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Please answer ALL questions in both Sections A and B
The automotive sector is experiencing unprecedented challenges: the pandemic, many lockdowns and restrictions in movement, with work-from-home policies, people avoid using cars. On top of that, new companies, such as Tesla, gain market share, increase their sales and traditional car manufacturers experience unprecedented falls in their sales. On the 19th of December 2019, Fiat Chrysler (an Italian car manufacturer) and Peugeot (a French car manufacturer) agreed to a $38billion merge in a giant auto deal. Shareholders of each group would hold 50 per cent in the new entity, which will have revenues of €170bn, and a combined workforce of about 400,000. Its sales of 8.7m vehicles a year will put the merged entity ahead of General Motors and Hyundai-Kia.
Answer the following questions:
(i) Briefly outline and discuss the synergies that can be generated from this merger. (25 marks)
(ii) Do you think the companies should have followed a different strategy? Such as to form. an alliance, a joint venture, diversification, to continue in a stand-alone basis? Yes/No, why? Explain your answer. (25 marks)
On July 1, 2008, Bank of America Corp (BofA) announced that it had completed its acquisition of mortgage lender Countrywide Financial Corp (Countrywide) for $4 billion, a 70 percent discount from the firm’s book value at the end of 2007. Countrywide originates, purchases, and securitizes residential and commercial loans; provides loan closing services, such as appraisals and flood determinations; and performs other residential real estate–related services. This marked another major (but risky) acquisition by Bank of America's chief executive Kenneth Lewis in recent years. BofA's long-term intent has been to become the nation's largest consumer bank, while achieving double-digit earnings growth. The acquisition would help the firm realize that vision and create the second largest U.S. bank. In 2003, BofA paid $48 billion for FleetBoston Financial, which gave it the most branches, customers, and checking deposits of any U.S. bank. In 2005, BofA became the largest credit card issuer when it bought MBNA for $35 billion.
The purchase of the troubled mortgage lender averted the threat of a collapse of a major financial institution because of the U.S. 2007–2008 subprime loan crisis. U.S. regulators were quick to approve the takeover because of the potentially negative implications for U.S. capital markets of a major bank failure. Countrywide had lost $1.2 billion in the third quarter of 2007. Countrywide's exposure to the subprime loan market (i.e., residential loans made to borrowers with poor or nonexistent credit histories) had driven its shares down by almost 80 percent from year-earlier levels. The bank was widely viewed as teetering on the brink of bankruptcy as it lost access to the short-term debt markets, its traditional source of borrowing.
Bank of America deployed 60 analysts to Countrywide's headquarters in Calabasas, California. After four weeks of analyzing Countrywide's legal and financial challenges and modeling how its loan portfolio was likely to perform, BofA offered an all-stock deal valued at $4 billion. The deal valued Countrywide at $7.16 per share, a 7.6 discount to its closing price the day before the announcement. BofA issued 0.18 shares of its stock for each Countrywide share. The deal could have been renegotiated if Countrywide experienced a material change that adversely affected the business between the signing of the agreement of purchase and sale and the closing of the deal. BofA made its initial investment of $2 billion in Countrywide in August 2007, purchasing preferred shares convertible to a 16 percent stake in the company. By the time of the announced acquisition in early January 2008, Countrywide had a $1.3 billon paper loss on the investment.
The acquisition provided an opportunity to buy a market leader at a distressed price. The risks related to the amount of potential loan losses, the length of the U.S. housing slump, and potential lingering liabilities associated with Countrywide’s questionable business practices. The purchase made BofA the nation's largest mortgage lender and servicer, consistent with the firm's business strategy, which is to help consumers meet all their financial needs. BofA has been one of the relatively few major banks to be successful in increasing revenue and profit following acquisitions by "cross-selling" its products to the acquired bank's customers. Countrywide's extensive retail distribution network enhances BofA's network of more than 6,100 banking centers throughout the United States. BofA had anticipated almost $700 million in after-tax cost savings in combining the two firms. Almost two-thirds of these savings had been realized by the end of 2010. In mid-2010, BofA agreed to pay $108 million to settle federal charges that Countrywide had incorrectly collected fees from 200,000 borrowers who had been facing foreclosure.
Answer the following questions:
1. How did the acquisition of Countrywide fit BofA’s business strategy? Be specific. What were the key assumptions implicit the BofA’s business strategy? How did the existence of BofA’s mission and business strategy help the firm move quickly in acquiring Countrywide? Discuss the strategy in accordance with relevant literature. (17 marks)
2. How would you classify the BofA business strategy (cost leadership, differentiation, focus or some combination)? Explain your answer. (16 marks)
3. Describe what the likely objectives of the BofA acquisition plan might have been. Be specific. What are the key assumptions implicit in BofA’s acquisition plan? What are some of the key risks associated with integrating the Countrywide? In addition to the purchase price, how would you determine BofA’s potential resource commitment in making this acquisition? (17 marks)
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Assignments should be typed, using 1.5 spacing and an easy-to-read 12-point font. Assignments and dissertations/business projects must not exceed the word count indicated in the module handbook/assessment brief.
The word count should:
§ Include all the text, including title, preface, introduction, in-text citations, quotations, footnotes and any other items not specifically excluded below.
§ Exclude diagrams, tables (including tables/lists of contents and figures), equations, executive summary/abstract, acknowledgements, declaration, bibliography/list of references and appendices. However, it is not appropriate to use diagrams or tables merely as a way of circumventing the word limit. If a student uses a table or figure as a means of presenting his/her own words, then this is included in the word count.
Examiners will stop reading once the word limit has been reached, and work beyond this point will not be assessed. Checks of word counts will be carried out on submitted work, including any assignments or dissertations/business projects that appear to be clearly over-length. Checks may take place manually and/or with the aid of the word count provided via an electronic submission. Where a student has intentionally misrepresented their word count, the School may treat this as an offence under Section IV of the General Regulations of the University. Extreme cases may be viewed as dishonest practice under Section IV, 5 (a) (x) of the General Regulations.
Very occasionally it may be appropriate to present, in an appendix, material which does not properly belong in the main body of the assessment but which some students wish to provide for the sake of completeness. Any appendices will not have a role in the assessment - examiners are under no obligation to read appendices and they do not form. part of the word count. Material that students wish to be assessed should always be included in the main body of the text.