A private equity acquisition of Jaguar and Land Rover might be the best thing to happen to the companies, according to a professor at the Olin School of Business at Washington University in St. Louis.
The bidders fall into two basic classes: auto manufacturers and public-equity firms. These two groups have distinct theories about how they can create value, but one may be more effective than the other.
“The public-equity firms will clean house,” said Anne Marie Knott, associate professor of strategy. “They will find the areas of poor performance and turn them around. The record suggests that this is actually the most reliable way for acquirers to add value. Not only are these turnarounds good for the shareholders, but recent studies show they also are better for the economy. They lead to layoffs, but the result is that the laid-off employees ultimately land jobs better matched to their skills where, accordingly, they make higher wages.”
Of all the firms vying to make the acquisition, Cerberus Capital Management might have the most to offer because that company recently acquired Chrysler, according to Knott.
“People probably imagine that synergies between the various name plates are driving the Cerberus bid. I think the real payoff will come from the chance to reuse the knowledge Cerberus gains turning around Chrysler,” Knott said. “So one prediction would be that Cerberus makes more money turning around Jaguar and Range Rover than they do from Chrysler — assuming they do the turnarounds in order.”
Knott noted that the approach the auto manufacturers take to potential acquisitions is entirely different.
“The auto manufacturers’ theory of acquisition is to determine if they can create synergies between their newly acquired divisions and their existing divisions,” Knott said. “The record on this is not so good; while 40 percent of acquisitions create value, 60 percent destroy value. While scale and scope of economies certainly exist, if acquirers can’t be explicit about what those are, how the company will achieve them (when Ford couldn’t) and what the synergies are worth, the bids probably won’t materialize.”
Editor’s Note: Professor Knott is available for interviews. Television and radio reporters can conduct live or taped interviews via the University Communication’s studio, which is equipped with VYVX and ISDN line.