Saab to Spyker – A Viable Deal for Spyker?

Roughly one month ago, General Motors agreed to sell Saab to Spyker cars for approximately $400 million in cash and preferred stock. Whether or not this deal was a good value for GM was discussed in a previous post, but as a follow-up, the viability of this deal to Spyker will be discussed here. Spyker, though a car manufacturer, is a completely different type of automotive maker in terms of sales, employees, financials, and business model. Saab is also facing declining sales and a suffering brand image – two trends Spyker hopes and plans to reverse. The profitability of this deal is very difficult to predict and is dependent on many variables, but in all likelihood, this project is going to fail.

Spyker Cars is a very small, Dutch luxury maker of high-end sports cars, and despite being an automotive maker, Saab is a completely different kind of business. Spyker typically makes around 50 cars per year for a selling price in the ballpark of a quarter of a million dollars apiece, whereas Saab sold 40,000 cars in 2009 and 100,000 cars in 2008, each in the ballpark of $40,000 apiece. Compared to Saab’s 3,400 employees, Spyker has about 130. Spyker’s models are largely made-to-order and sold at just 36 dealerships worldwide, while Saab’s models are mass-produced and sold at about 150 dealerships worldwide. While these figures alone cannot predict whether this will be a successful deal for Spyker, they certainly are not figures showing support for the deal and compatibility between the two companies. The success of the deal is going to come down largely to how well Spyker and its management team can make the move from a small, niche market carmaker to a mass-producer with worldwide recognition.

Saab is being purchased at one of the lowest points in the company’s history. As mentioned previously, Saab sales have experienced a massive decline. In 2007, Saab sales were over 130,000 cars, and since then sales have fallen to 40,000 in 2009 – less than a third of 2007 sales. While the current economic downturn can be blamed in part, most of this was the doing of GM. In a response to Courtney Stuart’s article regarding the future of Saab, a current Saab owner writes:

“What GM did to Saab was short of criminal, they de-contented these cars to a HUGE degree and turned Saab into a marketing name with no substance.”

Many consumers share this same sentiment, as evidenced by the falling sales and declining brand image in the automotive community. Now that Saab has been sold and the opportunity to begin anew has presented itself, Saab stands a chance to be rescued. However, as the above figures, dissimilarities between the two companies, and consumer sentiments suggest, Spyker faces an uphill battle with this deal.

The Man for the Job

CIT Group hired ex-Merrill Lynch CEO John Thain earlier this week, marking Thain’s first return to work after resigning from Merrill in January of 2009. CIT, a commercial lender to small and midsize businesses, filed for Chapter 11 bankruptcy in November of last year and anticipates Thain will restore investor confidence about future expectations for the firm as it emerges from bankruptcy. Thain, on the other hand, is marred by his controversial exit from Merrill involving questionably high bonuses and mounting investment banking losses. Critics cite these controversies in arguing Thain was a poor choice to head CIT; however, Thain’s education, work experience, and desire to restore his legacy make him the ideal CEO.

In selecting a company head, the most important factor in the decision-making process is arguably education and work experience. Firms ideally want a leader from an excellent educational institution – preferably the Ivy League – and that leader should also have vast, relevant work experience. Strong performance at an elite school indicates the candidate is intelligent and possesses a strong capability to learn. Work experience shows that the candidate has gained a wealth of industry and product expertise, and he or she has been exposed to a wide variety of company situations and market scenarios. Additionally, the candidate will be able to fix and prevent problems, as well as recognize and expand upon opportunities. Thain has a bachelor’s degree from MIT and a Harvard MBA, and in terms of work experience, Thain was president and COO of Goldman Sachs, CEO of the New York Stock Exchange, and CEO of Merrill Lynch. That kind of a resume speaks for itself – Thain’s work experience coupled with his strong academic credentials prepares him well for the job.

CEOs tend to have big egos, which is unfortunate in most cases as CEOs have made extremely risky business decisions and made high or illegal demands for compensation. However, Thain’s ego is actually a good thing in this situation, because he needs to restore his legacy after it was tarnished during his final days at Merrill Lynch. Thain rose to the top of Goldman Sachs, one of the most elite and prestigious financial firms on The Street, later leaving fortune for fame as he took the helm of the New York Stock Exchange. Following the money, Thain left to be the CEO of Merrill Lynch, and after earning $84 million in 2007, he was at the peak of his career. Merrill suddenly began accumulating massive losses due to investments in mortgage-backed securities and other risky assets. In preventing an almost certain bankruptcy, Thain negotiated the sale of Merrill to Bank of America, and because he believe he “saved” the company, he requested a $40 million dollar bonus. Public and governmental scrutiny obviously fell upon this request, which he lowered to $10 million, then to $0, and now he has been quoted in interviews as saying he never requested a bonus at all. He resigned from Merrill, and his legacy as it stands is the greedy CEO who took down Merrill. He, nor any other CEO wants to be remembered that way. With this in mind, Thain will take over at CIT, wanting to be remembered as the man who saved CIT.

At the surface, it may not appear to be a wise decision to hire a greedy CEO who has run the largest multibillion dollar financial corporations to now lead a somewhat smaller CIT, but as mentioned above, his past experience and need to repair his image make him a perfect candidate. The market shares this sentiment – CIT shares rose 3.5% after the announcement was made.