Free Essay About Merger, Acquisition And International Strategies
This essay on merger, acquisition and international strategies focuses on two public corporations in the automobile dealership industry. The first category is the public listed company, which has made acquisitions or mergers and operates internationally. The company selected under this category is Penske Automotive Group. The second one focusses on a public listed company that does not have any history of mergers or acquisitions and operates solely within the US. The company chosen under this category is CarMax, Inc.
Penske Automotive Group – Company Background
Penske Automotive Group, founded in 1990 is an international chain of automotive dealership operating principally in the United States and Western Europe, Australia and New Zealand. The company deals with both new and used automotive and commercial truck dealership, diesel engines, gas engines, power systems and related parts. Penske is a public company listed in NYSE with the ticker symbol as PAG is a Fortune 500 company employing more than 21,000 people worldwide .
2014 turned out to be the most profitable year in the history of Penske with the overall revenues witnessing a healthy rise of 18.9% to $ 17.18 B. US accounted for 60.8% of the total sales and UK contributing 35%. The revenue mix for their lines of operations are as mentioned here- New vehicles- 50.5%; Used vehicles- 28.8%; Finance and Insurance- 2.5%; Service and Parts- 10%; Fleet and Wholesale- 4.9% and Commercial Vehicles and Other- 3.3% .
Penske Automotive Group has made a large number of strategic acquisitions since inception aimed at complementing their existing brand mix and providing long term growth. Of the many acquisitions made, this article will focus on Penske’s acquisition of Hertz car rental franchise market, evaluation of the strategy that led to the acquisition and analysis of the acquisition decision made. The company’s international business level and corporate level strategies are also evaluated and recommendations are made to enable improvement of their operations.
Penske’s Acquisition of Hertz Car Rentals
Penske has acquired the operating rights of Hertz car rental business in two geographies- Memphis, Tennessee and certain areas of Indiana.
Under the initial agreement in September 2012, Penske purchased Hertz’s 15 company owned airport and off-airport rental locations in Memphis, thereby acquiring the right to operate them under Hertz brand. Subsequent to this, Penske expanded their Hertz car rental operations in March, 2013 through the acquisition of Hertz’s assets and franchise rights 20 car rental locations (airport and off-airport) in certain areas of Indiana market. Penske purchased the assets of Hertz’s existing Memphis market and Hertz will provide their full range of services which will enable Penske to gain an instant access to the market and facilitate the expansion of their market presence.
In addition to the expansion of market presence, Penske enjoys other benefits as well. The biggest advantage for Penske to gain the maximum out of these acquisitions is the ready availability of the support ecosystem in place which includes cars, dealerships, service centers etc. The acquisition was the quickest route for Penske to enter into the highly lucrative car rental market. Through the acquisition, Penske gets the access to use the Hertz car rental system, including rental, sales activities and programs, fee payment, access to intellectual property and also includes advertising and promotion provisions. Through this deal Penske gained control of three airports- Indianapolis International, South Bend and Fort Wayne. Penske is focused on the off-airport market as well. The deal also involves provisions for sub-branding. The agreement with Hertz is for 10 years, with provisions for extending it. It also targets further expansion to other markets as well.
As of December 31, 2013, Penske manages more than 50 on and off airport Hertz car rental locations. In 2013, the car rental business earned Penske $ 52.6 million in revenue and is showing healthy growth trends. In a very short span, Penske was able to lift Hertz brand to the most valuable one in both Memphis and Indiana. Penske maintains a fleet of approximately 5,500 cars, primarily Toyota along with Honda and GM to a lesser extent. Penske will later transfer these cars to their used car dealerships or sell them through brokered sales, sales to wholesalers and other dealers.
Thus it can be seen that the acquisition of Hertz car rental operations in Memphis and Indiana has provided Penske with an entry to the lucrative car rental market and helped them to diversify their business. It has also helped them to boost the car sales and these deals ensure a consistent availability of used cars at their dealership.
Business Level Strategy Recommendation
A review of the social media reveals a lot about the quality of the customer care centers and the vehicles of Penske, particularly their truck rental division. There are a lot of complaints and grievances published by their customers. A lot of their customers have complained about the quality of the trucks and the bad up keep of the vehicles. They are also not very happy with the quality of service provided by Penske’s customer care centers. Based on these two challenges, this report recommends Penske to adopt a social media monitoring mechanism/software through which they can keep track of their customer’s comments and complaints and provide satisfactory reparation for them. Penske also need to revamp their customer care centers by providing proper training to their employees so that they are able to deliver the appropriate solution for the customer’s queries or complaints. By adopting these recommendations, Penske can ensure customer satisfaction and through that better customer retention and repeat business opportunities.
Corporate Level Strategy Recommendation
The corporate level strategy recommendation to be made here relates to the recommendation on customer care mentioned above. Given the size and scale of operations of Penske Group, it is highly recommended that they keep a highly qualified and trained resource pool to manage their operations in the domestic and international markets. The industry is highly competitive and finding qualified resource is a challenge for all the companies operating in this area. The resource mix should consist of employees with proper qualification, relevant industry experience, familiarity with the local market and more importantly a taste towards automobiles. Keeping a healthy pool of resources will help the company to meet the resource requirements on a short notice which will ensure smooth and uninterrupted operations. It is also recommended that the company adopts employee friendly policies in order to reduce the turnover and keep up the talent.
Let us now analyze the second case- a public corporation without the history of any mergers or acquisitions.
