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International Review of Financial Analysis

9:1 (2000) 77102

Value creation and challenges of an

international transaction
The DaimlerChrysler merger
Matej Blasko, Jeffry M. Netter*, Joseph F. Sinkey, Jr.
Terry College of Business, University of Georgia, Athens, GA 30602-6253, USA

Abstract
Globalization is a buzzword in international finance and economics. On May 6, 1998, in
London, Daimler-Benz of Germany signed a merger agreement with Chrysler Corporation of
the United States. Using the DaimlerChrysler merger as a case study, this paper focuses on
value creation and analysis of various issues in an international transaction. The market
responded very favorably to this merger, and we review the potential sources of value creation
in the merger as well as outline the steps undertaken to consummate the merger. We also
consider an interesting question: Can a company truly be global? Differences in corporate
culture, compensation policies, ownership structure, and the legal environment pose significant
challenges to all mergers but especially international business combinations. Important postmerger events, such as the Standard & Poors decision not to include DaimlerChrysler in the
S&P500 Index and the clash of corporate cultures and compensation schemes, have presented
major roadblocks to it becoming a truly global company. 2000 Elsevier Science Inc. All
rights reserved.
JEL classifications: F23, G34
Keywords: Mergers; Acquisitions; International finance; Business combinations; Value creation;
Globalization

1. Introduction
The two companies are a perfect fit of two leaders in their respective markets.
Both companies have dedicated and skilled workforces and successful products,
but in different markets and different parts of the world. By combining and

* Corresponding author. Tel.: 706-542-4450.

E-mail address: jnetter@terry.uga.edu (J.M. Netter)
1057-5219/00/$ see front matter 2000 Elsevier Science Inc. All rights reserved.
PII: S1057-5219(99)00020-4

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Table 1
Industry overview (1998)
Rumored merger
partners

Largest carmakers

Earnings

Revenue

Car sales

Cash

General Motors

$2.8 billion

$140 billion

7.5 million

$16.6 billion

Ford Motor*
DaimlerChrysler
Volkswagen
Toyota Motor Co.
Honda Motor Co.

$6.7
$6.5
$1.3
$4.0
$2.4

$118
$147
$75
$106
$54

6.8
4.0
4.6
4.5
2.3

$23.0
$25.0
$12.4
$23.0
$3.0

billion
billion
billion
billion
billion

billion
billion
billion
billion
billion

million
million
million
million
million

billion
billion
billion
billion
billion

Isuzu, Suzuki,
Daewoo
Honda, BMW
Nissan, Fiat
BMW, Fiat
Daihatsu, Hino
BMW

* In the spring of 1999, Ford Motor acquired Swedens Volvo car division for $6.5 billion. Volvo sold
400,000 cars in 1997. DaimlerChrysler called off merger talks with Nissan. Subsequently, Renault of
France acquired a stake in Nissan. Source: Naughton (1999), Company reports, Merrill Lynch & Co.,
Salomon Smith Barney, J.P. Morgan, Wasserstein Perella.

utilizing each others strengths, we will have a pre-eminent strategic position in

the global marketplace for the benefit of our customers. We will be able to
exploit new markets, and we will improve return and value for our shareholders.
This is a historic merger that will change the face of the automotive industry.
This is much more than a merger, today we are creating the worlds leading
automotive company for the 21st century. We are combining the two most innovative car companies in the world.
Jurgen Schrempp
Chairman of the Daimler-Benz Management Board
On May 7, 1998, Daimler-Benz of Germany announced plans to merge with Chrysler
Corporation in the largest international merger in history. Jurgen Schrempp of
Daimler-Benz and Robert Eaton of Chrysler had signed the combination agreement
the day before in London. The combined entity is called DaimlerChrysler AG and
is incorporated under the jurisdiction of the Federal Republic of Germany. The
companys stock (DCX) trades on all of the worlds major stock exchanges, including
New York, Frankfurt, London, and Tokyo, as well as on the other exchanges in the
U.S., Germany, Austria, Canada, France, and Switzerland. In many respects, the
DaimlerChrysler merger is shaping the future of the auto industry and has triggered
consolidation in an industry plagued by overcapacity. Table 1 presents an overview
of the auto industry, including rumors about mergers that are likely to follow the
largest international merger ever.
This article provides an overview of the important elements of the DaimlerChrysler
merger and relates them to the empirical evidence on mergers.1 Specifically, this study
analyzes potential sources of value creation and the evidence on whether value creation
has occurred in the DaimlerChrysler merger. We also discuss specifically some of
the important issues that must be taken into account in cross-border mergers and
acquisitions. Differences in corporate culture, compensation policies, ownership structure, and legal environment may pose significant challenges to international business
combinations.

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2. Motivations for mergers

According to Myers (1976), Mergers are tricky; the benefits and costs of proposed
deals are not always obvious. In a Modigliani-Miller framework, if mergers do create
value, they do so by changing tax liabilities, changing contracting costs, or changing
investment incentives. If the size, timing, and riskiness of the combined future cash
flows of the merged firms exceed the cash flows of the separate firms (synergy),
the merger will be a positive net-present-value project. Grinblatt and Titman (1998)
and others identify the potential sources of gains from mergers. They include:
1. Operating synergies center around cost reductions or synergies related to economies of scale or scope, lower distribution or marketing costs, or elimination of
duplicate assets.
2. Tax motivations include changes that occur in mergers that reduce tax liabilities.
These can include effects from stepping up the basis of the acquired firms assets,
amortization of goodwill, tax gains from leverage, and acquiring tax losses.
3. Mispricing motivations can occur if bidding firms have information about target
firms that permit them to identify undervalued firms.
4. Market-power motivations are based on the idea that the acquiring firms can
gain monopoly power in a merger, perhaps by buying competitors or foreclosing
suppliers.
5. Disciplinary takeovers can create value if acquiring firms recognize managerial
shortcomings in target firms and introduce more efficient managers.
6. Earnings-diversification motivations suggest that acquiring firms focus on diversifying earnings in an attempt to generate higher levels of cash flow for the same
level of total risk. This approach substitutes reductions in business risk (earnings
fluctuations) for greater financial risk (leverage). Grinblatt and Titman (1998,
p. 680) note that diversification can also reduce the probability of bankruptcy
for a given amount of debt and avoid information problems that arise in using
a external capital markets.
Since mergers are tricky they also can destroy value. Most of the ways mergers
destroy value center on the basic agency-cost idea that the interests of managers and
shareholders may not be aligned. Thus, managers may pursue mergers because of
motivations other than the ones in the best interest of shareholders. Examples of
motivations for mergers that may destroy value include mergers resulting from managers hubris (Roll, 1996), managerial compensation tied to the size of the firm, and
managers desire to make acquisitions in areas where they have human capital, therefore making themselves more valuable to their own firm.
3. Empirical evidence
The empirical evidence on mergers and acquisitions, while large, is not conclusive.
Event-study evidence on large samples tends to find that, on average, in the short
run around a merger announcement target shareholders benefit significantly from
acquisitions, while bidder shareholders are unaffected or lose slightly.2 The net an-

