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Acquisition Proposal For Volkswagen Group Gp Essay Help

Introduction


The purpose of this research is to provide Volkswagen Group with a strategic acquisition proposal in the automotive industry. Commercial and passenger cars are the primary categories of the worldwide automobile industry. Due to the COVID-19 epidemic, the automobile market is anticipated to see a severe decline in sales in 2020. Wagner (2020) predicts that global sales of passenger cars will drop to 60,5 million units in 2020, from a peak of 79,6 million units in 2017. Prior to the advent of the virus, the industry was already experiencing challenges. Consequently, a considerable number of smaller firms will be unable to withstand the market downturn, creating advantageous acquisition prospects for larger firms.



Volkswagen

Company Profile

Volkswagen Group is a major player in the automobile sector, generating about $279 billion in revenue in 2019. (Volkswagen AG, 2020). Volkswagen group brands include Volkswagen Passenger Cars, Audi, KODA, Bentley, Porsche Automotive, Volkswagen Commercial Vehicles, Scania Vehicles and Services, MAN Commercial Vehicles, and other financial services providers (Volkswagen AG, 2020).



Despite the industry's volatility, the company offers robust growth potential and great financial stability. The company's net income has increased significantly during the past five years (Volkswagen AG, 2020). From $11.83 billion in 2018 to $13.89 billion in 2019, net income climbed by more than 14%. (Volkswagen AG, 2020). After witnessing a significant dip in the stock market and reaching its lowest price of $101.5 per share on March 18, the company recovered on April 9 to $128.3 per share (Yahoo Finance, 2020d). As soon as the viral outbreak begins to subside, the company should recover.

Volkswagen and EV Market

The electric vehicle (EV) business is a fast expanding market that attracts automakers from all over the world. While the market for all passenger cars was trailing at 3.5 million sales per month in the prior year, EV sales are slowly increasing from 125,000 to 162,000 per month (Bullard, 2019). By comparing the EV market to worldwide passenger vehicle sales, Figure 1 enhances comprehension of the EV market. At a CAGR of 15.69%, analysts anticipate the market will increase from $129,671.56 million in 2018 to $359,854.56 million by the end of 2025. (Valuates Reports, 2019). In other words, the EV market is flourishing, allowing both start-ups and established vehicle manufacturers to develop novel customer service strategies.

Figure 1. EV Sales VS All Passenger Vehicles Sales (Bullard, 2019).

German and Chinese firms are fighting to be the industry leaders, with China now in the lead (Bullard, 2019). Volkswagen is aware of the present EV industry trend and intends to adapt its business strategy to the impending changes. The corporation expects to dominate the industry in the near future by investing more than $30 billion in EV research and development and production, which is equal to its three-year earnings total (Matousek, 2019). It hopes to produce 600,000 units annually in China by 2022, whereas Tesla plans to produce only 150,000 vehicles (Hanley, 2019). Therefore, the primary objective of the Volkswagen Group is to steadily expand its presence in the EV market.



Potential Acquisition Candidates

General Reflections

In order to be compatible with the Volkswagen Group, potential acquisition candidates must satisfy a number of criteria. First, the target company must have the potential to generate value (Salter & Weinhold, 1981). Second, the prospective applicant should answer Volkswagen's specific requirements (Salter & Weinhold, 1981). Lastly, the purchased company must help achieve strategic objectives (Salter & Weinhold, 1981).



Volkswagen can gain from the horizontal acquisition of Chinese EV firms in light of its desire to become the world's leading EV manufacturer and the expansion of the EV market described in the preceding section. These acquisitions will benefit the Volkswagen company by expanding its presence in the region to produce 600,000 electric vehicles by 2022. In addition, as China was severely affected by the COVID-19 epidemic, the current financial performance of automotive companies in the region is anticipated to be weak.



The transaction should be financed using debt and paid for with cash. Volkswagen's current debt to assets ratio (D/A) is 0.837 (€ 187,092 million of total liabilities by €223,536 million of total assets), which is a very high ratio (Volkswagen AG, 2020).



Even though the D/E ratio in 2019 declined from 0.839 in 2018 (Volkswagen AG, 2020), the change is insignificant, and it would be preferable to finance the acquisition by issuing extra shares under normal circumstances. Volkswagen should however evaluate the COVID-19 scenario and its potential outcomes. According to Russel Investments (2020), central banks in the United States, Europe, and the United Kingdom are anticipated to execute unprecedented stimulus measures, which frequently involve lowering the key interest rate (Russel Investments, 2020). Therefore, the Volkswagen Group will likely benefit from the lowest interest rate of the twenty-first century. Therefore, it is preferable to pay for the purchase with borrowed funds.

