Risk Analysis and Risk Management Plan

Risk Analysis and Risk Management Plan

 

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Introduction

Mergers and acquisitions can bring some unique due diligence considerations for the acquiring company however, it is necessary to work on how to minimize the risk of implementation, people, cultures, different legacy systems, business disruption, etc. are taken as the complex matters which need to be considered. During acquisition, any business takes the assets, contracts, and liabilities of the acquired company.

In contents of the acquisition of Fiat Chrysler Automotive (FCA), it’s considerable for General Motors (GM) to reckon with the risks they are acquiring. Fiat Chrysler Automotive is an international automotive company, so General Motors needs to be prepared to take on all risks associated with foreign complexity that include risks such as international tax law risk, regulatory risk, labor law risk. Also, FCA has 189 thousand employees, which means the risk factor is associated with culture. Differences in culture between acquirer and target create complexity that is often not considered because it is not seen as a financial risk. Most important is a financial obligation that needs to be considered. Although Fiat Chrysler Automotive is much smaller than General Motors, which has an annual revenue of $123 billion, FCA the world’s seventh-largest carmaker with a market capitalization of $30.9 billion, reported revenue of € 108 billion in 2019, net debt had fallen to 1.3 billion euros ($1.6 billion) by the end of March. ( Flak A., 2018 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Identification and Assessment of Risk Items

 

Industry Risks

Risk Factors Description
Technology advancement The automotive industry is facing an unprecedented transformation with changes in technologies. Trends in connectivity, mobility-as-a-service, autonomous driving, and e-mobility are rapidly changing vehicle technologies from the body to the drivetrain.
Market risk Automotive OEMs are challenged by peak demand and increasing competition. Auto sales are flattening in many mature markets such as Japan and Europe, while North America faces the prospect of slowing demand conditions in the market. From 2014 to 2019, the global light-vehicle sales are estimated to increase at a compound annual growth rate of only 3.1%.
Cultural integration risk

 

The integration is a large risk of M&A process. It involves many areas including involving in internal management audits, the integration of sales forces, the threat of employee enhancement, loss of value, etc. The most important issue is the cultural of the target company.

 

 

 

Company Risks

 

 

Risk Factors Description
Uncertainty in revenue The uncertainty in revenue is one of the leading company risks facing the acquisition plan between General Motors and Fiat Chrysler Automobiles. The automotive market has experienced a drastic shrinking in the recent past. The sector has recorded a slowdown in the production and sales of motor vehicles, leading to reduced revenues. For instance, FCA sold 4.42 million vehicles in 2020, registering an 8.8 percent drop from 2018 (Felipe, 2020). Although the Covid-19 pandemic significantly contributed to reduced sales, the market share had started shrinking in 2019, before the disruption. The uncertainty is also brought about by the increasing competition from players in emerging markets such as China. Moreover, lifestyle changes pose a considerable risk to the company. Today, most customers have become more environmentally conscious, thus preferring electric cars that use clean energy. Court cases challenging the acquisition might also delay or prevent the company from generating significant revenues.
Accounting practices The risk of accounting practices is also a critical challenge during acquisition. Accounting practices risk involves the possibility of the company reporting misleading or incorrect financial information. The problem can arise due to failure of controls or fraud. Most often, accounting fraud misleads investors and partners. The occurrence of this risk can result in losses and damage to the reputation and integrity of the company. FCA has been indicted in accounting malpractices in the past. For example, in 2019, the Securities and Exchange Commission (SEC, 2019) charged and ordered FCA to pay $40 million for misleading investors. The report indicates that the company falsely reported the number of vehicles sold in the United States between 2012 and 2016. As such, accounting practices is a critical risk to be considered during the acquisition.
Losing Talented Workforce The company risks losing a talented workforce after the acquisition. In most cases, companies trim the workforce after acquisition to manage costs. Sometimes this approach dampens morale among employees, leading talented workers to leave the company. Moreover, the differences in organizational culture between the two companies can orchestrate high employee turnover. This risk is likely to occur since GM and FCA have different cultures.
Liability risk The company faces various potential liabilities due to acquisition. For instance, the company will bear all the losses made by the target company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analysis and Prioritization of Risk

Risk prioritization is a crucial process in risk management. It involves determining the type of risks to act upon first before addressing others. Notably, risk prioritization follows a risk impact assessment, whereby risk events that are more likely to occur and have higher impacts are prioritized. In this case, the two companies should focus on high-priority risks during the acquisition. For instance, the company should develop employee retention strategies to avoid losing talented employees. Ideally, this risk event has a high likelihood of occurrence and severe on the company. Consequently, the company should prioritize uncertainty in revenue since it has a significant impact on the company’s growth.

 

 

 

 

 

 

 

 

 

 

 

 

 

Recommendation of Risk Mitigation and Management Measures

Risk Factors Mitigation
Technology advancement · Invest in R&D in e-drive and other technologies such as Advanced Driver Assist Systems (ADAS).
Market risk · Become a comprehensive solutions provider with complementing capabilities in one segment, such as interior, electronics, or connected cars.

· Keep the customers loyal to the company’s brand and attract new customers with new designs and technologies.

· Develop a new product line such as a connected car.

Cultural and integration risk

 

· Allow members of the due diligence team to become part of the integration team. An experienced and skillful integration team will help with integration planning during diligence to gain a better understanding of the target company.

· The integration planning should begin early, GM should collect information on the target’s culture as soon as possible. Be open and consistent in communication.

· Quick implementation of restructuring initiatives.

 

 

Recommendation of Risk Mitigation and Management Measures

 

 

Company Risk Factors Mitigation
Uncertainty in revenue  
Accounting practices  
Losing Talented Workforce  
Liability risk  
   
   
   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conclusion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

 

Felipe. (2020). 60% of FCA sales are SUVs/pickups. Fiat Group World, https://fiatgroupworld.com/2020/03/24/60-of-fca-sales-are-suvs-pickups/

Flak A., 2018 “Fiat Chrysler cuts debt by more than expected “

https://www.reuters.com/article/us-fiatchrysler-results-idUSKBN1HX1OG

Securities and Exchange Commission. (2019). Automaker to Pay $40 Million for Misleading Investors. https://www.sec.gov/news/press-release/2019-196

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