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nouncement effects of takeovers (over both target and bidder) are positive, although
the variance of these announcement returns is large. Various researchers have searched
for the source of the gains from mergers, and there is evidence that mergers can create
value by reducing taxes, increasing productivity, improving incentives, and generating
synergies. Another approach has been to examine the long-run performance after a
merger using stock or accounting data. The results from the long-run performance
literature are mixed, in part, because of the difficulty of estimating long-run performance.
Another approach has been to examine the long-run performance of firms after
the merger using stock or accounting data. For example, Loughran and Vijh (1997)
examined benefits to long-term shareholders from corporate acquisitions. They found
a relationship between the post-acquisition returns and the method of payment. The
analysis suggests that firms completing cash-tender offers earn significantly positive
excess returns, while the stock mergers appear to destroy value over the long term.
It appears that the method of payment for a target may provide valuable clues about
the managers confidence in the quality of a proposed merger. However, a growing
literature has noted that serious methodological and theoretical difficulties exist in
estimating long-run performance. For example, Lyon, Barber, and Tsai (1999) say
the analysis of long-run returns is treacherous, while Fama (1998) argues that badmodel problems are unavoidable and more serious in tests of long-run returns. Thus,
the question of the long-run performance of firms after mergers remains unsolved.
Another approach to the study of the effects of mergers is a case approach. For
example, Kaplan et al. (1997) examined two acquisitions that in the long run did
not create value, in large part, they argue, because the bidder management did not
understand the targets business. Bruner (1999) analyzed the loss of value in the
aborted deal of Volvo and Renault, while Lys and Vincent (1995) focused on value
destruction in ATTs acquisition of NCR. Bruner argued that his hypothesis of path
dependence could complement hypotheses about value-destroying mergers that originate from managers themselves. By path dependence, he means that researchers
should recognize that decisions managers have made in the past might constrain their
choices in the future. While Bruner suggests that researchers should look further back
in time than the first announcement of a merger to build a deeper understanding of
the origins of bad deals, path dependence should also affect good deals. On balance,
past decisions can provide a solid foundation for good future deals, or they can become
quagmires that doom future transactions. Nevertheless, Kaplan (1989, 1994) shows
that the Campeau acquisition of Federated (even though it ended in bankruptcy)
created value.
In summarizing the empirical evidence on mergers Grinblatt and Titman state:
Based on an analysis of the empirical evidence we cannot say whether mergers,
on average, create value. Certainly, some mergers have created value while others
were either mistakes or bad decisions. Of course, many of the mistakes were
due to unforeseen circumstances and were unavoidable. (1998, p. 702)
This case analyzes the Daimler-Chrysler merger in the light of the existing empirical

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81

evidence to identify potential areas of value creation and to present early evidence
on the success of the merger.
4. Company profiles and the reasons for the DaimlerChrysler merger
Jurgen Schrempp, Chairman of Daimler-Benz Management Board, has been behind
a dramatic turnaround at Daimler, transforming the firm into a competitive global
powerhouse.3 On January 12, 1998, Schrempp visited Robert J. Eaton, Chairman and
CEO of Chrysler Corporation, at an International Auto Show in Detroit to suggest
discussion of a possible merger. Less than four months later, there was a signed merger
agreement. Table 2 presents a chronology of the DaimlerChrysler merger and the
most important steps taken before the merger closed in November 1998. The key
steps in the merger process included initial discussions on the feasibility of the merger,
discussions of governance and business organization structures, signing a merger agreement, and closing the merger transactions after getting approvals from the interested
parties: boards of directors, shareholders, and regulatory agencies.
Daimler-Benz AG, a stock corporation (Aktiengesellschaft), was the largest industrial group in Germany with 1997 revenues of DM124 billion ($68.9 billion). Although
known primarily for its luxury Mercedes cars, Daimler operated in four business
segments: Automotive (Passenger and Commercial Vehicles), Aerospace, Services,
and Directly Managed Businesses. Chrysler Corporation, incorporated in Delaware,
operated in two principal segments: Automotive Operations and Financial Services.
Primary operations included research, design, manufacturing, assembly, and product
sales (including trucks and accessories), as well as financial services providing consumer
financing for Chrysler products.4
Several potential reasons exist for the merger. Daimler derives 63% of sales from
Europe, while Chrysler depends almost exclusively on North America, with a 93%
share of all sales. As Robert Eaton mentioned, Both companies have product ranges
with world class brands that complement each other perfectly. We will continue to
maintain the current brands and their distinct identities (Merger agreement signed,
Canada Newswire, May 7, 1998). Moreover, both companies are trying to expand
geographically in their respective markets, and immediate growth opportunities will
exist by using each others facilities, capacities, and infrastructure. Auto industry
experts (see Table 3) also welcomed the merger, although analysts from firms that
were not involved in the merger (Goldman Sachs and CSFB advised Daimler-Benz
and Chrysler) were more cautious in their long-term performance forecasts and recommendations. According to the DaimlerChrysler merger prospectus:
During the course of (merger) discussions, representatives of Chrysler stated
that it was important to Chrysler that any potential transaction maximize value
for its stockholders, that it be tax-free to Chryslers U.S. stockholders and tax
efficient for DaimlerChrysler AG, that it have the post-merger governance structure of a merger-of-equals, that it have the optimal ability to be accounted
for as a pooling-of-interests, that it result in the combination of the respective

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Table 2
Chronology of the DaimlerChrysler merger
January 12, 1998

February 1218, 1998

March 2, 1998
MarchApril, 1998
April 23May 6, 1998
May 6, 1998
May 7, 1998

May 14, 1998

June 18, 1998
June 25, 1998
July 23, 1998
July 31, 1998
August 6, 1998
August 6, 1998
August 27, 1998
September 18, 1998
September 18, 1998
November 6, 1998
November 9, 1998
November 12, 1998
November 17, 1998

Jurgen E. Schrempp, Chairman of the Daimler-Benz Management Board, in

U.S. for North American International Auto Show in Detroit, visits Robert
J. Eaton, Chairman and Chief Executive Officer of Chrysler Corporation, to
suggest discussion of possible merger.
Initial discussions on possible merger within small group of representatives
and advisors from both companies.
Robert J. Eaton and Jurgen E. Schrempp meet in Lausanne, Switzerland to
discuss governance and business organization structures for a possible merger.
Working teams prepare possible business combination in detail.
Working teams negotiate business combination agreement and related documentation.
Merger agreement signed in London.
Merger agreement announced worldwide: Daimler-Benz and Chrysler combine to form the worlds leading automotive, transportation, and services
company.
Daimler-Benz Supervisory Board agrees to merger.
Daimler-Benz management team visits Auburn Hills.
Chrysler management team visits Stuttgart.
European Commission approves merger.
Federal Trade Commission approves merger.
Announcement that DaimlerChrysler shares will trade as global stock rather
than American Depositary Receipts (ADRs).
Daimler-Benz and Chrysler mail Proxy Statement/Prospectus to shareholders.
Daimler-Benz and Chrysler management teams meet in Greenbrier, West
Virginia to discuss post-merger plans.
Chrysler shareholders approve merger with 97.5% approval.
Daimler-Benz shareholders approve merger with 99.9% approval.
Chrysler issues 23.5 million shares to corporate pension plan to qualify for
pooling-of-interests accounting treatment.
Daimler-Benz receives 98% of stock in exchange offer.
DaimlerChrysler merger transaction closes.
Day One: DaimlerChrysler stock begins trading on stock exchanges worldwide
under symbol DCX.

