Shareholder value maximization? OR Long-term strategy?

Once mention the shareholder value maximization, the first consideration would be share price or dividends. However, as a senior manager, when mentioned the value creation, is the shareholder maximization the first point being considered?

Or, senior managers even trends to make financial reports more “beautiful” than realism. EPS and ROCE becoming the most considerable figures are used to cover up the company’s operating situation. The exposure of a series of multiple company of Enron, WorldCom and other accounting scandals, contribute sharply decreasing of U.S stock market within that time. Most seriously, public confidence keep landslide.

As I am concerned, the acquisition should be focus on a standard which is future value maximization. I’ll use the case Geely’s acquisition of Volvo support my view.

Zhejiang Geely Holding Group which is now the largest private-run car maker in China agreed on March 28^th in 2010 to buy Ford Motor's Volvo car unit for $1.8 billion. This, to some extent, becomes the country's biggest overseas auto purchase. Greely has claimed participate into buy Volvo when Ford was give the information to sell it in 2008 in public. This news has attracted worldwide media attention simple because even most of the foreigner not heard about Geely and its product. After getting the support for Chinese government, Geely was named as the preferred buyer of Volvo Cars by Ford on October 28^th of 2009. However, between December of 2009 and March of 2010, Greely has been through a long and difficult negotiation.

How about Geely? Can it holding the huge chain and manufacturer in Sweden, besides that, Volvo keep lost during the acquisition? The advanced technology shall be the key director drives Geely with the opportunity to be the leading role in China’s car market. For more than that, is this overseas acquisition is a represent for the growth of China finally get into main strength of world-car-maker.

How did this acquisition influence Geely’s shareholder value? Geely’s chairman Li  has been confident that Volvo would make significantly growth within two years for making profit in the fast growing Chinese market. Just profit? Obvious not. What Geely brings to Volvo is more than this turning point, but deeper and wilder understanding of Chinese market. According to Li, there will be local manufacture chain and factories which using for cutting down the cost of Volvo to make profit.  He can help Volvo reduce the cost by establishing its Chinese local supply chain. “I see Volvo as a tiger: It belongs to the forest and shouldn’t be contained in the zoo,” Li said. For these reason, achieve the shareholder value maximization is not only the share price or EPS from the financial reports. But also the goodwill, huge development and prospect market of one company. For the shareholder of Geely, the luxury car market is main profitable part of whole industry. Geely try to exploit its own luxury car, but with not so much good result. Not only because of the competition of three German car makers, but also the technology, brand recognition with advanced management and sales system. Meanwhile, the confidence from suppliers and retailers shall be the part of environmental fctors.

 Organisational capabilities: help from government

Strategy: acquisition and using Volvo exploit luxury car market

Finance: $1.8billion for acquisition, predict total $2.7 billion into operating Volvo

However, three years later after the Geely’s acquisition of Volvo in March of 2012, how did this acquisition been judged? Journal from WSJ on December 3^rd 2012 illustrate that Volvo—“the tiger” has dropped its profits by 84% in the first half of 2012 even this, Volvo will be lucky to sales 47,000 cars for reach the level of 2011 modest.

What’s going wrong with this situation? Had Geely rushed to promote its brand recognition? Without changed management strategy of Volvo really could change it into making profit?  The results here are more encouraging. Geely is now viewed as China’s leading independent car maker, with the best designs and reliability. In 2011 Geely even assigned Peter Horbury, a talented Volvo designer, to work on Geely products in China. In the original acquisition plan, Volvo was to fund investments in new products from its own profits. That’s no longer realistic. Fixing Volvo could get extraordinarily expensive, which raises a new question: Does Geely possess the billions of dollars, the branding know-how and the political clout necessary to make Volvo a winner in the global luxury car market?

Now, for consider the value management. There is no denying that Li has increased not only the reputation but also drive the company into the leading car maker in China.