Publications
Publications
- January 1999
- Journal of Financial Economics
An Analysis of Value Destruction and Recovery in the Alliance and Proposed Merger of Volvo and Renault
By: Robert Bruner
Abstract
Volvo's attempt to merge with Renault in 1993 temporarily destroyed SEK 8.6 billion (US$ 1.1 billion) in Volvo shareholder wealth. This study traces the destruction to hubris, managerialism, and the escalation of commitment—elements suggested in previous research. In addition, the case suggests path dependence as a source of wealth destruction in mergers. An elaborate structure of cross-shareholdings, joint committees, and a poison pill made it difficult for the strategic allies (Volvo and Renault) to follow any strategic path other than merger if they wanted to exploit economies more fully. Activism by institutional investors was instrumental in halting the destruction of shareholder wealth and redirecting the firm. This study reveals significant positive abnormal returns associated with the institutional activism. Consistent with Shleifer and Vishny (1986), institutional 'jawboning' is valuable. An analysis of the voting premium between Volvo's 'A' and 'B' shares suggests that the value created by institutional voice derived from the strategic change in the firm's direction rather than the power of the coalition of institutional investors to expropriate wealth.
Keywords
Mergers & Acquisitions; Institutional Investors; Alliances; Privatization; Mergers and Acquisitions; Institutional Investing; Auto Industry
Citation
Bruner, Robert. "An Analysis of Value Destruction and Recovery in the Alliance and Proposed Merger of Volvo and Renault." Journal of Financial Economics 51, no. 1 (January 1999): 125–166.