Source: DaimlerChrysler Merger Prospectus (1998b).

businesses of Daimler-Benz and Chrysler into one public company. Representatives of Daimler-Benz indicated (in addition to the previous) that the surviving
entity of any combination be a German stock corporation, thereby enhancing
the likelihood of acceptance of the transaction. (DaimlerChrysler, 1998b, p. 47)
The Chrysler Board unanimously approved the merger and recommended the
transaction as fair to and in the best interests of Chryslers stockholders. The board
suggested several factors that led to their approval (DaimlerChrysler, 1998b, p. 50):
(a) the likelihood that the automotive industry will undergo significant consolidation,
resulting in a smaller number of larger companies surviving as effective global competitors (see Table 1 for industry overview); (b) the two companies complementary

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Table 3
Analyst ratings at the time of merger
Credit Suisse First Boston (Nicholas Colas, Susanne Oliver, November 20, 1998)
Valuation: EPS: 1998e 11,00DM; 1999e 12.44 DM.
Abstract: We believe that the merger of Chrysler Corporation and Daimler-Benz has created the
worlds most formidable competitor in the automotive industry. In our view, DaimlerChrysler
represents an attractive investment opportunity, with a superior industry position, a very strong
balance sheet and significant cost savings potential. We are introducing a price target of US$
101, representing 15% upside potential from the current price.
Goldman Sachs Investment Research (Keith Hayes, Hugh Campbell, October 5, 1998)
Valuation: EPS: 1998e US$ 5.98; 1999e US$ 7.25.
Abstract: Preparing for the 21st Century. Proposed merger would create global powerhouse able to
confront changes underway in world automotive industry. Three-year estimated cost benefits of
$3 billion create immediate earnings momentum. Complementary strengths in terms of product,
geography and organizational skills.
Merrill Lynch (Stephen Reitman, November 27, 1998)
Valuation: Accumulate; Long Term: Neutral.
Abstract: Upgrade of Intermediate opinion.
BT Alex.Brown (Mark Little, November 12, 1998)
Merger of equals. DaimlerChrysler holds a global presence in an industry that is fast consolidating.
This offers advantages through economies of scale, purchasing and shared skills, but none of
this guarantees greater profitability. DaimlerChrysler is well placed to withstand the economic
downturn that we are expecting and our current forecast blended valuation looks fair. We
therefore initiate coverage with a market perform recommendation.
Source: Company reports. e denotes estimate.

strengths: Daimler-Benz is stronger in luxury and higher end cars, and Chrysler is
stronger in sport-utility vehicles and minivans; Daimler is stronger in Europe, Chrysler
in North America; Daimlers reputation for engineering complements, Chryslers
reputation for product development; (c) the opportunities for significant synergies
afforded by a combination based not on plant closings or lay-offs, but on such factors
as shared technologies, distribution, purchasing, and know-how; and (d) expected
benefits of $1.4 billion in the first year of merged operations, and annual benefits of
$3 billion within 3 to 5 years. The Chrysler Board also outlined several potential risks,
including the difficulties inherent in integrating two large enterprises with geographically dispersed operations incorporated in different countries, and the risk that the
synergies and benefits might not be fully achieved.
The Daimler-Benz Management Board also unanimously approved the merger by
taking into account several other material factors such as: (a) Daimlers strengthened
competitive position through an immediate expansion of its automotive product range
and through a geographic expansion in the U.S., and thus reducing the risk associated
with the dependency on the premium segment of the automobile market; (b) enhanced
liquidity for Daimlers stockholders by creating the third largest automotive company

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in the world in terms of revenues, market capitalization, and earnings; and (c) the
potential short-term synergies in purchasing, distribution, and research and development, and the potential long-term synergies in the development and growth of markets.

5. Conflicts of interest
As in most mergers, there are potential agency problems from managers decisions
on what actions to take in the merger:
In considering the recommendation of the Chrysler Board, stockholders of
Chrysler should be aware that, as described below, certain members of Chryslers
management and the Chrysler Board may have interests in the Chrysler Merger
that are different from, or in addition to, the interests of Chrysler stockholders
generally, and that these interests may create potential conflicts of interest
(DaimlerChrysler, 1998b, p. 68).
Some of the potential agency conflicts resulted from the compensation plans in
place. Subject only to the consummation of the merger and his continued employment,
Robert Eaton receives $3.7 million in cash payment, 628,300 DaimlerChrysler ordinary
shares ($66 million), and stock appreciation rights with respect to 2.27 million DaimlerChrysler ordinary shares. Four other Chrysler officers receive cash payments and
DaimlerChrysler shares and options. Moreover, Chryslers executive officers (a group
of 30 persons) have employment continuation agreements for a period of 2 years
following any event that constitutes a change in control. As a result, if their employment
were terminated within 2 years after the merger, they would receive an estimated
lump sum severance payment in an aggregate amount of $96,907,018. The largest
portion of this sum ($24.4 million) would accrue to Mr. Eaton, who would receive a
single lump sum payment equal to three times his base salary plus the average annual
bonus plus certain benefits.

6. Merger announcement effects

Table 4A documents the stock market reaction to the merger announcement for
both Daimler-Benz and Chrysler, which are similar to the results from earlier studies
of mergers. There was a 30.9% abnormal return for Chryslers shares, and somewhat
in contrast to large sample studies that find negative bidder returns, the shares of
Daimler-Benz realized a positive excess return of 4.6%. The combined market capitalization of Daimler and Chrysler was $95.2 billion at the close of NYSE trading on
May 7, 1998. Table 5A shows the market capitalization of Daimler-Benz and Chrysler
around the merger announcement. This was $10.2 billion greater than the combined
market value of the firms before the merger announcement. The increase in firm
value is consistent with the predicted expected benefits of $1.4 billion in the first year
of merged operations and annual benefits of $3 billion within 3 to 5 years.5

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7. Valuation issues
In a stock swap merger, the exchange ratio must be determined. The exchange
ratio may be determined according to the firms book values, market values, sales,
earnings, or some other characteristic. Table 6 illustrates the shares of former DaimlerBenz, Chrysler, and the combined entity based on these characteristics.
One possible approach is to apportion the ownership rights to the former shareholders using the market values of the two companies the day before the merger announcement. As market values change quickly and reflect new information (including leaks
from the merger talks), average market values computed over a longer time period
represent a better alternative. The market value of Daimler-Benz on May 5, 1998,
one day before the merger announcement, was $58.1 billion, whereas Chryslers market
value was about half that value at $26.8 billion. Based on these market capitalizations,6
Chryslers share of the combined company would be 31.6%.
The actual exchange ratios for the DaimlerChrysler shares were set at 1:1.005 for
Daimler-Benz shareholders and 1:0.6235 for Chrysler shareholders. Splitting DaimlerChrysler among the former Daimler and Chrysler shareholders according to these
exchange ratios put Chryslers share of the new company at 41.4%. Thus, Chrysler
shareholders received a 31% premium over the closing prices of their shares on May
5, 1998 (NYSE).
7.1. Financial analysis
While companies looking for a merger partner often begin with an in-house analysis,
eventually the complexity of financial, legal, accounting, and taxation issues requires
outside consultants. The following section focuses on the financial analyses performed
by the advisors to the involved parties in the DaimlerChrysler merger.
Daimler-Benz retained Goldman Sachs and Chrysler hired CSFB to act as their
financial advisors. In determining the exchange ratio, Goldman Sachs and CSFB
considered several valuation techniques, including discounted cash-flow techniques,
P/E multiples, and comparable-companies analysis (based on equity analyst price
targets). Financial advisors reviewed publicly available business and financial information related to the merging companies as well as financial forecasts provided by
Daimler and Chrysler.
CSFB prepared and presented a fairness opinion to the Chryslers board. It based
its opinion on a variety of financial and comparative analyses using numerous assumptions with respect to Chrysler, Daimler-Benz, industry performance, and general
business, economic, and market conditions. CSFB maintained that because of complex
considerations and judgments used in its analyses (DaimlerChrysler, 1998b), the opinion is not susceptible to decomposition. Nevertheless, below we briefly describe the
component parts of their analyses.
CSFB reviewed the stock price performance of the merging companies and compared them with the performance of other U.S. and European auto manufacturers.7
The high, low, and average share prices were considered, and CSFB concluded that
the proposed exchange ratio for the DaimlerChrysler shares represented a premium