Overview of Possible Applicants

Potential candidates for purchase should be Chinese automakers with a three-year track record of consistent performance in the EV industry. Bloomberg's list of firms competing in the electric passenger vehicle market according to their revenues from electric passenger vehicle sales is presented in Figure 2. (Bullard, 2019). According to Figure 2, BYD, Geely, BAIC, SAIC, and JAC Motors are the most suitable acquisition candidates. Only three candidates — BYD, SAIC, and Geely — will be evaluated in this report.

Figure 2: Revenues from EV sales by Company (Bullard, 2019). BYD

Rechargeable Battery and Photovoltaic Business, Mobile Handset Components and Assembly Service, and Automobiles and Related Products are the three business segments of BYD Company Limited, a Chinese corporation (Yahoo Finance, 2020c). It provides a vast array of goods and services, including lithium-ion batteries, mobile phones, electric tools, automobiles, buses, and real estate services (Yahoo Finance, 2020c).



In 2018, the company's net income decreased significantly from $4.07 billion in 2017 to $2.82 billion (Yahoo Finance, 2020a). Its stock market performance is marked by severe volatility, which is reflective of its unpredictable financial performance (Yahoo Finance, 2020a). Even though Volkswagen AG can benefit from acquiring the company, BYD offers a multitude of ancillary services that would require Volkswagen to acquire competence in various fields, which could be burdensome.

Geely

Geely Car Holdings Limited is an investment holding company that operates in the People's Republic of China as an automobile manufacturer (Yahoo Finance, 2020b). It manufactures and sells autos and automobile components and offers aftermarket services (Yahoo Finance, 2020b). It invests in vehicle engine research and development (R&D) and electric hybrid engine R&D, which can help Volkswagen enhance its R&D potential (Yahoo Finance, 2020b).



The company's net income has increased rapidly over the past three years, reaching $12.55 billion in 2018; yet, its stock market value has decreased steadily since March 2018, indicating that it can be purchased at a comparatively low price (Yahoo Finance, 2020b). Considering the company's profile and performance, Volkswagen may be able to purchase it.

SAIC

SAIC Motor Corporation Limited is a Shanghai-based automaker that offers a comparable range of goods and services to Volkswagen. It manufactures and distributes autos and parts, and also offers finance services (Yahoo Finance, 2020c). The company's financial performance has been comparable to that of its competitors over the past three years, with revenues reaching $36.01 billion in 2018. (Yahoo Finance, 2020c). Since 2018, its stock market performance has mirrored that of Geely, indicating a gradual fall (Yahoo Finance, 2020c). Even though the company provides comparable services, its size may cause Volkswagen to incur extra debt.



Conclusion and Suggestion



Currently, the COVID-19 pandemic is causing a severe drop in the automotive industry. Volkswagen may benefit from the moment of unpredictability by strategically acquiring a Chinese automaker to expand its position in the region. Geely Automobile Holdings Limited appears to be Volkswagen's best alternative, since it will assist Volkswagen achieve its strategic objectives and meet its needs. After the COVID-19 issue has subsided, it will be easier to obtain low-interest loans, thus the acquisition should be paid for in cash using borrowed funds.



References



Bullard, N. (2019). China is dominating the market for electric vehicles. Bloomberg. Web.



Hanley, S. (2019). Volkswagen intends to dominate the production of electric vehicles in China. The Clean Technica website.



Matousek, M. (2019). Volkswagen is placing a significant bet on electric vehicles, despite the fact that they represent a minute portion of the worldwide automobile market. It has no other choice. Business Insider. Web.



Russel Investments (2020). Global market forecast — Q2 update. Web.



Salter, M., & Weinhold, W. (1981). Choosing appropriate acquisitions. Web-based Harvard Business Review.



Valuates Reports (2019). Electric Vehicles market analysis. Web.



Volkswagen AG (2020). Online annual report for 2020.



Wagner, I. (2020). The automotive industry: statistics and facts Statista. Web.



Yahoo Finance (2020a). BYD Limited Company. Web.



Google Finance (2020b). Limited Geely Automobile Holdings. Web.



Google Finance (2020c). Limited SAIC Motor Corporation Web.



Google Finance (2020d). Volkswagen AG. Web.

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