The Feasibility of General Motors Companys Acquisition by Embry Investment Group - Case Study Example

General Motors Corporation The research aims to study the feasibility of General Motors Company’s acquisition by Embry Investment Group. Ituses various qualitative and quantitative techniques to analyze and gauge the future growth potential of GMC, to support EIG’s management in its decision to acquire the former. Executive Summary The research report aims to find out the feasibility of acquiring General Motors by Embry Investment Group, by considering its market and financial performance. The report is prepared, based on secondary data, using General Motors historic data i.e. balance sheet, income statement, stock prices, annual report and other business journals. The report covers the market analysis of General Motors; it tries to gauge the forecasted revenue, market share and absolute growth of the company with the industry benchmark. It also includes the analysis of financial statements of the company, by taking into account its historic data (balance sheet and income statement). It uses various ratios to gauge the future projected performance of General Motors vis-à-vis liquidity, profitability, activity and solvency. Post analysis it offers its opinion to EIG regarding the acquisition decision after taking into consideration the above mentioned analysis. Company Profile General Motors Company is a US based Company headquartered in Detroit, Michigan. It is engaged in the business of designing, building and selling cars, crossovers, trucks and automobile parts across the globe. It produces vehicles in 37 countries under various brands vis-à-vis Cadillac, Opel, Alpheon, Chevrolet, Buick, Cadillac, GMC, Holden, HSV, etc. It holds 20% and 77% stake in IMM and GM Korea. It has strategic joint ventures in various nations namely China, Russia, Pakistan, India, Egypt and South Africa. Its total employee strength is 212,000 and its business operations are spread across 120 countries. It has been the market leader in sales for 77 consecutive years from 1931 to 2007. Analysis Analysis Methodology The qualitative data is prepared from secondary data vis-à-vis periodicals, journals, books and web sources The research report is prepared using secondary data i.e. GM’s historical financial statements, stock prices and other web portals for relevant information about General Motors. Ms Excel formulae are used to derive key ratios interpreting the company’s financial health as the decision to buy is incumbent on the outcome of the analysis. Market and business environment analysis General Motors Sustainability Strategy Design – Fewer brand coverage, leveraging global resources to deliver the best to its customers Build- Optimization of global footprints and cost effective vehicles Reinvest – General Motors believes in reinvesting cash flows from business into vehicle manufacturing and technology development Sell – Deliver world class products by maximizing company and stockholders wealth (General Motors Company, 2013). Comparative Business Analysis Figure 1: Car sales from 2012 – 2015 The above Figure is significant of the car sales (Million units) figures for the years 2012, 2013 2014 and 2015(forecasted) and the growth rates respectively. It is seen that the Industry growth rate for car sales has fallen over the years from 6 %( 2013) to 5 %( 2015), despite an increase in sales from 2014 -2015(3% to 5%) (General Motors Company, 2013). Figure 2: GMC car sales from 2012-2015 The figure represents GMC’s sales figure for the years 2012, 2013, 2014 and 2015 in million units. GMC’s growth rate is seen falling from 6% in 2013 to 4% in 2015. There’s no significant change in the growth rate of GMC with the industry benchmark (General Motors Company, 2013). Figure 3: Top five vehicle manufacturers, worldwide (million units) The above Figure represents the top five vehicle manufacturers in 2014 in million units. It is observed that Toyota has the largest share amongst the big five with 10.23 % market share, followed by Volkswagen with 10.14%, GM with 9.92%, Renault-Nissan with8.5% and the least Hyundai-Kia with 8.01% (General Motors Company, 2013). Figure 4: Comparative study of absolute growth rate Figure 4 observes the GM absolute growth rate over 4 years with the industry benchmark. GM’s absolute growth rate is 12% while the industry’s figure stands at 14%. Owing to intense global competition from Toyota and Volkswagen and market forces play, GM failed to retain its leader position, but has been sustaining at satisfactory levels (General Motors Company, 2013). External Environment Analysis Porter’s Five Forces 1. Threat of new entry – The entry barriers are high, owing to high cost of R&D, establishment costs, technological costs, government regulations etc 2. Buyer power – Owing to slow moving markets and the industry nature there’s little or no buyer bargaining power. 3. Supplier power - Expansion of business in newer markets, has given rise to more supplies and suppliers, thus creating more bargaining power of the suppliers. 