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The merger agreement signed in London

Worldwide announcement of the merger
Combined 2-day return

May 6, 1998
May 7, 1998
May 67, 1998

18.7%
10.5%
30.9%

13.5
7.57
15.0

5.93%
1.25%
4.57%

Abnormal DM
return

t-stat

Abnormal USD
return
2.96
0.90
1.82

t-stat

March 2, 1999

February 5, 1999

DaimlerChryslers Executive Vice-President of Manufacturing Dennis K.

Pawley announced retirement.
Senior Vice-President of communications for DCX, Steven J. Harris, was hired
by General Motors Corp.
Two top engineering executives at DCX, Chris Theodore and Shamel Rushwin,
resigned to take similar positions at Ford Motor Co.

Event description

0.95
1.80

1.70%
4.25%
(2-day return,
March 1 to
March 3rd close)

(Continued)

0.97

t-stat

1.75%

Abnormal EURO
return

p. 86

Top executives
resignations*
December 4, 1998

Event date

DaimlerChrysler

p95686$u19

B. Post-merger abnormal returns to DaimlerChrysler (DCX) for some important events

FinAna

Abnormal returns (ARs) computed as market-adjusted returns. S&P500 and DAX30 indexes were used to adjust Chrysler and Daimler-Benz
returns, respectively. USD refers to U.S. dollar, and DM stands for Deutche mark. To compute t statistic, a standard deviation of ARs during
the year 1997 were computed. The methodology follows Ruback (1982), and Bruner et al. (1999) and adjusts for the autocovariance of returns:
SD [*VAR(ARt) 2 ( 1)COVAR(ARt,ARt 1)]; t stat AR()/SD(); where number of days in the event window.

Event description

Event date

Daimler-Benz

Chrysler

86

Table 4
Announcement effectsAbnormal returns
A. Abnormal returns to Daimler-Benz and Chrysler around the merger announcement

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5.98%
(2-day return)
5.04%

14.6%**

Abnormal EURO
return

2.1

2.5

7.1

t stat

p. 87

Abnormal Returns (ARs) and respective t statistic computed as specified in the note to panel A. Datastream World Index used to adjust returns.
* In addition to these resignations, DaimlerChrysler has been hit by loss of other top executives: Robert Lutz, who retired as Chryslers Vice
Chairman in June after playing a key role in the companys turnaround; Rex Franson, President of Chrysler Financial Corporation resigned in
January; William Glaub, CEO of Chrylser Canada died November 26, 1998. And finally, Robert Eaton, former CEO and Chairman of Chrysler,
has agreed to retire after 3 years to the merger.
** US dollar return to Chrysler shares from the close on September 30, 1998 to October 2, 1998, adjusted by S&P500.
Sources: News: Associated Press, AFX News, PR Newswire, Wall Street Journal, Business Wire. Prices: Datastream Inc.

March 10, 1999

Standard&Poors announces that it wont include DaimlerChrysler in the

S&P500 Index.
Rumors about DaimlerChrysler deal to acquire an equity stake in Nissan
Motor Co.
DCX breaks talks with Nissan. Nissan shares fell 10.9%.

Event description

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January 1113, 1999

News related to the loss of

S&P500 status and the
merger talks with Nissan
October 1, 1998

Event date

DaimlerChrysler

FinAna

Table 4
(Continued)
B. Post-merger abnormal returns to DaimlerChrysler (DCX) for some important events

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87

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$61.8 billion
$60.6 billion

$31.6 billion
$34.6 billion

$93.4 billion
$95.2 billion

$84.9 billion

Combined

13.8%
12.0%

DCX (e)

8.4%
14.7%

DCX ($)

3.8%
19.1%

S&P500

Cumulative returns since May 5, 1998 (Merger)

11.8%
3.1%

DAX30

8.5%
14.9%

DSWorld

DCX denotes DaimlerChrysler; S&P500 is S&P500 Composite Index; DAX30 is a major stock index in Germany; DSWorld is a composit
world stock-market index compiled by Datastream Inc. Euro-returns for DCX(e) and DAX30; U.S. dollar returns for DCX($), S&P500, and
DSWorld. DCX(e) euro-returns equivalent to DM (Deutche Mark) returns and computed using DM/USD exchange rates. DCX started trading
on NYSE (as when-issued security) on October 26, 1998.
Source: Wall Street Journal, Datastream Inc.

$77.8 billion
$72.4 billion

$84.9 billion

DCX market
cap

p. 88

May 5, 1998 (1 day prior to the

merger news)
October 26, 1998 (DCX starts
trading as when-issued security)
July 30, 1999 (more than a year later)

Date

p95686$u19

B. Post-merger market capitalization and returns of DaimlerChrysler (DCX)

Chrysler had 647.3 million and Daimler-Benz 569.3 million shares outstanding. Closing prices of Chrysler (C) shares and Daimler-Benz ADRs
(DAI) on NYSE were used to compute the respective market capitalization.
Source: Wall Street Journal.

$58.1 billion

Daimler-Benz

$26.8 billion

Chrysler

FinAna

May 5, 1998 (1 day prior to the merger

news)
May 6, 1998 (the merger agreement signed
in London)
May 7, 1998 (worldwide announcement)

Date

88

Table 5
DaimlerChrysler stock price performance
A. Market capitalization of Daimler-Benz and Chrysler around the merger announcement

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Table 6
Share of Daimler-Benz and Chrysler of DaimlerChrysler AG based on different characteristics
Share of DaimlerChrysler derived from
Characteristic

Daimler-Benz

Chrysler

Market Values (as of May 5, 1998)

Actual Exchange Ratio
Total Revenues (year ended December 31, 1997)
Net Assets (year ended December 31, 1997)
Net Income* (year ended December 31, 1997)

68.4%
58.6%
52.9%
56.1%
46.7%

31.6%
44.6%
47.1%
43.9%
53.3%

* Goldman Sachs figures in DaimlerChrysler Prospectus (1998, p. 64).

