Daimler-Chrysler Merger

INTRODUCTION

The year 1998 was remarkable in the mergers and Acquisition scenario of the

world. It was the year, which saw mega deals such as the Exxon-Mobil! merger,

the merger of Traveller and Citicrop and of course the merger between auto giants

Daimler and Chrysler. The last deal in particular was a whirlwind merger. The

initial talks of the merger spurted up in January that year from an auto-exhibition

(the North-American international Auto show in Detroit) and the initial exchange

lasted barely 17 minutes between both the CEOs; driving too fast? The merger

agreement saw the light of the day as early as May 7 the same year and was

consummated by November 1998. The pace at which the merger took shape left

little room for revisiting thoughts and doubts about the merger. The partners got

united in the wedlock with the vision of becoming a world enterprise by the year

2001.

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DAIMLER-CHRYSLER THE LARGEST

INDUSTRIAL MERGER

The two auto giants merged in what was dubbed as the largest industrial merger till

then, Daimler-Benz, an icon of quality in the auto industry for over a century

merged with Chrysler, the smallest but the most efficient of the Big Three car

makers of America. In a $ 39 bn stock swap transaction Daimler-Benz merged

with Chrysler to form Daimler Chrysler AG. The new corporation was

incorporated in and would be headquartered in both Germany and Auburn hills,

Michigan. The merger was recommended by both the board and was approved by

an overwhelming majority of the shareholder of the both the companies. The

shareholders of Chrysler approved it with a majority of 99 percent of those present

in the SGM while those of Daimler-Benz approved with over 95%. According to

the agreement the shareholder of Chrysler held by them while those of Daimler-

Benz received 0.6235 share in Daimler Chrysler in exchange of each share of

Chrysler held by them while those of Daimler Benz received the merge entity. As

a result of this exchange the shareholders of Chrysler commanded a 43 percent

share in the new company while those of Daimler-Benz held the remaining 57

percent.

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The new company Daimler Chrysler AG’s stock is traded around the world as a

single class of “registered ordinary shares” and not as ‘depository receipts”. This

step in itself is the first time ever a German registered company has done such a

thing.

At the time of the merger Daimler-Benz presence was largely concentrated in

Europe which contributed 63 percent of the revenues in 1997 while 89 percent of

Chrysler’s revenues came from North America. Daimler Chrysler will have more

than $20 bn in its cash reserve, an amount just under what the bigger Ford Motor

Co. had at the end of the third quarter, and well ahead of No.1 General Motors

Corp.

The combined entity is the third biggest carmaker in the world just behind

General Motors and Ford. The merger that brought both these distinct corporate

entities under one roof was widely publicized as the ‘merger of equals. This

fusion of tow of the most profitable auto companies was though of as marriage

made in heaven. Well, why not?

he merger seemed all set for a take off with everything in its side The historic

merger was expected to bring in a growing share of global transportation market

and cost savings of $ 1.4 bn in the first year of merged operations. Areas where

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cost cutting and consolidation would be possible were Research and

Development, joint purchase of raw materials, procurement. Synergies were

further expected to be realized in the medium-term by sharing know-how in

engineering and manufacturing, Daimler Chrysler expected to annual benefits in

the following years to be higher.

Why merger?

D not add numbers. Create opportunities Jurgen E Schermpp, the chairman and

CEO of Daimler Chrysler.

One reason for Daimler-Benz to get into the merger was the idea of growing into

a global motor company, to borrow Lee lacocca, the charismatic chairman of

Chrysler (During one of its worst phases in history)’s terminology and dream,

Global Motors, a fully integrated international car builder and seller. Why back in

1980 itself lacocca felt that the number of automakers was going to fall down

from 30 that existed then to any where between 6 to 12.

That surely seems to be one of the essential factors during this merger. For

Chrysler it meant survival, which from its history, chairman Eaton figured, would

be difficult for it to achieve on its own. While for Daimler-Benz it meant

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expansion, growth, newer turts and ready-made addition to the product line

besides a well-knit distribution system and an established presence in one of the

large auto motive markets in the world. All this was necessary if Daimler-Benz

wanted to be global player and a leader in the new millenium.

Both the companies figured that the auto industry was looming large with over

capacity and a shake out was imminent. The merger deal seemed a logical fit

bringing with it an ideal product and geographical fit and with nothing possible to

go wrong with it.

