NEGOTIATING COMPANY MERGERS:

THE DAIMLER CHRYSLER CASE STUDY

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Col Sanjeev Khanna

Col Inderjeet Singh
Col Amit Chatterjee
Col Amit Pal Group D
Col Sanjay Bhardwaj
Col Avinash Katoch

DGR GSCM Course

 THE DAIMLER CHRYSLER CASE
“During the next three years we are going to
fire 26.000 employees and to close six factories”
Dieter Zetsche, DaimlerChrysler CEO, February 2001

Introduction

1. In May 1998, when the impending merger of Daimler-Benz and Chrysler was
announced, it heralded the biggest cross-border industrial merger ever. The rationale
was obvious. Chrysler was perennially third in the Detroit Big Three and despite
heroic efforts by Lee Iacocca to revitalize the company it struggled to maintain its
productivity and world ranking.  Daimler-Benz – more prestigious and dynamic – was
essentially a specialist producer of premium saloons and had made few efforts to
widen its product range and customer base.
2. The amalgamation of the two companies would produce an industrial giant
with global sales of more than $150 billion, making it fifth among the world’s car
manufacturers. It was to be a shining example of what globalization could achieve for
an adventurous group combining two well established brand names. A smooth
integration of the two famous corporations would enable the group to meet the
demands of nearly all segments of the car market, and sales could be expected to
increase exponentially. The phrase “smooth integration”, was a key challenge to
Daimler-Chrysler as well as the route to success.

3. However, by 2004, Schrempp’s DaimlerChrysler was a far cry from what the
1998 merger promised to deliver. The company’s financial record was lackluster,
bogged down by Chrysler’s $637 million loss in 2003. DaimlerChrysler remained the
world’s number three car maker, leaving the 2000 goal–to become the number one
auto company in the world–unfulfilled. Whether the merger would provide the hoped-
for results remained to be seen. The companies finally demerged on May 14,
2007 after nine years of a difficult marriage.

Background

4. Mercedes-Benz The well-known German car manufacturer Daimler-Benz

was founded in 1926, when the Benz & Cie. Rheinische Gasmotorenfabrik and the
Daimler-Motoren-Gesellschaft merged. Since the beginning, Daimler-Benz was a
well-established company in the German and European car industry. The name
Daimler-Benz stands for precision and German high-quality products. Cars of the
Daimler-Benz brand represent cars of the luxury sector. Despite its success in
Germany and Europe, the company never succeeded in getting ahead of the
competition on the big and important U.S. American market. Prior to the merger with
the Chrysler Corporation, Daimler-Benz’ market share of the U.S. American market
was less than 1%. The high work intensity throughout its production processes in
order to guarantee the high-quality standards, did not allow Daimler-Benz to become
competitive on the hard-fought American market.
5. In the late 1980s, Mercedes-Benz found itself under assault from a host of
new competitors, most notably from Toyota Motor Company's Lexus division. That
sent its sales and market share sliding. Mercedes struck back by slashing costs and
emphasizing customer needs over engineering. The payoff was sweet, with sales
reaching record levels. Meanwhile, parent company Daimler was engaged in non-
auto businesses such as Dutch-based Fokker, a money-losing aircraft company. In
January 1997, the supervisory board of Daimler approved the restructuring of the
company by merging Mercedes into Daimler, and named Jurgen Schrempp as its
CEO of Daimler-Benz. This was the plan that Schrempp had proposed to the board
for the sake of efficiency and cost savings, after considerable political maneuvering.
As part of his restructuring, Schrempp in a speech delivered during the annual North
American International Auto Show, clearly expressed the platform he had
established for Daimler-Benz. Strengthening the pillars of Daimler-Benz by improving
the competitiveness and the capital returns of each business units, acceleration of
the existing business through the penetration of fast-growing markets and the
development of new products. Also, speed up globalization by establishing new
production platforms for emerging markets, especially in Asia.
6. A report prepared by market analysts confirmed Schrempp's fear about the
growth limitations of Mercedes-Benz. The report concluded the A-class product was
too expensive, with too much high technology for the targeted high growth emerging
markets. The analyst recommended Chrysler as the best company to partner with to
achieve Schrempp's goal of attaining a broader market base. The report contained
typical due diligence information on Chrysler's capital employed, return on capital,
the
operating profits, the products, breakdown of sales geographically, and the corporate
culture. Based on an analysis of the report, Schrempp was convinced that Chrysler
was the best partner to help achieve profitable growth. As one of his aids eluded
Daimler- Benz did not want to end up as a subsidiary of a United States firm like
Jaguar did with Ford.