CarMax – Company Background
CarMax started its operation in the year 1993 under the ownership of Circuit City Stores, Inc. CarMax is listed in NYSE (KMX) since 1997 and has become an independent entity since October 2002 after spinning off from its parent Circuit City, which is now defunct. Since the opening of their first store in Richmond, CarMax operates solely within the US and currently operates 133 stores and have sold more than 5 million retail vehicles nationwide (as of fiscal year end February 28, 2014). As of 2014, sales of over 85% of the used vehicles were in the 0-6 year old category. CarMax also sells new vehicles of three manufacturers- Fiat, Toyota and Nissan at four locations as well as vehicles older than 6 years. According to CarMax, their key competitive advantages include ability to provide customer satisfaction with the car buying experience by virtue of low, no-haggle prices and customer friendly sales staff and processes.
This section of the article focuses on identifying a company that would be a profitable candidate for CarMax to acquire.
Scope of Acquisition
Prior to identifying the company that would make a profitable buy for CarMax, it is important to analyze whether it makes sense to go after an acquisition at the first place.
The US used car market is highly fragmented and extremely competitive and is almost three times bigger than the new car market in terms of the number of units sold. In 2014, the used car sales were around 42 million units, whereas the sales of the new cars stood at around 16 million units. With a growing economy and lowering fuel prices, there is a higher inflow of vehicles to the used car market.
There are two major factors which act in favor of CarMax to go after an acquisition. CarMax is the largest retailer of used cars in the US, but accounts for only 2% of the total volume turning around in the market. The second factor is the level of penetration in the US. CarMax are currently present in markets which accounts for less than 60% of the total US population. CarMax has strong presence in the east, but has zero presence in about 13 states and minimal presence in about 20 states (presence in 2 cities or less). From this data analysis, it can be seen that it makes much sense for CarMax to go after the inorganic growth route as well, which helps them instantly to win a higher market share and presence in states where they currently have minimal or zero operations.
Identifying the Acquisition Target
The potential acquisition target has been finalized after considering two primary factors that will help improving the market share, market reach and overall growth of CarMax. The two factors are – Improving presence in the western states, where CarMax currently has negligible presence and improving the company’s share in the new car retail business. Considering these two parameters, it has been identified that Lithia Motors, Inc. will be the most suitable target for CarMax to consider for acquisition.
Lithia Motors, Inc. (NYSE: LAD) was founded in 1946 in Oregon and focuses on the retail sales of both new and used cars. The company primarily serves the western United States and is currently the ninth largest automobile retailer in the US. A financial comparison of CarMax and Lithia Motors is given in the table below-
Targeting to acquire Lithia Motors has multifold advantages to CarMax. Lithia Motors has around 120 dealerships, mostly concentrated in the western states of WA, OR, CA, NV, ID, MT, NM, CO, WY, IA, ND, TX, HI, AK etc. Acquiring Lithia will enable CarMax to instantly establish their presence in these above mentioned states, where CarMax is not a dominant player as they are in the rest of the US. Lithia Motors has an approximate split of 60:40 in new cars to used cars. This will also help CarMax to become a force to reckon with in the new car retail market. This makes particularly attractive since there has been resurgence in the new car sales with a growing economy and lower fuel prices.
Business Level Strategy Recommendation
Car retail dealership business is highly competitive. Almost all the major players including CarMax run and rely on the brick and mortar as well as websites to serve their customers. Although their brick and mortar format has been highly appreciated for their customer focus and friendliness, their website as well as the mobile application demands high level of attention from the management. One of the areas that they need to focus on is to achieve consistency in responding to customer queries and complaints made through their website or social media. The other area that they need to improve upon is the content in their website. Many a times, it has been observed that the features and specifications of the cars on sale are not completely covered. In a market as competitive as this, nobody can afford to discount on these small, but significant matters. This is one area which CarMax has to address on a war footing.
Corporate Level Strategy Recommendation
Since the commencement of operations in 1993, CarMax has not made any strategic acquisitions and has been relying entirely on the organic growth route. This may be the right time for CarMax to expand to newer geographies and thereby widen their business horizons. As the data proves, CarMax has only 2% of the total used cars retailed in the US and serves only 60% of the population. The growth opportunities are immense and taking the acquisition route helps them to get instant access to newer markets and more importantly the access to talent, which is a real challenge facing the industry. Hence it is recommended that CarMax should focus on both organic and inorganic ways to grow the company.
Finance, Y. (2015, February 20). Competitors. Retrieved from Finance.yahoo.com: https://finance.yahoo.com/q/co?s=LAD+Competitors
Folliard, T. J. (2014, April 25). CarMax Inc. Annual Report 2014. Retrieved from investors.carmax.com: http://investors.carmax.com/files/doc_financials/Annual%20Report/Complete-Annual-Report-2014.pdf
Group, P. A. (2014, March 10). Investor Relations. Retrieved from penskeautomotive.com: http://investors.penskeautomotive.com/phoenix.zhtml?c=82644&p=irol-irhome
Group, P. A. (2015, February 11). News Release. Retrieved from penskeautomotive.com: http://investors.penskeautomotive.com/phoenix.zhtml?c=82644&p=irol-newsArticle&ID=2015595
Lois Rossi, J. H. (2015, January 23). Manheim's 20th Annual Used Car Market Report Sees Growth, Stability As Key Drivers Of Robust Used Vehicle Market In 2014. Retrieved from prnewswire: http://www.prnewswire.com/news-releases/manheims-20th-annual-used-car-market-report-sees-growth-stability-as-key-drivers-of-robust-used-vehicle-market-in-2014-300024676.html
Penske Automotive Group, I. (2015). Penske Automotive Group. Retrieved from penskeautomotive.com: http://www.penskeautomotive.com/
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