The story behind the Merger

But behind all this, each of them was facing problems that the other could

ideally solve. The merger appealed to Chrysler for many reasons. An analysis

done around three years before the merger suggested that would not last as an

independent entity by the turn of the century owing to two major problems. The

first one was the lack of any strong international presence. Chrysler had little

access to markets beyond its borders with less than 10 percent sales coming

from other countries. This meant that Chrysler’s success and very existence

depended sole on the conditions in the US market. It had no other operations to

cushion it from any downturn in the US market. The second and more important

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problem was lack of quality in the makes of Chrysler. Whether deserved or not this

perception had tagged Chrysler’s vehicles with a tag of unreliability and poor

quality. Chrysler was painful aware of all these problems and much more. Its

management was aware that a potentially serious shakeout in the global auto

industry would leave nothing to the Chrysler corporation.

The situation of Daimler-Benz on the other hand was that its cars were perceived

as too staid. This perception kept the young vechile buyers way form the Daimler-

Benz’s cars and thus made this particular segment out of the reach of the company.

Tough a leader in the premium, segment, Daimler-Benz realized that this was no

forte of Daimler-Benz alone, other automotive companies were entering the

segment wooed by the fat margins. This intensified pressures on the company.

Secondly, lack of any presence in the more popular mass car segment was slowly

making its impact felt. A Mercedes was limited to the elite with fat pockets only.

This meant that a common man world over could only dream of, but rarely afford

and the younger generation, which would just start earning, could not even think of

dreaming it. This was becoming a serious impediment for the otherwise nice going

Daimler-Benz. In fact Daimler-Benz made an effort to enter this segment on its

own with its Mercedes A-class however, the effort backfired when A-class showed

a tendency to tumble that necessitated expensive repair the vehicle. But more than

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that it hit the company’s reputation of quality. This experience brought home the

pint that Daimler-Benz needed a partner who could bring with it expertise in this

particular arena. Another key area was that for years Daimler-Benz had neglected

the US market, the largest of the car market. And in 1998 Daimler-Benz had a

meager 1 percent share in this market. The company realized that it could not

afford to neglect it any more.

In merging with Daimler-Benz Chrysler could get access to the worldwide

presence especially in Europe and would also get a ready made distribution

network that would help it expand its operations on wold scale.

For its part Daimler- Benz would have a market share of around 15 percent in the

US market where it has little presence. Daimler- Benz would also get access to

the trendy designs that Chrysler has come up in the small car segment, where it

needed to hit the right choice badly. Thus it only made right business sense to

merge with each other for both these companies.

In the light of these problems each company seemed to be an ideal partner to

solve the problems of the other. The two companies had little overlaps of

operations. Though operating in the same industry Chrysler and Daimler-Benz

had nothing in common, either in product lines or in geographical coverage.

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Daimler-Benz had always been a luxury carmaker and was into the heavy trucks

segment while Chrysler for its part was a manufacturer of small cars, jeeps and

sports utility vehicles. Chrysler presence was limited to the North American

market while Daimler- Benz’s presence spread across the globe with no

significant market share. This aspect in itself was pacifying to the thousands of

workers on both sides of the Chrysler pay rill. Since this meant that there would

not be any major job cuts and closures as an immediate after eefect of the merger.

This ensured that the worker not only welcomed it but also supported it. This

ensured it but also supported it. This ensured that the workers’ morale and

cooperation was ensured for the deal. Chrysler’s team had always had certain

awe for the engineering prowess of the Germans while the Germans respected the

cost cutting abilities and the designing skills of Chrysler. So the only direction

they would move wax up, better.

POST MERGER INTEGRATION

The success of any merger rests mainly on the effectiveness of postmerger

integration. Synergies possible in various areas might just be lying in corners here

and their idling away unless tapped properly through effective integration process.

And Daimler Chrysler seemed to realize this right from the beginning. The process

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of integration that Daimler Chrysler adopted was very well planned right from the

beginning. Their past experience with mergers coupled with the obsession for

perfection led the German managers go to a great extent to leave anything

concerning the merger to chance. If that melding of processes goes smoothly, we

would probably have seen steadily higher quality from Chrysler and falling costs at

Mercedes.

Traditionally post merger integration process is takes place in two ways. The first

is where one of the partners takes the lead and guides the merged entity towards

one vision the merged entity towards one vision and set of values. The other

beings a bottom up approach where a series to task forces involving large number

of executive from both the merging companies discuss and resolve key

implementation issues in a decentralized way.

Daimler Chrysler went a step ahead and adopted an integration’s strategy that

was above the limitations of each as it adopted a hybrid approach, that combined

both these methods. The board structure would oversee a series of integration task

forces but with a centralized co-ordination team. The company’s integration team

was structured as follows.