6. Chrysler The Chrysler company was founded by Walter Chrysler on June

6, 1925, when the Maxwell Motor Company (est. 1904) was re-organized into the
Chrysler Corporation. The company was headquartered in the Detroit enclave
of Highland Park, where it remained until completing the move to its present Auburn
Hills location in 1996. The Chrysler Corporation, used to be a well-established and
firmly positioned organization in the U.S. American market. Chrysler succeeded in
producing car models that responded to the American demand for adventurousness
and pioneering. The company had developed an image of being a skipjack and had
proven their bouncebackability a few times. Since the end of World War II, Chrysler
had already faced insolvency four times, but at last it always succeeded in defending
itself from the competition and to stand its ground against the competitors every
single time. The company’s processes were characterized by very high efficiency
throughout the production process and low costs in product design and Chrysler all
but abandoned Europe in the late 1970s when financial woes forced it to retreat.
Struggling to meet payroll and losses piling up, Chrysler persuaded the Carter
Administration to provide $1.5 billion in federal loan guarantees. Chrysler, to achieve
its goal, spent billions of dollars for upgrading its minivans and Jeep product lines,
which it acquired when it bought American Motors Corp. in 1987 from Renault. That
move proved to be a great success as American car buyers shifted their purchase
decisions to these product types. By the mid-1990s, Chrysler was the most profitable
car company in the world. (CNN Financial News, 1998) In the year 1997, Chrysler’s
market share of the U.S. American car industry equalled about 23%. But it was in the
90s when times became harder for the car industry and Chrysler had to find a
strategy to prepare itself for the difficult times ahead in order to avoid facing
bankruptcy once again.

7. Bob Eaton, Chairman, Chrysler Corp. recognized the overcapacity and

excess production in the auto industry to be a major problem for future profitability
and ultimately survival of Chrysler. He estimated the overcapacity to equal the size
of six Chrysler Corporations. He further speculated that in ten years, the number of
automakers would shrink from forty to twenty, and in twenty years, the number will
shrink by one half again. He then concluded that Chrysler might not make it on its
own. To survive, it needed a partner The prospect identification was well thought out.
Daimler-Benz and Chrysler could each bring to the proposed merger strengths that
support the overall objective of the new entity.

Merger of Mercedes Benz and Chrysler

8. When decided to merge, the two companies shared the very ambitious goal of
becoming the leader in the world’s car industry. They aimed at reaching this goal by
uniting their different know-how, their different work processes and their completely
different organizational cultures in order to then make use of shared distribution
channels, draw on shared technologies and take advantage of the gathered
knowledge together. Due to the developments in the car industry mentioned above
and the listed reasons, the two carmakers entered into negotiations over a possible
merger in January 1998. On May 7th, 1998 the two chief executives Robert J. Eaton,
CEO of the Chrysler Corporation at times, and Jürgen E. Schrempp, former CEO of
Daimler-Benz, announced the merger of the two car producers.

9. The DaimlerChrysler AG was founded and became the world’s third biggest
car manufacturer, only defeated by Ford and General Motors in terms of yearly
revenues and market share. The merger of the two carmakers was considered a
‘merger of equals’. None of the two parties wanted to take over the other one. Rather
did they want to make use of the strengths of the two partners involved and be
strong together.
After the successful initial joining of the two, the successful post-merger-integration
had to be guaranteed in order to ensure the long-term success of the merger. Within
the post-merger integration process, it was of crucial importance to link the two
completely different corporate cultures inherent to the businesses.

10. Certain elements of the Daimler-Benz management were awake to the

problems likely to arise when German and American executives and work forces
were to be united at various levels of activity and responsibility: German and
American mindsets and worldviews differ sharply. There are worse cross-cultural
mismatches, but there are also better ones. Wisely, Daimler-Benz appointed a senior
executive, Andreas Renschler, to supervise the integration. He had worked several
years in the United States and was sufficiently well-versed in both cultures to foresee
and hopefully circumvent cultural difficulties which would undoubtedly present
themselves.

