An analysis of value destruction and recovery in the alliance and proposedmerger of Volvo and Renault

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 t he destruction to hubris, managerialism, and the escalation of commitment - elements suggested in previous research. In addition, the case suggests pa th dependence as a source of wealth destruction in mergers. An elaborate st ructure of cross-shareholdings,joint committees, and a poison pill made it difficult for the strategic allies (Volvo and Renault) to follow any strate gic path other than merger if they wanted to exploit economies more fully. Activism by institutional investors was instrumental in halting the destruc tion of shareholder wealth and redirecting the firm. This study reveals sig nificant positive abnormal returns associated with the institutional activi sm. Consistent with Shleifer and Vishny (1986), institutional 'jawboning' i s valuable. An analysis of the voting premium between Volvo's 'A' and 'B' s hares suggests that the value created by institutional voice derived from t he strategic change in the firm's direction rather than the power of the co alition of institutional investors to expropriate wealth. (C) 1999 Elsevier Science S.A. All rights reserved.