Source: Company reportsDaimlerChrysler Merger Prospectus (1998), NYSE Daily Stock Price
Record from 1998.

for the former Chrysler shareholders ranging from 15 to 37%. CSFB also reviewed
the equity analysts price targets from selected investment research reports. The
exchange ratio represented a premium of 16% over the mean target prices.
To estimate the present value of stand-alone Chrysler, a discounted (unlevered)
free-cash flow analysis was performed for the years 19982002. The analysis defines
unlevered free-cash flows as unlevered net income plus depreciation plus amortization
less capital expenditures less investment in working capital. With projections influenced by vehicle sales, the level of retail incentives, and the success of new product
models, two separate business scenarios were considered: a base case and a sensitivity
case. CSFB also performed a similar analysis for every business segment of DaimlerBenz and observed that the exchange ratio represented a premium of approximately
14 to 16% over the ratios of discounted cash-flow-equity valuations.
Operating and stock market data were used to analyze Chrysler relative to peer
companies (General Motors Corporation and Ford Motor Company). The EPS (earnings per share) multiples for the selected companies ranged from 8.0 to 9.5. Correspondingly, CSFB performed a similar analysis for every business segment of Daimler-Benz.
Based on the EPS analyses, the exchange ratio represented a discount of approximately
17% under to a premium of 15% over the ratios of comparable companies equity
valuations.
Goldman Sachs, as a financial advisor to Daimler-Benz, also recommended the
proposed transaction and deemed the exchange ratio to be fair to Daimlers stockholders. Similar to CSFB, Goldman Sachs reviewed, among others, the Combination
Agreement, the Annual Reports to stockholders, and other SEC filings8 for the prior
5 years, including interim reports to stockholders and internal financial analyses.
Financial advisors also considered premia (discounts) in similar transactions. CSFB
analyzed precedent strategic-business merger-of-equals (MOE) combinations. Its analysis indicated that the exchange ratios were negotiated within a narrow band around
the implied pre-announcement stock market ratios. For the 12 precedent MOE transactions9, where each of the constituent companies had even representation on the combined companys board of directors, the premiums ranged from 0.5 to 21.7%. Goldman

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Sachs analyzed comparably sized transactions and performed a transaction premiums

analysis on 40 earlier mergers larger than $10 billion. The premiums paid in these
transactions, as compared to the price 1-day prior to the announcement date, ranged
from a low of 5% to a high of 95.1% with a median of 27.3%.
The initial discussions put forth several criteria for the merger (DaimlerChrysler,
1998b, p. 47). However, some of these criteria seem to be at odds with each other.
One of the important issues of the merger transaction was that it had the optimal
ability to be accounted for as a pooling-of-interests. The Chrysler Board expressly
recognized that purchase accounting treatment would have no impact on cash generation or on the business logic for the transaction, although it would reduce reported
earnings because of the need to account for and to amortize goodwill (the excess
purchase price over book value) (DaimlerChrysler, 1998b, p. 51; other details of the
transaction also available there). Table 7 provides DaimlerChryslers unaudited proforma combined consolidated statement of income. The pooling-of-interests accounting is at odds with tax-efficiency, as purchase accounting would increase the firm
value by decreasing the present value of future tax liabilities. However, popularity of
pooling-of-interest accounting led the regulators to mandate purchase accounting for
all U.S. mergers . We may thus expect that international mergers may incorporate
combined entities in countries with more lenient accounting regulations.
7.2. Fees to financial advisors
Daimler-Benz contracted Goldman Sachs to act as its financial advisor to the merger
and agreed to pay $35 million in fees, plus an additional fee equal to 0.25% of the
increase in the market capitalization of DaimlerChrysler during the 6-month period
following completion of the merger. This fee is limited to be at least $5 million but
not greater than $25 million. Daimler-Benz also agreed to reimburse Goldman Sachs
for all expenses and indemnify Goldman against certain liabilities.
Chrysler engaged CSFB and agreed to pay CSFB a fee of $35 million for its services,
plus an additional fee equal to 0.11% of the change in Chryslers fully diluted equity
market value on December 31, 1997 compared to the fully diluted value of the
DaimlerChrysler shares received by Chryslers stockholders, subject to a maximum
of $20 million. In addition, Chrysler agreed to reimburse CSFB for all out-of-pocket
expenses, including the fees and expenses of its legal counsel and any other advisor
retained by CSFB.

8. Legal structure of the combination

To achieve various goals, such as pooling of interests accounting, and compliance
with certain regulations required a fairly complicated legal structure for the DaimlerBenzChrysler merger. Figure 1 illustrates the transaction as well as the resulting
structure (described in DaimlerChrysler, 1998b, pp. 1113). Baums (1999) describes
the details of the legal structure and problems arising from defective regulatory and
legal environment, but we limit our discussion to the most important points.

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91

Table 7
DaimlerChryslers combined consolidated statement of incomeunaudited pro forma combined
consolidated statement of income (Pooling-of-Interests Method) for the year ended December 31, 1997,
(in millions, except per share amounts)
Historical

Pro Forma
Combined
DM

Combined5
USD

105,205
(84,879)

229,255
(183,822)

127,131
(101,936)

25,107

20,326

45,433

25,195

(17,433)
(5,663)
1,620

(9,703)
(2,972)

(27,136)
(8,635)
1,620

(15,048)
(4,788)
898

3,631
618

7,651
251

11,282
869

6,257
482

Income before income taxes

Tax benefit relating to a special
distribution
Income taxes

4,249

7,902

12,151

6,739

2,908
1,074

(3,038)

Total income taxes

Minority interest

3,982
(189)

(3,038)

Net income

8,042

4,864

Revenues
Cost of sales
Gross margin
Selling, administrative and other
expenses
Research and development
Other income
Income before financial income and
income taxes
Financial income, net

Pro forma combined earnings

per share
Pro forma combined basic earnings
per ordinary share
Pro forma combined diluted earnings
per ordinary share

Daimler-Benz
DM

Chrysler
DM

124,050
(98,943)

2,9081
(1,964)2

1,613
(1,089)

944
(189)

524
(105)

12,9063

7,158

13.293,4

7.37

13.163,4

7.30

Reflects the nonrecurring tax benefit relating to the Special Distribution.

Includes nonrecurring tax benefits of DM 1,962 relating to the decrease in valuation allowance as
of December 31, 1997, applied to the German operations that file a combined tax return.
3
Excluding the nonrecurring income tax benefits, net income, and pro forma combined net income
would have been DM 3, 172 ($1,759) and DM 8,036 ($4,456), and pro forma combined basic and diluted
earnings per share would have been DM 8.28 ($4.59) and DM 8.21 ($4.55), respectively.
4
The assumed weighted average number of ordinary shares outstanding for basic and diluted earnings
per share were 970.8 million and 983.6 million, respectively.
5
Translated at the rate of exchange of $1.00 DM 1.80.
Source: Company reportsDaimlerChrysler Merger Prospectus (1998b).
2

Several factors attributed to the legal complexity of the merger. Interestingly, no

true merger between Daimler-Benz AG and Chrysler Inc. ever happened. Although
a direct merger of Chrysler into Daimler-Benz would significantly simplify the transaction, it would have dissolved Chrysler as a legal entity, which would require a costly

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M. Blasko et al. / International Review of Financial Analysis 9 (2000) 77102

