remains a powerful actor, meaning that its management cannot be replaced by a new one, as it will lead to a significant reduction in effectiveness.

Loss of IP

The loss of intellectual property is another issue that should be considered when determining the future cooperation between two companies. Every company has its own intangible assets protected from outside use or employment without agreement (Sherman, 2018). The discussed deals introduce alterations in managing this factor and its current state. Thus, a joint venture presupposes that every company remains capable of controlling its IP and using it in the way it wants (DePamphilis, 2019). At the same time, the complete acquisition presupposes that intangible assets can be controlled by a firm responsible for a merger. It might introduce the risk of losing IP because of various factors, including transferring rights to another brand as the result of the agreement (DePamphilis, 2019). For this reason, it is vital to establish the terms of the interaction and avoid conflicts caused by the loss of IP and potential claims. At the same time, the acquiring company avoids such risks as it remains capable of controlling all assets and managing them of its own will.

Law and Jurisdiction

The establishment of a new partnership between different firms is always regulated by the existing laws and regulations. Additionally, global cooperation is also controlled by the legislation creating the framework for the collaboration and other processes. Companies forming a joint venture have specific agreements regulating their interaction, the distribution of shares, rights, and duties (Sherman, 2018). These contracts are created following the existing law and cannot be violated, guaranteeing the absence of unfair practices or other attempts to act unfriendly (Sherman, 2018). The complete acquisition is also regulated by international law, which monitors the terms of the agreement, financial aspects of the deal and ensures that both parties remain protected and do not suffer from fraud or other violations of the existing legislation (Sherman, 2018). From this perspective, both a joint venture and a buyout can be appropriate options for a company, and the choice depends on the current situation and the existing plans.

Discussion

Altogether, the analysis shows that forming a joint venture and a complete acquisition have their own unique peculiarities that should be considered when selecting the possible option for further expansion and generating competitive advantage. However, regarding the case study, buyout seems a preferable option. It can be evidenced by the information acquired from discussing the aspects mentioned above. First, it will allow Union with more control over the company and all its assets, meaning that it will improve its presence in the market and will become more successful. Second, new branding strategies will be available for the company, which is vital for its future development. Finally, the existing international and state regulations ensure safety during this deal and reduce the risk of an unfriendly turnover or other hostile actions. For this reason, the complete acquisition seems an advantageous option that should be selected by Union to establish the ground for its future rise.

Acquisition Process

The complete acquisition of one company by another is a complex process that should be controlled to ensure positive outcomes. After the decision to buy HK, Union should start negotiating with the potential partner to establish the terms of the deal and all issues associated with it. This stage is followed by the due diligence phase, presupposing reviewing the fundamental aspects, such as financial, commercial, labor, and fiscal ones (Sherman, 2018). It is vital to outline the contingencies influencing the operation and select strategies to manage them. The creation of draft contracts is the next step needed to list the methods of payment, power patterns, rules governing the partnership, guarantees, and people retaining (Sherman, 2018). The transaction financing comes after all aspects are determined and partners are ready to make a deal. Finally, closing is the last stage implying the merger via signing the commercial operation and integration of two units (Sherman, 2018). Increased attention to every step is vital to promote the success of the whole process and avoid legal issues.

Risks and Their Management

At the same time, the process of acquisition always implies some potential risks that should be managed; otherwise, it will lead to the worsening of outcomes. One of the possible threats is overpaying for the target company (Sherman, 2018). Trying to generate a competitive advantage or enter a new market, the acquirer employs too significant investments to guarantee successful purchase. It might also come from ineffective valuation practices and previous cases of overpaid deals (DePamphilis, 2019). It destroys shareholder value, and the reduces effectiveness of the company. Additionally, overpaying might undermine the financial resources of the company and decrease its value because of the ineffective strategies used to make a deal. Statistics show that about 70% of all acquisitions fail to create value for shareholders (DePamphilis, 2019). It proves the significance of the risk and the necessity to address it to avoid undesired results.

Managing this threat is one of the important factors needed to ensure an effective merger and avoid poor outcomes. To avoid overpaying, the creation of a comprehensive and in-depth report can be recommended. It will promote the better realization of the brand’s position, state of the market, and relevant prices (Sherman, 2018). Additionally, the valuation report offers information about tax returns, key financial showings, and the organizational structure of the target company. It helps to correctly realize the importance of the deal and the opportunities associated with it. At the same time, the fair and relevant price can be offered due to the improved negotiation process, and the due diligence phase focused on determining the conditions of the would-be cooperation and financial aspects of the purchase (Sherman, 2018). Under these conditions, by conducting a better analysis, it is possible to avoid overpaying and create a significant value for shareholders, which is essential for the stable rise of the firm.

Integration shortfalls should also be viewed as potential risks associated with the commercial aspect of the company’s work. These state for the problematic post-merger integration, which is treated as one of the most sophisticated parts of the process (Rowden, 2017). Union and HK have to align their strategies and reconsider them to form a basis for new patterns (Sherman, 2018). At the same time, in numerous cases, there is a threat of employee disenchantment, decreased motivation, loss of value, and failure to create effective collaboration (DePamphilis, 2019). Additionally, the differences in culture, which is especially vital regarding the case, might complicate cooperation between employees and decrease its effectiveness. All these factors will lead to a substantial reduction of income and multiple commercial issues. Under these conditions, it is vital to use effective practices and methods to minimize this risk and manage integration to cultivate desired outcomes.