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A Management Board consisting of 18 members drawn from t bot Daimler- Benz

and Chrysler. A subset of 8 board members was created as the chairman’s

integration Council (CIC). A post merger integration structure was put in place in

which 12 issue resolution teams were assigned specific areas to proceed with the

integration. This team met weekly and debated via the video- conferencing.

The merger was regarded as a combination of equals and so the company decided

to have co-chairmen in place. Both Juergen Schrempp and Robert Eaton were to be

the co-chairmen and Co-CEOs of the company for a period of three years after

which Eaton was to leave the seat to Schrempp and step down. They decided ipon

a structure, Which maintained two headquarters one on Stuttgart, the throne of

Daimler- Benz and the other in Auburn Hills, Michigan Chrysler’s headquarters.

Further more the merger proceedings were clear about one things, the maintenance

of unique identity of each company’s brands. They decided that it to be an area

where nothing would change because of merger.

To facilitate the constant shuttle of managers between Stuttgart and Auburn Hills

Daimler Chrysler established Daimler Chrysler Aviation. The transatlantic star

airbus 320 flies to and for from America to Germany four times a week 3 with the

capacity of 56 passengers.

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THE GLOBAL AUTO INDUSTRY

Traditionally auto industry has been cyclical in nature, with sales and bottom lines

zooming in the days of an up trend and everything falling to pieces during a

downturn. This cyclical nature of the industry puts small players in a dangerous

position during the down turn. For some years now, the industry is flowing

beyond the capacity According to estimates the auto industry has an over capacity

of around 80 plants more than are necessary to meet the demand of cars. That in

sheer size would means six times that of the erstwhile Chrysler corporation. This

leaves little room for pricing flexibility. With so many products available in the

market no company can afford to price its cars uncooperatively. The US market in

the recent years has been facing unusually fierce competitions from foreign

automakers.

An increase in price would mean that consumers would be expected to pay more

for the car, but with such fierce competition that cannot be counted upon, if

someone else is offerings a similar vehicle on a better level. On the contrary,

companies are forced to give incentives to push the sales of vehicles in the

downturn of the industry. This leaves alternative of maintaining the profit

margins in the industry, controlling and cutting costs. In addition, this puts a

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tremendous pressure on the manufactures wooing too few buyers with too many

cars.

The spread of the Internet as a new purchasing channel adds to the woes of

manufacturers. Internet provides customers with a wider choice of vehicles to

choose from rather than if they were to approach a dealer. All this translates to b

receding bottom lines, which cannot be overlooked.

The tastes and preferences of the consumers are also undergoing frequent changes

necessitating a faster roll out of new models and designs of cars. Further more

globalization has made the world smaller and a company in America no longer

competes with Americans alone but will be forced to measure up to the

technological advances of the Japanese and the engineering prowess of the

Germans as well. This escalated the costs incurred in research and development.

Added to all this are the stringent environmental regulations that would come into

pay by 2008 making it all the more difficult for auto manufacturers to maintain

their margins. Once these environmental regulations are put in place it would

become imperative on the part of manufacturers to maintain them.

The industry is moving ahead in a direction where size foes matter in order to

exist. And only global players would have the economic strength to all the shots.

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All these factors in tandem are working towards consolidations in the industry,

which would leave a handful of powerful players rather than a lot of small,

insignificant specially vehicle manufacturers dotting the scenario.

RESTRUCTURING FOR THE DAIMLER CHRYSLER GLOBAL

IMAGE

In September 1999 Daimler Chrysler restructured its businesses to reflect the

global nature of the operations. A new management board was created which now

would consist of 12 members be side the co-chairmen. The business is divided into

three automotive divisions besides aerospace, service divisions and seven

functional activities. The automotive divisions are managed through three brand

focussed divisions : The Mercedes- Benz /Smart division, the Chrysler/ Play-

mouth /Jeep/ Dodge division and the Commercial Vehicles divisions. Dismantling

the CIC, they instituted an Automotive council, which would drive integration

opportunities and ensure cross-fertilization of innovation, knowledge,

technologies and ideas. Separate Sales and Marketing council was established to

co-ordinate sales and marketing operations.

The company integrated the financial services of Daimler-Benz and Chrysler

under one roof as Daimler Chrysler Financial Services (debis) in Berlin. With a

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portfolio value of $76.69 bn, Daimler Chrysler financial services ranks as the

further largest financial Services Company outside the banking and the insurance

sector.

Purchasing department in Daimler-Benz was highly decentralized with each

location making its own purchases. But after the merger purchase in all the regions

to Gary Valade, thus centralizing purchasing operations. This put the company on

better bargaining terms with suppliers.