4. Threat of substitutes – Newer technology and better variants targeting the developing nations, is a major threat facing GM. 5. Threat of competitors - Other industry giants like Toyota and Volkswagen coming up with newer models and better technologically efficient cars in the developing nations (Jones, 2009). Financial Analysis Financial Statement Analysis Ratio Analysis   Dec12 Dec13 Dec14 Dec15(Forecasted) Liquidity ratios         Current ratio 1.30 1.31 1.27 1.24 Quick Ratio 1.02 1.08 1.07 1.05 Profitability ratios         Net profit margin 4% 3% 3% 2% Gross profit margin 7% 12% 9% 6% P/E 79 120 153 247 EPS 37% 34% 23% 17% Activity based ratios         Debtors Turnover ratio 6.38 4.69 4.41 4.16 Collection period 57 78 83 88 Working Capital ratio 8.84 7.20 7.91 8.72 Asset Turnover ratio 102% 93% 88% 83% Solvency Ratios         Debt Equity ratio 2 2 3 4 Net-worth ratio 24% 26% 20% 15% Capital Gearing Ratio 0.0010 0.00060 0.00050 0.00041 Table 1 (Yahoo Finance, 2015) General Motor’s liquidity position is good, implying its ability to meet its short term obligation. It has sufficient liquid assets to pay its current liabilities. The historical data shows that it contained its liquidity position over the years 2012, 2013 and 2014. The forecasted figure of 2015 is also good, implying high short term solvency. GM’s profitability position is low, despite a strong and increasing P/E. It shows that the appreciation of the stock value is attributed to its non business activities. Net profit and gross profit ratio growth have been decreasing, thus affecting the earning level of the common stockholders. Its growth in cost of revenue is more than the revenue growth, resulting in a low GP margin. Despite witnessing a cut in operating expenses, its lower gross profit has resulted in a forecasted operating loss for the year 2015. Subsequently its EBIT figures have also witnessed a fall in share coupled with rising interest expense resulting in lower PBT. There’s no major variance in administrative and interest expenses, but the cost of revenue has a larger contribution towards the falling profit margin. Its debt collection period has also risen, implying a larger cycle for payments received, thus affecting the net realizations from bills receivables. The working capital cycle remains positive, but can also be characterized as more requirement of funds for business operations. It is observed that General Motors has been efficiently utilizing its assets in generating revenue for the years 2012, 2013, 2014. Though there is a fall in the figures, yet the forecasted figure for 2015 is highly satisfactory. General Motors long term solvency position is highly favorable as its debt is more than its stockholders equity, implying lower PBT and lower tax expenses. Though cost of debt is always higher than cost of equity, it has tax benefit associated with it, thus GM going for a high debt equity mix has resulted in lower taxable income. GM has invested its stockholder’s equity in lower proportions towards its assets, implying it has taken debt money to buy/acquire its assets and has invested its equity money in business operations and expansion. The forecasted figure of GM’s debt equity mix is highly geared towards debt money than equity, thus creating higher payment obligations towards its creditors (Alvarez and Fridson, 2002). Stock analysis Figure 5: Stock price growth (Yahoo Finance, 2015) The above Figure indicates trend of monthly stock return of General Motors of last 3 financial years, 2012, 2013 and 2014. There is a sharp rise in the opening and closing stock prices from December 2011 to January 2012. The growth trajectory of stock prices and change in the prices have seen significant increase in October 2012, December 2012, April 2013, May 2013 and decrease in April 2012, June 2012 and January 2014. Moreover, the growth rate is undulated for the period 2012-2013, but no significant changes have been witnessed in 2014. There is more of a flattened stock price movement compared to the earlier period. Such changes in the stock prices can be associated with some buyback of shares. Expected stock return analysis Monthly risk free rate of return in USA (Rf) 0.31% Average monthly Market Return (Rm) 1.41% Beta (b) 1.06 Formula: Er=Rf+b*(Rm-Rf)   Expected return of stock (monthly) (Er) 1.5% Expected return of stock (annual) 17.75% The above table represents the expected stock return analysis of the General Motors. From the analysis it can be seen that beta of the GM stock is higher than 1 which represents that the stock is more risky and the annual return for next financial year is expected to be 17.75 considering the monthly stock return of last 3 financial years. From the ratio analysis through profit margin of the company is not in a good position but the stock performance is quite impressive and attractive for the shareholders. The P/E is also showing significant rise from 79 in 2012 to 153 in 2014, moreover such is expected to rise in the forecasted period to 247. Thus, such