One of the most approaches to managing this risk is the involvement of due diligence team members in the integrating group. This method has several advantages vital for the successful overcoming of all barriers of the merger. First, it will create the continuity of the process and guarantee that both actors possess the needed information vital for establishing a new environment accepted by all workers (Sherman, 2018). Second, the management skills of these specialists might help to forecast potential issues and offer methods to resolve them (Sherman, 2018). Finally, including employees from the target company in the planning activities helps to acquire their vision of future cooperation. It is a critical aspect necessary to attain success as they have a comprehensive knowledge of the firm’s peculiarities and can help to focus on the most complicated points. Using this method, it is possible to avoid the negative influence of integration and establish the ground for successful cooperation.

Finally, there is always a risk of unexpected costs linked to the deal. Following the statistics, about 80% of all agreements of this sort are characterized by the increase in the estimated sum due to the influence of various factors. These might include advisor, investment, banking, legal fees, taxes, or deal costs that were not considered previously (Sherman, 2018). Additionally, for Union and HK, international regulations should also be considered, which might demand new investment. In such a way, there is a chance that a negotiated price will grow significantly and influence the value of the agreement and acquisition (Sherman, 2018). This factor will also impact the commercial aspect as the firm will have to spend more money and reconsider its budget devoted to this process. It means that consideration of the unexpected costs and their management is another vital aspect of the acquisition.

The potential partners can use some effective approaches to manage the problem mentioned above. First of all, it is possible to shift towards a flat rate model during the due diligence phase (Sherman, 2018). It will help to step away from less effective methods, such as per page pricing, and create the complete image of the planned acquisition, considering all possible spending and factors that might influence the final value (Sherman, 2018). Additionally, the preliminary analysis and planning might also contribute to better results and help to avoid unexpected costs. The correct understanding of the existing legal environment, fees, taxes, and prices for particular services will lead to creating a relevant budget necessary to make the deal and avoid new commercial risks. Finally, involving experienced practitioners might also be a potent method to resolve this problem (Rowden, 2017). Effective management of this risk will lead to better results and minimize losses.

Altogether, the acquisition process is a complex process consisting of several important stages. For NK and Union, it is vital to discuss the terms of the agreement, outline their expectations, and create the contract by considering all possible factors. At the same time, there are always specific commercial risks that might emerge during this process. These might include overpaying, poor integration, or unexpected costs influencing the value of the deal and outcomes. For this reason, to address these aspects, it is vital to use management and analysis tools leading to better data collection and its processing. Possessing up-to-date information, both parties might be more effective in planning and distributing costs, which is vital for positive results and the ability to overcome possible difficulties. The collaborative effort of the two companies will promote easier post-merger integration and create the basis for future improvement.

Joint Purchasing Department

At the point of the merger and acquisition of Union and HK Carz, a joint purchasing department will be created. Procurement is a vital lever that contributes to synergizing the companies in the post-merger. Most typically, a merger increases the combined companies’ volumes of necessary supplies. When two companies combine through acquisition, optimizing procurement synergies is strategically critical to driving rapid growth and long-term EBITDA improvements. Procurement synergies are important to generate the optimal value proposition for the new entity (Kaplan, 2019). It means that this factor should be considered necessary for future success.

Corporate Identity

A corporate identity is a perception for the entire company, including all visual elements to represent the organization, including logo, tagline, font, images, color pallete, and others. Therefore, it is most visualized via branding and trademark. The identity design is also commonly reflected in physical form as well via uniforms, packaging, advertising, and merchandising. Corporate identity is also formed through other means that the company presents itself, such as advertisement, public relations, and potentially product design. Although it is not connected to any given product, corporate identity serves as the identifying factor of the organization and should represent what the firm stands for. If there is a dissonance between corporate identity and how the company is perceived, it generates confusion and mistrust in public (Rowden, 2017). For this reason, it is vital to avoid differences in this sphere.

There are typically three approaches to corporate identity during mergers and acquisitions. First is assimilation, with the buyer company fully swallowing the other company, and its identity is discarded, with the buyer maintaining its own. This underperforms in the market by 15%. The next variant is ‘business as usual,’ where each entity in the merger keeps its separate identity, it underperforms on average by 25% (Rowden, 2017). Finally, there is ‘fusion’ with components from both the companies being used in a new identity, it outperforms the market by 3% on average (Knowles et al., 2011). It is expected that the Union’s corporate identity will be kept intact during the acquisition but drawing elements from its new organization. This is particularly relevant for the Asian markets where Western firms rarely succeed initially. With cultural and visual aspects from HK Carz, Union may be more recognizable in the market. The new corporate identity will be based on a framework of integration post-acquisition and seeking to understand involved stakeholders. It is critical to comprehend that even though firms may be highly complementary on paper, they do not indicate practical combinations (Melewar & Harrold, 2000). Without clear and strong management and strategic direction guiding corporate identity in the acquisition, it will become bundled and poorly mixed, one would rather see Union take control to establish an innovative brand.