One example of cost savings that have come about from the merger is that of the

operations in Graz. In Graz, Austria Mercedes and Chrysler vehicle line. The Graz

plant originally made the Jeep Grand Plant originally made to roll out the new

M-Class sport utility vehicle to expand the production. This led to cost savings of

$70 million since it need not build a new plant and can sell by shipping the

components from its plant in Tuscaloosa.

Another such example is the use Chruysler’s industrial adhesive, laced with glass

beads to bond inner and outer door panels in the Mercedes S-Class. This brought

about coast savings of $ 12,000 a year besides solving a vexing problem for the

German automakers.

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The company has instituted platform teams, which seek to improve

communications and product quality besides reducing the time required to design

and develop new vehicles.

Daimler Chrysler Chrysler formulated a Brand Bible, while was the holy book of

guidelines that lays down clear line of demarcation between brands. The effort

was necessary to distinguish the brand identity of each of the company’s

vehicles. Functions, which were influential in maintaining the brand image such

as sales and marketing, positioning in the market and market communications for

the brands would follow the book. Synergies reaped would be from sharing of the

operations that would not disturb the brand image. Synergies would come from

operations such as joint use of administrative functions, market research, vehicle

and spare part logistics as well as wholesale operations.

PERFORMANCE MEASURES

As a consequence of the merger the performance measures at Daimler Chrysler

were streamlined to incorporate the best practices of both the sides. The concept

of value based management came into play, which meant, many changes in the

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forms and presentation of reports to the shareholders. It adopted the US FAAP,

which made it necessary to announce quarterly reports of earnings. Further more

Daimler Chrysler devised the concept of Return on Net Assets to keep a close track

of the performance of he company

The cultural difference between the two companies have always been there. Over a

century of existence both had developed distinct corporate cultures and meshing

them up into one super culture was thought of as a disastrous step. So, where did

the solution lie? They took the path of understanding each other’s culture and

developing tolerance to each other’s methods. Individually designed exchange

programmes including brief information’s visits, project works lasting several

months or longer stays abroad have been organized at all levels. Both the

employees and their families were prepared for such stays through intercultural

seminars. German and English language course were particularly encouraged.

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Financial Analysis

At the time of the merger Daimler Chrysler promised to achieve $1.4 bn in cost

savings in the very first year and continued savings of around $2 bn thereafter. An

analysis of the facts and figures shows that the promise was delivered as far the

first years is concerned.

A look at the income statements of Daimler Chrysler at the end of 1999 sends a

positive message about the merger. However, the numbers are not so very

comforting for the recent quarters as we shall see.

After the merger Daimler Chrysler organized its businesses broadly into two

major divisions, the industrial services and the financial services. The industrial

services division comprised of all auto manufacturing operations which were

again categorized into three divisions the Mercedes-Benz/ Smart division,

Chrysler division and the Commercial Vehicles division, which comprised to

Daimler Chrysler’s truck and bus manufactures. The Aerospace division and the

services are the other two major division of the company.

The consolidated revenues of the company increased by 14 percent on a ytoy basis

from 313.7 bn Euros in 1998 to 149.9 bn Euros in 1999. The increase in revenues

was a result of increased sale of various cars and tricks around the world. The

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operating profits of the company improved by 28 percent over the 1998’s 8.6 bn

Euros to 11bn Euros. Even without considering the one time effects such as

considering the one time effects such as the gain from the sale of debis shares the

operating profit improved by 20 percent which is better than the rate of increase

in the revenues of the company. This increase in: the operating profit stems

primarily from the synergies of the merger, which have transformed into massive

cost savings especially on the procurement, supply and sales organization fronts.

Furthermore Daimler Chrysler presented the result of its Adtranz division fully

under the other category 50 percent stake from ABB.

The net income of the company reported an increase of 19 percent from 4.8 bn

Euros to 5.7 bn Euros. However, extra effected the figures of both the years.

Important among them are merger costs and the loss on early extinguishment of

long-term, high yielding debt, which had a negative impact on the net income in

1998. In 999, Daimler Chrysler reduced its stake in debital AG from 52.4 percent

to 10.0 percent, which resulted in a gain of 659 mn Euros. In addition Parliament

in 1999 resulted in a one-time tax burden of 812 mn euros. Even after adjusting to

all such one-time effects the net income for 1999 was 16 percent higher than that

of 1998.

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The earnings per share increase from 5.03 Euros to 5.73 Euros in 1999. For the

year 1999 the company declared a dividend of 2.35 Euros per share. All the

divisions of Daimler Chrysler achieved higher operating profits for the year.