high P/E in case of General Motors is characterized by falling EPS, due to share buyback, resulting in higher P/E. Since, GM’s stock price movement was less radical than the movement of its EPS, hence, the price that investors are willing to pay to earn a $ has significantly risen. With the continuing operations and ratios thereof, indicates an upward trend line favoring the appreciation of General Motors stock value. The gradient of the trend line is much flatter compared, but is positively skewed, resulting in investors’ wealth maximization in the long run (Bassetti, Magee and Edwards, 2012) (Yahoo Finance, 2015). Key Findings Market Perspective Embry Investment Group’s decision to buy or hold the acquisition of General Motors Company is incumbent on the above research and analysis. Considering the market scenario, General Motors’ performance has not been at par. It has lost its leader position to Toyota and Volkswagen, clearly indicating opportunities in newer and better product offerings to attract newer markets and market segments. Though its revenue share has risen over the years (2012 – 2014) and is expected to grow in 2015, yet the total market size has also grown. Such increase in total market size is attributed to the increased production capacity and demand for other brands. Such circumstances offer General Motors with an opportunity to thrive in the market as well as make it vulnerable to buyouts from competitors. It can also raise finance to increase its efforts to better market its offerings and back it up with increased production capacities. This clearly observes the need of fresh capital for General Motors to make a turnaround in the market (Jones, 2009). Financial Perspective General Motors financial health is much of a concern for its management. Over the years it has shown a down trend in the profitability of its business. Its gross profit has remained low and has fallen from 2012 to 2014 and is expected to fall in the next period, owing to its high cost of revenue. High cost of operations has pushed the earnings before interest and tax, profit before tax, resulting in low distributable income to investors. The green side of such performance is the short term and long term solvency position. It is observed from the analysis that General Motors has adequate short term and long term assets to meet its operational cost ( Expected Working capital turnover ratio of 8.72 – 2015) as well as its long term funds (borrowed funds). Considering the current debt equity mix of the company and financial health, it is a highly feasible opportunity for EIG to acquire General Motors. The acquisition would yield positive returns for EIG, as there’s an existing market for General Motors products and if EIG infuses more capital in the business operations. If EIG acquires GM, it should be wary of the current debt obligation in the market. Though it has strong asset cover over its short and long term liabilities, yet EIG should consider altering the debt equity mix to lower interest expense so as to reap higher profit margins and more earnings to common stockholders. It should also consider some fund allocation to research and development to devise strategies to curtail the operational and non operational costs (Alvarez and Fridson, 2002). Conclusion Embry Investment Group (EIG) plans to invest in General Motors Company. Prior to the strategic buyout EIG wants to forecast GMC’s growth and profitability prospects. Buyouts and acquisitions are antecedent of business failure, poor management, management strategy, new investment, market access, etc. General Motors is now faced with vulnerability of buyout by major investors owing to its poor performance standards and market share. It has also lost its leader position to automobile giants like Toyota and Volkswagen. It has failed to stimulate demand and increase its sales at par with the industry growth. Though the industry size is increasing at a slow pace, General Motors rate of market share growth is much slower than the industry benchmark. There is a need of fresh capital, which is debt free, to increase the production capacity of GM as well as venture in new projects. It requires debt free capital, as it already has a large debt portion, taking additional debt would decrease the profit margin and result in low earnings to the stockholders. References Alvarez, F. and Fridson, S. M. (2002). Financial Statement Analysis: A Practitioners Guide Volume 145 of Wiley Finance. Danvers: John Wiley & Sons. Bassetti, C. H. W., Magee, J. and Edwards, D.R. (2012). Technical Analysis of Stock Trends, Tenth Edition Technical Analysis of Stock Trends. Boca Raton: CRC Press. General Motors Company. (2013). Annual Report 2013. Retrieved from: http://www.gm.com/annualreport/downloads/2013_GM_Annual_Report.pdf Jones, G. H. C. (2009). Strategic Management Theory: An Integrated Approach Strategic Management Series. Mason: Cengage Learning. Yahoo Finance. (2015). General Motors Company. Retrieved from: https://in.finance.yahoo.com/q?s=GM&ql=0. Read More