Case assignment 5

ZF Friedrichshafen' Acquisition of TRW Automotive- Text case #19, page C- 248``

The same case can be purchased on line through:

https://www.thecasecentre.org/programmeAdmin/products/view?id=142292Links to an external site.

1. Would one characterize ZF's acquisition of TRW as horizontal, vertical or related? Please explain your answer.
2. What did ZF hope to gain through buying TRW? Why did ZF acquire TRW rather than develop organically?
3. Explain why each firm needed to restructure as described on page C-254.
4. Why or why not is this likely to be a successful acquisition?

This case describes ZF's cash purchase of TRW, combining two of the automobile manufacturing industry's most innovative and important suppliers. The case describes expected changes in the industry they serve and the ways the two companies seek to address those changes. You will also see many of the practical considerations in an acquisition process.

The first question concerns the nature of the transaction. Correctly identifying this is a foundation for considering what the transaction might offer the firms as well as antitrust issues that might arise. The case's first paragraph addresses this question as do many succeeding paragraphs and the very useful Appendix 1.

ZF wanted to buy TRW for many reasons. Question 2 is an opportunity to apply the left side of text figure 7.1 to the case facts. You will find many reasons. Among what you find, please consider:

• What megatrends ZF identified in its customers' industry and what ZF stated the combined company would be
• Any location advantages TRW might offer (in a later chapter we will study that a firm's home market greatly affects its competitive strength)
• Is size an issue? We caution against growth for its own sake, but might there be a reason to grow? If so, why not simply invest in R&D, expansion, etc.?
• The case has quotes from outsiders, including a competitor's CEO, that describe the two firms and what the combined firm will offer.

Each reason deserves its own paragraph identifying the reason and explaining its details.

Interesting facts that might or might not enhance your responses to questions:

• Neither firm seemed to enjoy industry- average margins. Calculate the margin of each from the 2014 results of each shown in figure 2. Compare those to the industry averages of Appendix 2.
• ZF planned an all cash $13.5B purchase, financed ultimately by issuing bonds. The firm, however, seemed to have available interim bank financing.

The case describes the reasons for some divestments in a manner that lets you respond to question 3. Reading the case text in conjunction with Appendix 1 will make the information clearer. This is an assignment question to illustrate pre- acquisition restructuring sometimes required by regulators. It also highlights the EU's currently greater sensitivity to competition constraints.

Assess whether ZF's acquisition is a good idea. Look at the transaction (and many prior question responses) and compare the facts to text table 7.1. Consider too how well the firms are avoiding the potential problems on the right side of text figure 7.1. (Remember that the 13thtext edition's version of table 7.1 reverses the attributes and results for items number 2, 4 and 6.)

As always, use the grammar guidelines included with the case assignments. Answer each question with a clear, concise, precise topic sentence. Add additional supporting sentences citing course concept, case facts, etc. as necessary to help a reader understand the reason for your topic sentence's answer.

Multiple questions require multiple paragraphs.