Fig. 1. Graphic illustration of the legal structure of the DaimlerChrysler merger. [Source: DaimlerChrysler
(1998b)]

transfer of assets into a new U.S. subsidiary. The resulting structure has kept Chrysler
Inc. (later renamed DaimlerChrysler Inc.) as a legal entity, which is now a wholly
owned subsidiary of DaimlerChrysler AG. Baums also describes regulatory obstacles
that exist in this and other direct cross-border mergers.
9. Ownership structure and the largest stockholders
DaimlerChrysler was the first automotive company with a genuinely global ownership structure at the time of merger. Initially, stockholders were located equally in
the United States (44%) and Europe (44%). German stockholders held 37% of shares.
Three core stockholders owned 27% of DaimlerChrysler shares outstanding, 17,000
institutional investors held 49%, and 1.3 million retail investors held 24%. Insiders
controlled approximately 3% of ordinary shares.10

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93

However, on March 15, 1999, the company announced that the percentage of
DaimlerChrysler shareholders in the United States fell to 25% from 44% in November
1998, when the merger closed. DaimlerChrysler indicated that the decline was a
consequence of Standard & Poors decision not to include the resulting German
company in the S&P500 Index. This move may have forced many mutual funds that
track the S&P500 Index to unload the stock and has potentially increased
DaimlerChryslers cost of equity. We discuss the S&P decision later in the paper.
The three largest stockholders include Deutsche Bank of Germany, the Emirate
of Kuwait, and Kirk Kerkorian/Tracinda Corporation of Las Vegas, Nevada. In its
1996 and 1997 Annual Reports, Daimler-Benz AG disclosed that Deutsche Bank AG
and the Emirate of Kuwait had shareholdings representing approximately 23% and
13% of the ordinary shares. The largest Chrysler stockholder, Tracinda Corporation,
owned approximately 11% of the outstanding shares of Chrysler common stock. Prior
to the merger, Mr. Kerkorian (Tracinda Corp.) agreed to vote all of these shares in
favor of the approval and adoption of the merger. In December 1998, Deutsche Bank
AG announced it would spin off more than $24 billion in industrial holdings, including
DaimlerChrysler, by forming separate limited partnerships to manage each block of
shares, all controlled by a new unit called DB Investor (Miller, 1998).
10. Differences in corporate culture
Although the managements of Chrysler and of Daimler-Benz expect the Transactions will produce substantial synergies, the integration of two large companies,
incorporated in different countries, with geographically dispersed operations, and
with different business cultures and compensation structures, presents significant
management challenges. There can be no assurance that this integration, and
the synergies expected to result from that integration, will be achieved as rapidly
or to the extent currently anticipated. (DaimlerChrysler, 1998b, p. 24)
Unless Daimler imposes its culture on the new company and takes complete
charge, dont be surprised if the deal fails.
Jeffrey E. Garten,
Dean of the Yale School of Management (Garten, 1998, p. 20)
The success of this cross-border merger depends on the managements ability to
create a single corporate culture and strategy. Robert Eaton and Jurgen Schrempp
emphasized the evolutionary process of combining two companies that exhibit a
plethora of differences. Although the combination of Daimler-Benz and Chrysler was
designed as a merger of equals, Daimler-Benz has been the more-equal partner and
is imposing its own corporate imprint on the merged company. For the moment,
DaimlerChrysler keeps dual operational headquarters in Stuttgart, Germany and
Auburn Hills, Michigan. However, Jurgen Schrempp is expected to take over the
whole company after his co-CEO, Robert Eaton, retires after 3 years (see Table 8
for composition of management board). The centralization of control and decisionmaking is necessary to mesh the now-competing marketing, engineering, and manufac-

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Table 8
Board of Management (Vorstand)

Name

Age Area of responsibility

Year
appointed

Jurgen E. Schrempp
Robert J. Eaton
Dr. rer. pol. Manfred Bischoff
Dr. rer. pol. Eckhard Cordes

54
59
56
48

1998
1998
1998
1998

Theodor R. Cunningham

52

Thomas C. Gale

55

Dr. jur. Manfred Gentz

James P. Holden

57
47

Prof. Jurgen Hubbert

Dr. phil. Kurt J. Lauk

59
52

Dr. jur. Klaus Mangold

Thomas W. Sidlik

55
49

Thomas T. Stallkamp

52

Heiner Tropitzsch

56

Gary C. Valade
56
Prof. Klaus-Dieter Vohringer 57
Dr.-Ing. Dieter Zetsche
45

Chairman
Chairman
Aerospace & Industrial Non-Automotive
Corporate Development & ITManagement (including responsibility for
MTU/Diesel Engines and Automotive
Electronics)
Sales and Marketing Latin America (all
automotive brands) and Chrysler Truck
Operations
Product Strategy, Design and Passenger
Car Operations Chrysler, Plymouth, Jeep,
Dodge
Finance and Controlling
Brand Management Chrysler, Plymouth,
Jeep and Dodge & Sales and Marketing
North America (all automotive brands) &
Minivan Operations
Passenger Cars Mercedes-Benz,
Commercial Vehicles & Brand
Management Commercial Vehicles
Services
Procurement & Supply for the Chrysler,
Plymouth, Jeep and Dodge brands & Jeep
Operations
Passenger Cars and Trucks Chrysler,
Plymouth, Jeep, Dodge
Human Resources & Labor Relations
Director
Global Procurement and Supply
Research and Technology
Brand Management Mercedes-Benz,
Smart & Sales and Marketing Europe,
Asia, Africa, Australia/Pacific (all
automotive brands)

(19871)
(19922)
(19951)
(19961)

Year
term
expires
2003
2001
2003
2003

1998 (19872) 2003

1998 (19852) 2003

1998 (19831) 2003

1998 (19932) 2003

1998 (19971) 2003

1998 (19971) 2003
1998 (19951) 2003
1998 (19922) 2003

1998 (19902) 2003

1998 (19971) 2003
1998 (19902) 2003
1998 (19971) 2003
1998 (19971) 2003

The current members of the Board of Management, their respective ages as of March 31, 1999, their
areas of responsibility, the year in which they were appointed, and the years in which their terms expire,
respectively, are shown.
1
Year first appointed to the Board of Management of Daimler-Benz AG.
2
Year first appointed as an officer of Chrysler Corporation.
Source: DaimlerChrysler 1998 Annual Report.