MERGER PITFALLS:

Though the merger started off on a fine note delivering the synergies it had

promised uin the very first year of its existence the falling revenues at Chryser in

the recent quarters brought the merger into news and for the wrong reasons at that.

The first successful year after the merger was received with applause and when

things started Chrysler’s performance started going down this year, analysts and

industry experts began to take a second look at the merger and questions were

being raised as to the logic of the merger itself. There were many things that had

eclipsed the deal even temporarily.

LITTLE INTEGRATION

In spite of Daimler Chrysler’s elaborate plans of integration there was very little

integration that had occurred between the merged entities. Though Mercedes

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engoys enormous presence in Europe the share of Chrysler is still less than 1

pedrcent. In the filed of technology too there was little sharing done. Sample these

last year the executives of Daimler vetoed the proposal to build an American car

on the basis of Mercedes’ popular E-Class Sedan. The proposal was to build a

new sadan by using the Mercedes’ popular E-Class chassis and suspension with a

separate engine, drive train andExternal body. The plan was rejected because it violated the

“brand dible”A proposal to install Chrysler pickups and jeep Cherokees is yet to materialize

owing to the fact that Mercedes would sell Chrysler the engines only at a higher price than that

could be found in the open market.They further abandoned the concept vehicle called the Java, a

small four-door car intended for Europe against the Volkswagen Golf Java was one step up from

Mercedes line of A-class subcompacts.

Clashing cultures

Right form the inception of the idea cultural clashes in this transitional merger were known to be

inevitable. However Daimler-Benz and Chrysler proceeded though the merger talks, as they

would have done otherwise with no special emphasis laid down on blending the cultural

differences. These has been growing discomfort especially on the American side with the go-by-

the-book attitude of the Germans. In fact the disillusionment is not limited to that.

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The farce of “merger of equals”

The merger had been dubbed as a merger of equal but the reality was different,

however Chrysler did not realize this till too late as Dr. Cole points out, “I

think the intent of both parties, initially, was that this would be a merger of

equal, although based on Chairman schemer’s comments recently , it is clear

that he belived that the Daimler side would be the lead in the merger, and I

guess you could interpret that as meaning that he intended it to be a takeover.

That was certainly not be opinion of the Chrysler people involved, however.”

The fact that his was no merger of equals but a takeover as expressed by

schrempp in an interview took the Chrysler people in an surprise. It came as a

Chrysler had been taken in. This did one major intangible damage to Daimler

Chrysler, a loss of trust in the leadership at Germany. The replacement of

Holed by a German chief, Dieter zetche is also putting doubts in the minds of

the American workers as to their own future. The problem only got intensified

as kirk kerkorian, the third largest shareholder in Daimler Chrysler but the

largest in the erstwhile Chrysler field a suit claiming damages to the tune of $9

bn alleging that the deal was fraudulent.

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Share performance

When the merger consummated and Daimler Chrysler came into existence in

the fag end of 1998 the stock market gave it a warm welcome and the stock

price went up to an all time high in January 1999 to more than $100 and the

share price today is hovering around $49. A drop of more than 50 percent in

the share price definitely dose no good. Since its peak in January 1999 the

company’s scrip has been steadily coming down. As the graph indicated the

share price has constantly deteriorated and now is at one of its all time lows. In

fact the current market capitalization is less than the erstwhile Daimler-Benz

alone. However this might just be a passing phase as Prof Rhys point out “The

post-merger share value was hopelessly optimistic, now it is too pessimistic.

Reality will soon dawn that the logic of the take-over remains as compelling

and strong as ever and that the future value if not only the Daimler Chrysler but

the Daimler Chrysler Mitsubishi combine will reflect this”

CONCLUSION

The merger seems to have surely run into troubled waters be it on account of the

aging models or cultural clashes or hurt egos. Would it be a wise decision for

Daimler-Benz to spin off Chrysler? Well there sure are some opinions supporting

the view. They cite the example of bmw, the number 3 automatker in germany

which had brought rover cars of uk but soon realized that it was difficult to turn it

around into a profitable unit and decided to sell it off to phoenix group earlier this

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year. A view that prof george hoffer also supports “…daimler got the worse of this

daimler’s deep pocket, than going it alone. They would have had the same

problems, because today’s real problem is a product one. Since the 2 operations

have been largely kept separate, they can be split & i wouldn’t be surprised to see

it sold to say, honda..”

who has had a raw deal? Daimler or chrysler, who has been taken in by whom?

All these questions might seem to be of little importance now. Whatever be it,

bygones or bygones. The fact today is that daimler chrysler is left with a problem

seems to have been blurredly at least temporarily. But driving on the merger road

where potholes are in galore, caution holds the key to a safe drive.

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