Why PSA Plans to Acquire Opel and Vauxhall

As Matthew posted, the French automaker Peugeot (also known as the PSA group) has been examining the prospect of purchasing two European subsidiaries of General Motors (Opel and Vauxhall). In fact, PSA is set to make the deal this Monday. Both Opel and Vauxhall have been financially draining for GM, so there is understandably some confusion as to why Peugeot would seek to acquire the companies. As Professor Smitka has said in class, two money-losing companies do not create a profitable company, but one larger money-losing company.

PSA only recently began to profit-the company’s 1.2 billion euro profit in 2015 was the companies first profitable year since 2011.

Income Statement (mil) 2015 2014 2013 2012 2011
Revenue $59,733.53 $65,159.308 $74,460.294 $73,271.889 $77,580.049
Gross Profit $11,107.448 $10,749.882 $11,186.252 $10,392.276 $13,244.237
Operating Income $2,107.432 $126.412 $-1,852.904 $-6,279.768 $1,162.82
Net Income $982.158 $-858.143 $-3,189.582 $-6,620.715 $761.401
Diluted EPS $1.14 $-1.4 $-9.32 $-20.62 $3.31

Along with this profit, PSA reported a 5.7% surge in sales. For comparison, in 2014, PSA posted a 555 million euro loss. The company took a major hit during the global financial crisis, and as a result was bailed out by the French state and Dongfeng Motor Corp. Both entities took a 14% stake in the company. After some restructuring, PSA began to make the proverbial climb back to a profitable future.

PSA CEO Carlos Tavares has commented on the purchase of Opel and Vauxhall, saying that he believes acquiring both companies would be a strategic purchase for PSA. Tavares believes that, based on the past financial performance of PSA, his company has the expertise to advise the current staff at Opel in a way that will positively affect profits. Tavares also believes that PSA would profit in terms of shared technology and purchasing power. The vehicles produced by PSA and Opel/Vauxhall share underlying technological platforms, which could result in significant cost savings for all the companies. PSA believes that a joint company consisting of PSA, Opel, and Vauxhall could sell more than 5 million cars annually, and improve the geographic range of each individual company in terms of where cars are sold.

Additionally, PSA, Opel, and Vauxhall are based in separate countries, which creates the potential for a “European car champion”, as Tavares termed it. However, the three countries are all intent on jobs remaining within their borders, especially the UK post Brexit.

In summary, PSA would acquire Opel and Vauxhall in order to combine engineering platforms and therefore realize cost savings, as well as to gain purchasing power and geographic sales range. Only time will tell if this “strategic” purchase pays off.

Sources:

  • http://www.dw.com/en/french-carmaker-psa-returns-to-profitability/a-19069999
  • http://europe.autonews.com/article/20170224/ANE/170229917/psa-has-track-record-to-turn-around-opel-vauxhall-tavares-says
  • http://gmauthority.com/blog/2017/02/psa-group-to-see-value-and-speedy-savings-in-opel-purchase/
  • https://www.theguardian.com/business/2017/mar/03/psa-close-to-deal-for-general-motors-vauxhall-and-opel-brands
  • http://www.hoovers.com/company-information/cs/revenue-financial.peugeot_sa.eb38d6bee49a69d1.html

7 thoughts on “Why PSA Plans to Acquire Opel and Vauxhall

  1. With the sale going through, it will be interesting to see how Opel and Vauxhall operate under the PSA umbrella. Tavares evidently believes these companies will provide a large benefit to PSA. He believes he can cut costs for Opel by nearly 2 billion Euros a year (BBC). Doing so would make the acquisition potentially profitable, but is it even feasible? Additionally, market size and share will no doubt increase as PSA becomes the second largest automaker in Europe. However, with the money losing histories of all three companies, it remains to be seen if they can be profitable together.

    http://www.bbc.com/news/business-39172225

  2. Two money losing companies combined is never a good thing on paper, or from a financial standpoint obviously. However, The CEO of PSA seems committed to the scenario of improved research collaboration and collective progress. I think Professor Smitka mentioned in class that the European car market is subject to different macro conditions, and this merger would be a unique situation. Similar to Sam’s ending comments, only time will tell if this strategic move pays off.

  3. As expected, PSA agreed to buy Opel this morning for $2.3 billion giving them a 16% market share in Europe (second to Volkswagen’s 24%). It is important to reiterate that PSA expects to see savings due to increased purchasing power and shared R&D as PSA looks to equip Opel models with its technology and architectures.

    http://www.cnbc.com/2017/03/06/peugeot-confirms-approach-to-buy-opel-expects-cost-savings-of-17-billion-euros-by-2026.html

  4. It looks like PSA is really banking on the ability to combine engineering platforms. If they are able to take advantage of this, then perhaps the group may be able to achieve some profitability in the future.

  5. With these major brands all operating under one roof, supply chains will be simplified and the company’s costs should be reduced. However, I am interested in seeing how this merger will affect the job status of the workers that were previously employed by GM’s Vauxhall and Opel. If PSA is truly looking to reduce costs, they will have to cut a lot of workers to be as efficient as possible or the company will risk not turning a profit.

  6. As we touched on in class, mergers rarely are successful or occur without some sort of ulterior motives (higher bonuses, executive salaries, etc.) Now PSA certainly could have conventional thinking in merging (reduced costs, greater market share) however, as we examined in class these benefits hardly come to fruition. As stated in a few comments and Sam’s post though only time will tell.

  7. I don’t really understand the advantage Peugeot would have over GM in terms of being able to make these companies profitable. Unless there is some sort of home field advantage that I’m unaware of within the auto industry, it just seems like very similar scenarios, which will likely yield very similar outcomes.

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