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95

turing departments. Schrempp understands that the centralization of headquarters is

inevitable if the management does not want to repeat mistakes of other cross-border
acquisitions. Renaults failure in with American Motors and Sony Corps lack of
control over CBS Records and Columbia Pictures are good examples. The links
between the companies of different countries may collapse on serious corporate culture, control, and strategy differences.
Labor unions and financial institutions play a major role in German corporate
governance. According to German Co-determination Law (Mitbestimmungsgesetz),
the Supervisory Board (Aufsichtsrat/Board of Directors; see Table 9) consists of 10
shareholder and 10 employee representatives. German Metalworkers Union (IG
Metall) invited a representative of the United Auto Workers (UAW) to take one of
the three IG Metalls positions and represent Chryslers labor union on this board.
This system is at odds with the U.S. governance system with a predominantly independent Board of Directors. When downsizing occurs because of the overcapacity in the
global auto industry, management will be faced with politically sensitive issues about
how to apportion layoffs between America and Europe. However, these concerns
were not a topic of the pre- or post-negotiation talks, as the company announced that
it added 13,000 employees in 1998, bringing its global workforce to 434,000.
11. Compensation policies
Another area with potential for culture clash is compensation philosophy. When
the merger was consummated, the independent compensation systems of both Chrysler
and Daimler-Benz disappeared. The performance-based stock appreciation rights
replaced the respective option plans. These rights carry the benefits of an option, but
no shares change hands. Holders instead get a cash payout equal to the difference
between the strike price and the stock price on the day of exercise. A global-standard
pay system will include 80250 top executives, while the pay of the other 440,000
employees will be set by region and will be competitive with similar companies operating in the same environment (Orr (1999)). However, given the UAW presence
on the board of directors, workers at Daimlers Alabama plant may get a pay boost,
too. There is also some evidence that their U.S. labor costs are only about half of
those in Germany.
Many U.S. firms lose top talent once acquired by a European firm. The social and
cultural environment makes European executives more egalitarian and unwilling to
pay top dollar to keep star employees (Orr (1999)). European politicians and workers
are much less tolerant of high profits and pay than their American counterparts.
Although many other multinational corporations pay their managers according to
their country affiliation, it is increasingly harder for them to keep the same management-level executives on different pay structures (Orr (1999)). The average total
compensation of the U.S. chief executives ($1.1 million) far outpaced the rest of the
world in 1998. Though Europe is moving toward U.S. pay practices, the compensation
ranged only from $400,000 in Germany to $650,000 in Britain, with the base pay being
the largest part of the total compensation.

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Table 9
The Supervisory Board (Aufsichtsrat/Board of Directors)

Name

Age

Principal occupation

Hilmar Kopper
Chairman
Karl Feuerstein1
Deputy Chairman

64

Robert E. Allen

64

Willi Bohm1

59

Sir John P. Browne

Manfred Gobels1

51
57

Erich Klemm1

44

Rudolf Kuda1

58

Robert J. Lanigan
Helmut Lense1

70
47

Peter A. Magowan

56

Herbert Schiller1

44

Dr. rer. pol. Manfred Schneider

60

Peter Schonfelder1

49

G. Richard Thoman

54

Bernhard Walter

57

Lynton R. Wilson
Dr.-Ing. Mark Wossner

58
60

Bernhard Wurl1

54

Stephen P. Yokich1

63

Chairman of the Supervisory Board of Deutsche

Bank AG
Retired Chairman of the Corporate Works
Council, DaimlerChrysler Group and the
Central Works Council, DaimlerChrysler AG
Retired Chairman of the Board and Chief
Executive Officer of AT&T
Senior Manager, Wage Office, Worth Plant,
DaimlerChrysler AG
Chief Executive Officer of BP Amoco p.l.c.
Chairman of the Senior Managers Committee,
DaimlerChrysler Group
Chairman of the Central Works Council,
DaimlerChrysler AG
Head of Department, Executive Council,
German Metalworkers Union
Chairman Emeritus of Owens-Illinois, Inc.
Chairman of the Works Council, Unterturkheim
Plant, DaimlerChrysler AG
Retired Chairman of the Board of Safeway, Inc.;
President and Managing General Partner of San
Francisco Giants
Chairman of the Corporate Works Council,
DaimlerChrysler Services (debis) AG
Chairman of The Board of Management of Bayer
AG
Member of the Works Council, Augsburg Plant,
DaimlerChrysler Aerospace AG
President and Chief Operating Officer of Xerox
Corporation
Chairman of the Board of Managing Directors
of Dresdner Bank AG
Chairman of the Board of BCE Inc.
Chairman of the Supervisory Board of
Bertelsmann AG
Head of Department, Executive Council,
German Metalworkers Union
President of International Union United
Automotive, Aerospace, and Agricultural
Implement Workers of America (UAW)

58

Year first
elected/
appointed
1998 (19902)
1998 (19902)
1998 (19943)
1998 (19932)
1998 (19982)
1998 (19932)
1998 (19882)
1998 (19782)
1998 (19843)
1998 (19932)
1998 (19863)
1998 (19962)
1998 (19932)
1998 (19902)
1998 (19983)
1998 (19982)
1998 (19943)
1998 (19982)
1998 (19792)
1998

The incumbent members of the Supervisory Board of DaimlerChrysler AG, their respective ages as
of March 31, 1999, their principal occupation and the year in which they were first elected or appointed
to the Supervisory Board are shown.
1
Representative of the employees.
2
Year first elected to the Supervisory Board of Daimler-Benz AG.
3
Year first elected to the Board of Directors of Chrysler Corporation.
Source: DaimlerChrysler 1998 Annual report.

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97

The compensation differences are best illustrated by the recent pay packages of
the two co-CEOs. For 1997, the $11.5 million salary of Robert Eaton dwarfed the $2
million take-home pay of Jurgen Schrempp. Since Eaton is unlikely to take a pay cut,
the managerial compensation will be converging upwards and be linked to the stock
price performance. Although the company is required to comply with both the SEC
and German regulations, DaimlerChrysler, as a German corporation, is under no
obligation to disclose its executives pay packages. The 1998 Annual Report (DaimlerChrysler, 1998b, p. 29) says only that the aggregate amount of compensation to all
members of the Supervisory Board (Aufsichtsrat) and the Board of Management
(Vorstand), as a 37-person group, was 43 million euro ($46 million). This amount
includes compensation payments by the former Chrysler Corp., with the exception
of one-time payments due to the business combination. In addition, the company set
aside 24 million euro ($26 million) to provide pension, retirement, and other benefits
to this group. For comparison, in 1996 and 1997 Daimler-Benz reported DM28.9
million ($17 million) and DM30.6 million ($16 million) in compensation and retirement
payments to its Management and Supervisory Boards.
12. Post-Merger events
We also looked at several other post-merger events with a direct impact on the
future operations and ownership structure of DaimlerChrysler. We analyzed three
major post-merger events: the decision of Standard & Poors not to include DaimlerChrysler in the S&P500 Index, the departure of Chrysler management, and merger
talks with Nissan. The stock price movements associated with these three events are
reported in Table 4B.
On October 1, 1998, before the merger was completed, Standard & Poors announced its decision not to include DaimlerChrysler in the S&P500 Index. The S&P500
dropped Chrysler on the last day its shares were traded. The S&P Index Committee
commented:
The S&P500 covers leading companies in leading industries and reflects the
importance of the US markets and economy. Investors see the index as the key
benchmark for the US markets. Moreover investors recognize that companies
and markets in one country perform differently from companies or markets in
other countries. Our action today affirming that the S&P500 represents the US
market and companies is a reflection of how investors manage their investments.
Blitzer (1998).
The market reaction to Chrysler shares upon this announcement was negative.
Chrysler suffered an abnormal return of 14.6% on the announcement day (actual
return of 16.3%). Chryslers daily volume doubled in the weeks after the announcement as compared to the weeks before the announcement, presumably in response
to the fact that index funds would not need DCX shares. Even though Co-chairman
Robert J. Eaton tried to persuade S&P to reverse its decision, S&P spokesman Will
Jordan said that was unlikely: Its a German company, it pays taxes in Germany,