Maximizing Joint Organization

For manufacturing firms, procurement represents 60-80% of total costs, so it is important to take action which will result in post-integration optimization. Dhal (2019) suggests using four key levers to capture the procurement synergy and maximize the joint purchasing organization capabilities, as seen in the table below.

The above approach is essentially an adoption of a change management model similar to Lewin’s change management model. It offers a basic method for change, ‘unfreeze,’ which consists of analyzing the status quo to understand what needs to be changed and preparing for it. Next comes ‘change’ – the active implementation of changes and putting new processes into practice while communicating. Finally, there is the ‘refreeze’, ensuring that changes remain and are working, developing strategies for evaluation, and measuring new performance (Hussain et al., 2018). While Dahl (2019) focuses on the processes, the Lewin model will likely have to be applied in the joint organization to the change management for staff. Procurement opportunities should be identified and addressed early in the acquisition process as it allows the new entity to function more effectively and focus on more complex activities such as spend management capabilities, forecasting cost reduction, and other elements to capture synergies later. Changes for procurement strategies are highly impactful, need to engage multiple stakeholders, and may take up to 18 months to complete (Dahl, 2019).

Clause Headings

One of the elements that will have to be reconsidered upon a merger is the Corporate Terms and Conditions that will be used with suppliers. This is a supplier contract or agreement, a legal document that indicates a pact between a business and a supplier to deliver products or services upon agreed upon terms (Upcounsel, n.d.). This document needs to have some of the following relevant clause headings:

1. Party identification and information – full legal entities, addresses, and contact information for involved parties.
2. Definitions – clear identification and interpretation of some key terms used in the corporate agreement.
3. Scope and Responsibilities – essentially the expected services or work that is expected to be completed in a contract (i.e., deliver, sale and delivery).
4. Conditions – any event or action that obligates the party to perform an action as specified in the contract (i.e., payment upon delivery).
5. Covenants – unconditional legal promises to what parties should not do (i.e., a supplier may be forced not to sell to a direct competitor).
6. Ordering and delivery – describes in detail the process of procurement and supply.
7. Refund and compensation terms – descriptors of financial exchanges between parties in varying contexts.
8. License restrictions – if one of the parties provides another the use of their brand, trade name, method, or product, this section outlines what can and cannot be done with these assets.
9. Warranties – a contractual assurance of the condition of the delivered product or service, for which the seller/supplier is liable.
10. Limitations of liability – a clause that limits the amount of legal exposure faced by the company if a lawsuit is filed against them.

When the Corporate Terms and Conditions are being drawn up to be used with suppliers, it is critical that the legal document protects the buyer, in this case, the new entity under Union, and shifts as much legal responsibility unto the supplier. Good contracts have built-in assurances and terms as to what occurs problems with supplied goods or services arise. Specific penalties should be established for non-critical breaches of contract, such as failure to meet quality standards or delivery times. Also, either in the corporate terms, or later individual contracts with the suppliers, the concept of how issues will be resolved should be present, such as through dispute resolution, with exit procedures also in place for contexts where either party is dissatisfied (Invest Northern Ireland, n.d.). It will guarantee effective collaboration and the absence of critical issues in the future.

Conclusion

Altogether, the analyzed case revolves around different types of cooperation between companies. Joint venture and complete acquisition might be used by companies regarding their goals and available resources. For Union, it is recommended to buy HK as it will provide additional resources and tools for empowering its position. At the same time, the firm acquisition is a complex process consisting of several stages and implying substantial risks that should be managed by using specific tools and analyzing existing options. Moreover, creating a joint purchasing department is another factor leading to more effective consideration of all possible issues and their resolution. In such a way, the success of the deal depends on multiple factors, and it is critical to consider the international regulations, current situation, the market, and available resources to achieve success.

References

DePamphilis, D. (2019). Mergers, acquisitions, and other restructuring activities: An integrated approach to process, tools, cases, and solutions (10^th ed.). Academic Press.

Dhal, S. (2019). Four essential levers to capture procurement synergy in a post-merger scenario.

Hussain, S. T., Lei, S., Akram, T., Haider, M. J., Hussain, S. H., & Ali, M. (2018). Kurt Lewin’s change model: A critical review of the role of leadership and employee involvement in organizational change. Journal of Innovation & Knowledge, 3(3), 123–127.

Invest Northern Ireland. (n.d.). Negotiating supplier contracts.

Kaplan, D.A. (2019). How to navigate procurement in a post-merger world.

Knowles, J., Dinner, I., & Mizik, N. (2011). Why fusing company identities can add value.Harvard Business Review.

Melewar, T.C., & Harrold, J. (2000). The role of corporate identity in merger and acquisition activity. Journal of General Management, 26(2), 1-15

Rowden, M. (2017). The art of identity: Creating and managing a successful corporate identity. Routledge.

Sherman, A. (2018). Mergers and acquisitions from A to Z (4^th ed.). HarperCollins Leadership.

Upcounsel. (n.d.). Supplier contract: Everything you need to know.