Cultural Issues During the Negotiations

11. Following the due diligence report and the decision to merge, the the two auto
giants proceeded with the negotiations. This was accomplished by the formation of a
merger team. The merger team's objective was to attain agreement between the two
partners about how to address and resolve the most sensitive and contentious
issues and become the foundation to complete the merger. However, mutual
agreement on modalities on resolution of contentious issues was not achieved. The
more serious, and later determined, critical issues that continued to haunt the firm’s
post-merger are discussed below.
(a). Merger of Equals. From the beginning, it was clearly expressed by
Jurgen Schrempp to his team members involved in the merger exploratory
period, during the merger negotiations, and to the transition team members
that, "under no circumstances would Daimler ever be the junior member of
any merger, and we must have the leading role". But, during the merger
discussions and negotiations, he assured Bob Eaton, Chairman of Chrysler
that the merger would be the "merger of equals," as Eaton expected, with one
management team composed of executives from both Chrysler and Daimler.
This was the core of Eaton's selling point to his management team and the
board members. As we will see later, Chairman Schrempp denied having
given such commitment, and attributing that to misunderstanding by the U.S.
management.

(b) Domicile of the new company. The issues pointing out the
advantages and disadvantages of establishing the company as a German
entity versus an American corporation were studied carefully by both sides.
Also, the possibility of selecting a third location, such as Netherlands was
studied. For the Chrysler Management, the domicile of the new company was
predicated on the most financial and tax advantages point of view from both
sides. For Schrempp, however, there was no way he could merge Daimler
and Chrysler as an American Corporation. His supervisory board would not
accept it. He could bring Chrysler into the fold, but could never move Daimler
out of Germany. For that, Schrempp was ready to wheel and deal on the
composition of the management and the price paid to Chrysler shareholders,
but he would never compromise on the new company as a German entity.
After considerable evaluation it was determined that the single best way to
ensure a tax-free deal for shareholders was to create a new German
company. This obviously was good news for Schrempp, but, for Eaton, he
wanted something in return, "the name" of the new company could be the
equalizer in the trade-off.
 (c) Naming the new company. Once it was decided the new company
was going to be a German company, Eaton was sure that he could get the
name Chrysler before Daimler to convey the merger of equal's philosophy.
Eaton's advisors were not optimistic about that and warned Eaton about the
sensitivity that Germans have toward name, specially, the name such as
Daimler-Benz with such a long term of history and heritage. When Eaton
announced to Schrempp that the name would be ChryslerDaimler-Benz,
Schrempp rejected it and offered a compromised version of "DaimlerChrysler"
and dropping "Benz." He further emphasized the importance of the name to
the point that the name was a "deal breaker." Eaton accepted Schrempp's
proposed name with the codicil that a Chrysler executive would replace
Schrempp on the board upon Schrempp's retirement. It seems that Schrempp
had not been forthright in the prospect selection stage and he had a "hidden
agenda" that subverted the negotiations from the beginning. Throughout the
merger negotiations, Eaton, made big compromises; the domicile, the name,
and later, his fixed tenure of three years as co-chairman of the new company
which created a huge leadership crisis in the U.S. operations. With the
German's domination of the bulk of these issues, it was not clear if this was
truly a "merger" or an outright acquisition. The ramifications of the way these
issues were "negotiated" prevented the new entity from functioning as an
integrated unit.

Cultural Issues during Transition Management (Blending of Systems)

12. The transition management team responsible for blending the two companies
into one comprised American and German executives representing their respective
companies' interests. The U.S. team traveled to Stuttgart and the German team
traveled to Auburn Hills by alternating the sites to emphasize equality between the
teams. During the transition, there were many cultural issues that surfaced and
presented challenges to both sides. Many such cultural fit issues, that were not
resolved and continued to plague the new company in its efforts to operate as a
unified team are listed as under: -

(a) Executive compensations: One of the thorniest issues at

DaimlerChrysler was the sharp discrepancies in compensations paid to the
executives in the U.S. and Germany. As an example, in 1997, Jurgen
Schrempp, chairman of Daimler-Benz received an estimated compensation
package of $ 1.5-$2m. At Chrysler, by contrast. Bob Eaton, was paid a base
salary of $ 1.6m and a bonus of $3m, for a total of $4.6m. He also made
another $5.2m by exercising stock options.

(b) Business Travel: Daimler-Benz employees flew first-class, in keeping

with the company's luxury image. At Chrysler, only top officers could fly first-
class. This may have seemed a mundane issue, but the travel policy became
a major source of conflict that took over six months to resolve.
 (c) Work habits and styles: The Daimler organization embraced formality
and hierarchy, from its intricately structured decision-making processes to its
suit-and-tie dress code and respect for titles and proper names. Chrysler, on
the other hand, disregarded barriers and promoted cross-functional teams
that favored open collars, free-form discussions, and casual repartee. Daimler
executives had larger staffs and fatter expense accounts. Chrysler officers
had broader responsibilities and bigger salaries and bonuses. The Germans
smoked, drank wine with lunch, and worked late hours. Chrysler banned
smoking and alcohol in its facilities. The Americans worked around the clock
on deadlines but did not stay late as a routine.

