Risk Analysis and Risk Management Plan
General Motors Company (GM) and Fiat Chrysler Automobiles (FCA)
Table of Contents
Letter to Board of Directors……………………………………………….……………………1
Introduction………………………………………………………………………………………2
Identification and Assessment of Risk Items 3-4
• Industry Risks
• Company Risks
Analysis and prioritization of risk………………………………………………………………5
Recommendation of risk mitigation and management measures………………………….…6
Conclusion 7
References 8
DATE: January 24, 2022
TO: Senior executive of General Motors Company
THROUGH: Chief Financial Officer
FROM:
Risk Analysis and Risk Management Plan
Dear CFO,
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 Category Category 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.
Supply chain and Raw materials risks COVID-19 has shown to have negatively impacted the entire automotive field in being able to get parts and raw materials in a timely manner. These shortages, slow production and add costs. For example, the lithium-ion batteries are one of many raw materials that are heavily depended on. With the popularity and growing dependence on electric vehicles this is creating the lithium cells a difficult commodity to keep in stock. This is forcing large fluctuations in costs and shortages in the supply chain.
Environmental, natural, industrial, terrorist, and other catastrophic event risk Environmental risks are associated with many of the toxic chemicals and materials used in addition to the emissions our vehicles do to earth. Natural disasters are earthquakes, fires, floods, hurricanes, and other climatic disaster beyond human control. Then there are terrorist or armed conflicts relating to protests of the political environment.
Company Risks
Risk Category Category 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.
Strategic Risks FCA’s business plan include strategic changes and business decisions that could have an adverse impact on the company’s current position in the market. FCA’s attempt to grow and expand include an acquisition that is still very new with much uncertainty with its integration as a whole as well as it’s continuation in the industry with the new name Stellantis. In their hot pursuit to gain competitiveness, this could prove to be a bad decision in the long run. Within this merger are cars like Peugeot with a rocky history with closures in it’s past as recent as 2013.
Operational Risks Risks relating to internal process, people, and systems are a great area of risk but operational risks for FCA will be experiencing some restructuring pains with the recent acquisition. There could be layoffs with centralizing processes which can make the work environment stressful during these times of change. There could also be some conflicts between management styles and expectations within the production plants as well as the dealerships. Conflicts can create barriers in executing work and meeting deadlines.
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.
Regulatory Risks For FCA their international presence is growing, and each region of the world has different regulatory laws and standards to live by. While on one hand it may seem like a good idea for the company to have a singular vision, on the other hand each location of its business must tailor their operations to each regulatory body governing the territory they are operating within. There are risks relating to non-compliance which include fees, fines, and legal expenses when operating to so many different regions of the world.
International tax law risks Like the regulatory risks, international tax laws are also financial risks. Not only complying, but also knowing how to make operational decisions that can be most advantageous in the outcomes of how much taxes are paid. Knowing the tax laws in one region could influence what is produced or sold within certain regions. FCA’s home office is located in the Netherlands which certainly operates under different tax law than of the US.
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.
Labor Law Risks FCA faces risks in dealing with many bargaining agreements with labor unions and could face a stoppage of production during times of non-agreement. Approximately 90% of their production employees are represented by trade unions and collective bargaining contracts. Additionally, because of these agreements, business decision can be impaired to be able to act quickly to adjust to changing market decisions which could impede a competitive edge in the market
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.
Our team provides the following enterprise risk assessment, which is a systematic and forward-looking analysis of the impact and likelihood of potential future events within FCA group and determine whether it achieves business objectives. Risks identified to have high or medium-high residual risk rating considered significant risks.
Risk Category Probability of Occurrence
High = (80 % – 100%)
Medium-high = (60 % -80%)
Medium-Low = (30 %- 60%)
Low = (0 – 30%) Impact of Risk
High = Catastrophic
Medium = Critical
Low = Marginal
Technology advancement Medium-high Medium
Market risk Medium-high Medium
Cultural integration risk High High
Uncertainty in revenue High High
Accounting practices Medium-high High
Losing Talented Workforce Medium-low Medium
Liability risk Medium-high High
Supply chain and Raw materials risks High High
Environmental, natural, industrial, terrorist, and other catastrophic event risk Medium-Low Low
Strategic risk Medium-High High
Operational risk High High
Regulatory risk Medium-High Medium
International tax law risk Medium-High Medium
Labor law risk Medium-low Medium
Recommendation of Risk Mitigation and Management Measures
Risk Catogory Control/Mitigating Plan
Technology advancement • Invest in R&D in e-drive and other technologies such as Advanced Driver Help 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
Risk Company Factors Control/Mitigating Plan
Uncertainty in revenue • The company should consider business diversification to address uncertainty in revenue. This includes investing in other well-performing sectors such as the smartphone market. The approach will help the company address the shrinking market share in the automotive industry.
• Expand product portfolio to include full-electric vehicles. Due to the changing lifestyles, more customers are demanding environmental-friendly cars. As such, the company should capitalize on this opportunity.
• Another mitigation to uncertainty in the revenue generation is countering the competition. The company should expand its operations, especially the production of luxury cars, to emerging markets such as China. In addition, the company should intensify the launch of new products in China and the EMEA region.
• Improve product quality and provide more efficient powertrain application to entice customer and increase sales
Accounting practices • Accounting practices risk can be mitigated by conducting due diligence. This involves performing an investigative audit on the target company to ensure accurate accounting reports.
• Implementation of effective internal control procedures. This will avoid control failures during and after acquisition.
• The company should conduct regular internal audits to eliminate potential accounting errors.
• It also cultivates a positive accounting culture in the organization. Honesty and transparency should be emphasized.
• Moreover, the company should set realistic goals and expectations. This will eliminate the temptation of accountants to manipulate accounting reports.
• Adhering to accounting standards such as the General Accepted Accounting Principal ( GAAP) will also help mitigate accounting risks
Losing Talented Workforce • Form an integration team to help reconcile employees from the two companies. The strategy Helps in addressing cultural differences and ensuring successful integration.
• Develop fair and transparent selection criteria to prevent favoritism and biases (Chao et al., 2020).
• Provide retention incentives to highly skilled employees. These include people with specialized skills and knowledge like Research and Development (R&D) teams.
• Another approach is merging HR departments from the two companies. This will allow them to work with managers to identify and retain a talented workforce.
Finally, the company should maintain an effective communication protocol to ensure that the talented workforce remains engaged and committed to the organization.
Liability risk • Hire legal experts to advise the company during the acquisition.
• Perform extensive analysis of the target company and due diligence. This will help in identifying potential liabilities and applying appropriate action.
• Conduct compliance assessment to avoid unnecessary liabilities. The Assessment helps determine whether the target company complies with the IRS, local agencies, and the Department of Labor.
Supply chain and Raw materials risk
Environmental, natural, industrial, terrorist, and other catastrophic event risk
Strategic risk
Operational risk
Regulatory risk
International tax law risk
Labor Law 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
