Many in the auto industry were surprised that Ford decided to pull out from the Daewoo Motor acquisition. Just weeks ago it looked like a done deal. But the price always looked high and Ford’s investors were increasingly nervous about the size of the proposed purchase. Moreover, due diligence uncovered some unpalatable truths. Dave Leggett looks at the background to the Daewoo Motor sale and wonders whether other potential buyers will now be scared off.
Hindsight is a wonderful thing. A strategy based on growth and financed by loans is OK if the cash flows in and the debt can be serviced. The Asian economic and financial crisis that struck in late 1997 turned assumptions about growth in the region upside down overnight. In many ways, the position of the South Korean conglomerates is an especially shocking legacy of the economic crisis whose effects are still being acutely felt.
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It was back in the early 1990s that Daewoo Motor sowed the seeds of its current financial problems. The company was coming out of an acrimonious split with joint venture partner GM and was busy charting a new and ambitious course. Investment accelerated rapidly in production capacity, R&D, new models and distribution infrastructure – at home and abroad. Big loans were secured on the basis of, ultimately, over-optimistic assumptions about future sales and revenue. A large proportion of the investment was overseas and Daewoo was notably audacious and opportunistic in its expansion tactics.
Daewoo went where others feared to tread
Often it seemed that Daewoo would venture where others feared to tread, concluding assembly deals all over the developing world in places like Uzbekistan. Hundreds of millions of dollars were invested in new engineering and design facilities so that the warmed over GM models, inherited from the failed joint venture with GM, could be replaced by all-new Daewoo models. It was proceeding (roughly) to plan until the Asian financial collapse of 1997. The South Korean economy was devastated. The domestic market collapsed, production fell off a cliff and servicing loans became a big problem.
Daewoo sells the family silver
Last year saw the complete financial collapse of the Daewoo Group, whose core 12 units had nearly $80 billion in debt – $26 billion more than its assets. Creditors looked for some divisions, including Daewoo Motor, to be sold off. The bidding for Daewoo Motor in the spring of this year saw three significant bids: from Ford, GM (a joint bid with Fiat) and DaimlerChrysler (with Hyundai). GM was seen as a front-runner because of a previous 15-year alliance with Daewoo that ended in 1992 over strategic and marketing differences. Daewoo was attractive to bidders on three main levels:
Daewoo’s manufacturing infrastructure was also seen as offering value, but the synergies from production on parts and platform consolidation were on an uncomfortably long time horizon. They would be at least five years out on most estimates. Ford was announced as the preferred bidder after it outbid rivals with a mammoth bid of US$6.9 billion.
Ford seemed extremely eager
Why was Ford so keen? The answer seems to lay with the widely held view that it is lagging in its Asian strategy. GM has tie-ups and equity stakes in Suzuki, Isuzu and Fuji Heavy Industries (owner of the Subaru marque). DaimlerChrysler now has a strong link with Mitsubishi Motors and has acquired a 10% stake in Hyundai. By contrast, Ford has only managed to form an alliance with Mazda (which has not been generating much profit). Ford also lost out to Hyundai in a bidding war for Kia three years ago.
The other big plus for Ford was the boost that the acquisition would give the company in Eastern Europe. Daewoo’s competitively priced products are building a strong brand presence in certain emerging markets – notably Poland and Russia. In terms of the Ford brand family, Daewoo could have been positioned as the value-driven spearhead for Ford’s emerging market assault globally.
The other two bids had potential problems as far as Daewoo’s creditors (represented by the Financial Supervisory Commission) were concerned. GM’s joint entry with Italian partner Fiat could have attracted the unwelcome interest of EU regulators worried about the competitive implications of a tie-up. The involvement of Hyundai in DaimlerChrysler’s bid was also certain to generate some political opposition to a DaimlerChrysler bid.
But due diligence brought a rethink
The process of due diligence brought a pullout from Ford. It was largely unexpected and seems to have been at least partly influenced by broader influences on Ford’s share price right now. The Bridgestone/Firestone tyres recall has unravelled as a costly and unhappy episode for Ford. Ford is the main customer for the problem tyres (fitted to the Explorer light truck) and however much the company wants to pin the blame on its supplier, the publicity has been extremely negative. The share price has been moving down and investors were becoming increasingly nervous about the scale of the proposed Daewoo buy. It’s unfortunate timing. The precise due diligence findings that tipped the balance remain unclear, but it has been speculated that the fine print on Daewoo’s Polish and Romanian manufacturing operations looked unattractive. New liabilities may also have been a factor and the time for financial turnaround may have just looked too long.
If Ford stays away from the negotiating table, that will certainly be a setback for the company’s Asian strategy. On the other hand, at least Ford will say that it didn’t dig a hole for itself with something that was a financial mess. Ford will want to build further on its relationship with Mazda (Ford expects that output of pick-ups produced at its Ford-Mazda joint venture in Thailand will reach 110,000 units in 2000). Ford also expects to export completely knocked down (CKD) kits of its Indian-made Ikon car for assembly in Asia. It’s a ‘making-the-most-of-what-we’ve-got’ strategy and it leaves Ford with a lot to do to catch its rivals.
And now?
The Korean government and Daewoo’s creditors will be anxious to secure a sale of Daewoo Motor as soon as possible and the bidding process will therefore be re-opened. A foreign strategic owner is still seen as the preferred solution and the Financial Supervisory Commission (FSC) has said that a new preferred bidder will be selected by creditors as early as next week. Either GM (with Fiat) or Hyundai (with DaimlerChrysler support) is likely to be selected to go through to due diligence. Both have indicated that they remain interested, although confidence that a deal can be concluded has been dented. If Ford took fright, will a new bidder also be scared off by what is uncovered? Also, don’t rule out Ford coming back. Ford’s pullout doesn’t look like a negotiating tactic, but Ford may want to come back with a much lower price eventually. That is especially likely if interest in picking up the ball from other players is not strong or just not there.
If the subsequent due diligence negotiations are similarly troubled, then maybe the FSC will look at breaking up Daewoo Motor and its subsidiaries. That would be politically explosive if carried too far and if large areas of the company’s operations were ultimately forced to close. Indeed, the political backdrop to all of this should not be underestimated. Industrial unrest and protest, while counter-productive, could flare-up at Daewoo. Opposition to the sell-off to a foreign owner is sizeable. Throughout the bidding process, South Korean labour unions have vigorously protested the proposed sale of Daewoo to a foreign automaker. Any solution has to go some way to satisfying their concerns. Balancing the concerns of creditors, managers, workers and a foreign partner in any solution will not be easy.