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its incorporated in Germany. Our long-standing policy is that non-U.S. companies

will not be added to the S&P U.S. indexes. Its fairly straightforward (1998, October
1, Business Wire). As we discussed earlier, a major impact of this decision was to
reduce the number of U.S. shareholders in DaimlerChrysler and make it more of a
German company. In response, DaimlerChrysler has continued a campaign to be
included in the S&P500. The latest lobbying occurred in comments by Chairman
Schrempp at a press conference on July 29, 1999, called to discuss the poor earnings
report we discuss in the next section.
Another post-merger event was the rumored merger with Nissan. Following the
merger with Chrysler, Jurgen Schrempp and other DaimlerChrysler executives started
to search for other suitable partners to expand their Asia operations. In January 1999,
they started preliminary merger talks with Nissan of Japan. Around January 11, 1999,
rumors spread about the intentions to acquire an equity stake in Nissan, and the DCX
shares fell by 6% (2-day abnormal return, t-stat 2.5). The talks continued until
March 10, 1999, when the no merger decision was announced. At this time, there
was an abnormal return of 5% to DCX shares, while there was a negative return of
10.9% for Nissan. The market apparently thought this merger would be bad for
DaimlerChrysler.
Finally, and perhaps most importantly, several top Chrysler executives and engineers
have departed since the merger. The major defection was that of 57-year old Dennis
Pawley, who left DaimlerChrysler in December 1998. Mr. Pawley, vice president of
manufacturing and leader of Chryslers turnaround, left for a consulting firm. In
February, a top corporate spokesman went to GM. In March 1999, the senior vicepresident of international marketing and minivans and the senior vice-president for
platform engineering went to Ford for similar positions. In July 1999, a lead Jeep
engineer Craig Winn, vice-president for Jeep platform engineering, left for GM .
While, as Robert Eaton pointed out, departures of executives is normal after a
merger, the differences in culture and compensation from the two international partners may have exacerbated departures after this merger. The AP wire (March 2, 1999)
reported that U.S. executives have complained privately that the Daimler half of
the company has taken a firmer grip on the new company. Perhaps another piece
of evidence of the culture problems in integrating the companies came from the actions
of Schrempp after the defections. At a news conference in Stuttgart, when called to
promote the increased earnings of the new company, Schrempp became agitated by
the questions from the U.S. media about the defections and said in an angry tone,
We dont need their know-how, you can quote me. In Table 4B we report the DCX
stock price movements at the time of these resignations. In every case the AR was
negative, although not significant.
13. Post-merger performance
The post-merger performance of DaimlerChrysler has not been good. Table 5B
and Figure 2 depict the post-merger market capitalization and the stock price performance of DaimlerChrysler. Shares of DaimlerChrysler underperformed by a wide

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Fig. 2. Relative performance of DaimlerChrysler (DCX) to S&P 500 Index, DS World Index and German
DAX30 Index. [Source: Datastream Inc.]

margin the following three indices: the Germanys main index DAX30, S&P500 Index,
as well as the DSWorld, a composite world stock market index compiled by Datastream
Inc. While it is still an open question which currency should be used to measure
returns to global stock, DCX stock has underperformed both DAX30 euro-returns
by 9 percentage points, as well as S&P500 dollar-returns by 34%. On July 29, 1999,
DaimlerChrysler reported lackluster second quarter earnings, and its stock price fell
8.8%. The New York Times (July 30, 1999, p. c1) reported the earnings had been
hurt by weaker than expected results from the Chrysler division (heavy losses in Asia
and Latin America), the weak euro, and losses on the Smart car in Europe. Although
it may be still too early to judge the value-creation or destruction in this merger, as
many of the synergies are yet to be realized, we provide preliminary evidence that
much of the initial merger-announcement returns dissipated.
14. Summary and conclusions
Using the DCX merger as a case study, this paper has focused on value creation
and analysis of various issues in an international transaction. The market reaction to
the merger was very favorable for both firms, and we illustrate the potential sources
of value creation in DaimlerChrysler. These include product lines that meshed well,
movement into the American market by Daimler and the European market by
Chrysler, and complementary engineering and marketing skills. However, we provide
evidence that the initial positive returns have dissipated.
Although globalization is one of the buzzwords in international finance and economics, an interesting and important question is: Can a company truly be global? Differ-

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ences in corporate culture, compensation policies, ownership structure, and the legal
environment can be viewed as barriers to entry to a global environment. While all
these factors affect mergers of domestic firms, the factors are magnified in an international merger. On balance, they pose important challenges to international business
combinations. Important post-merger eventssuch as the decision of Standard &
Poors not to include DaimlerChrysler in the S&P500 Index causing an outflow of
U.S. investors and the departures of executive from Chrysler (not Daimler)perhaps
caused by the clash of corporate cultures and compensation schemes, illustrate potential roadblocks to becoming a truly global company.
On balance, we conclude by echoing and expanding on the words of Myers (1976),
who said: Mergers are tricky; the benefits and costs of proposed deals are not always
obvious (p. 633). To wit, we add: International mergers are even trickier; the benefits
and hidden costs of these combinations are even less obvious.
Notes
1. The comparative evidence derives mainly from large sample studies. We are
aware of two other separate studies of the DaimlerChrysler merger: (a) using
the same public data we use, Bruner et al. (1999) have developed a Darden
case as a negotiation exercise on the price of the acquisition and other details
of the acquisition; and (b) Baums (1999) describes the legal structure of the
merger. The Auto Baron in Business Week (November 16, 1998) provides a
good overview of the merger.
2. Maquiera et al. (1998) found no evidence that conglomerate stock-for-stock
mergers create financial synergies or benefit bondholders at stockholders expense.
3. Daimler-Benz turned net losses of $3.5 billion in 1995 to net profits of $4.4
billion in 1997 under Schrempp. Top Executives, Industry Outlook, and
The Global Six (in Business Week, 1999) profile Schrempp.
4. Information in this section is from the DaimlerChrysler merger prospectus
(1998b) and company Annual Reports (1998a). Bruner et al. (1999) present an
extensive review of the companies operations.
5. We calculate the announced benefits correspond to the actual abnormal increase
in combined value: ($1.4 bill. $3 bill in 5 years forever discounted at 10%)
(1 0.3 current tax rate on distributed earnings in Germany) $14 billion.
6. Using closing prices of Daimler-Benzs ADRs and Chrysler shares on the NYSE
on May 5, 1998.
7. General Motors Corporation, Ford Motor Company, Bayerische Motoren
Werke AG, Fiat SpA, PSA Peugeot Citroen, Renault SA, Volkswagen AG,
and Volvo AB.
8. Securities and Exchange Commission (SEC) Annual Reports forms 10-K
(Chrysler) and 20-F (Daimler-Benz).
9. For example, BancOne Corp. and First Chicago NBD Corp.; Travelers Group
Inc. and Citicorp; TransCanada Pipelines Ltd. and Nova Corp.; Grand Metropol-

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itan PLC and Guinness PLC; Bell Atlantic Corp. and NYNEX Corp; and
Sandoz Ltd. and Ciba Geigy Group.
10. The DaimlerChrysler merger prospectus (1998b) disclosed that directors and
executive officers of Chrysler and their affiliates beneficially owned an aggregate
of 1.21% of the Chrysler Common Stock outstanding (including shares under
option) as of July 20, 1998.
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