(d) Decision making process: At Daimler, the German employees

decisions worked their way to the top of the hierarchy through formal
channels, then they were set in stone. At Chrysler, the executives allowed
mid-level managers to proceed on their own initiatives, sometimes without
waiting for executive level approval.

(e) Financial reporting system: The German accounting system is vastly

different. Companies and stockholders focus on full-year results, so the
companies crank up the numbers in the fourth quarter to make the strong
numbers. Conversely, the U.S. Financial reporting system is on a quarterly
basis, and is sleekly efficient.

13. Based on the above observations, it is clear that they didn't just make cars
differently, they lived in different worlds. The cultural differences extended beyond
attitudes and styles. Instead of trying to blend the best of each company's culture, it
became a question of comparing the styles. Because of that, with less than one year
into the integration, Schrempp and Eaton decided to put the brakes on integration
and to operate each of the three automotive units, Chrysler, Mercedes, and the
commercial truck business, separately.

Blending the Two Cultures: Post-merger

14. One year into the new operation, one did not hear harmonious working
relationship between the German and the U.S. headquarters. Chairman Schrempp
streamlined his management by purging several senior executives whose strong
performance and outspoken manners were threats to his dominance. Among the
casualties was Thomas Stallkamp, president of the company's U.S. arm who was
also responsible for the integration of the two companies. Stallkamp was after all the
leader who Americans had respected and trusted.

15. Furthermore, the leadership duo, Schrempp and Eaton, did not seem to be in
agreement about where to lead to the joined company. It appeared to be the
problem, that Chrysler was neither acquired by Daimler-Benz, nor was it guaranteed
equal status to its German partner. At first, the German management granted
Chrysler the freedom to do what they had always done and management bet on
Chrysler’s past successes. Chrysler was supposed to continue operating just like
before the merger and Daimler-Benz wanted to simply take advantage of Chrysler’s
efficiency. But the crux of the matter was that they did not take into consideration
that due to the merger the situation had changed, a number of key players had left
the corporation and remaining employees were demoralized and demotivated.

16. Due to the emerging problems the German management took over the whole
company’s management. During the years 2000 and 2001 the two American
successors of Eaton, James P. Holden and Thomas T. Stallkamp, were dismissed
consecutively within 19 months only. They were replaced by the German manager
Dieter Zetsche. In addition, Zetsche appointed another German manager, Wolfgang
Bernhard, as the new COO. The Germans took over the leadership squad at the
Chrysler division. It became apparent, that the DaimlerChrysler merger could no
longer be considered a ‘merger of equals’.

17. Moreover, in the year 2000, Schrempp stated officially that he had never had
the intention of a ‘merger of equals’. And he added that if the real intentions of
Daimler-Benz had been publicly known right from the beginning, the merger of the
two car manufacturers would never have taken place. Hence, the merger of the two
once successful businesses was foredoomed to failure. From Chrysler’s point of
view, Daimler-Benz turned out to not be the hoped-for strong partner, that would help
the corporation to manage the new difficult challenges that occurred in the car
industry. Instead of strengthening one another, instead of generating and making
use of new synergy effects, and instead of gaining competitive advantages over the
competitors, the merger with Daimler-Benz drove Chrysler into chaos. During the
third quarter of 2000, Chrysler had to enter a loss of $512 million and the share price
dropped dramatically from $108 in January 1999to $40. This merger had not
delivered the profits and products it promised, and the real question was would it
ever? Another question was could this turmoil of missteps, backbiting, finger pointing
and the admitted loss of the first two years of the merger been avoided with more
thought given to the management of the organizational culture during the partnership
formation. Given the "oil and water" cultures of Daimler-Benz and Chrysler
Corporation, the answer is an obvious yes. So the sale of the Chrysler division in
2007 seemed inevitable.

Conclusion and Lessons Learned

18. A large number of cross-border M&As fail because of seemingly

insurmountable difficulties. And so did as well the merger between the two car
manufacturers Daimler-Benz and the Chrysler Corporation. The failure of this merger
was not caused by the fact that it did not make sense to join two successfully
operating businesses of the same sector in order to make use of the one company’s
strengths to complement the other company’s weaknesses. Instead, the promising
merger failed due to cultural discrepancies that could not be bridged.

19. From a strategic point of view, this merger did make sense, but the problems
that doomed the merger to failure were the opposing and contrary corporate cultures
and organizational models, that presented insurmountable obstacles.

20. Within the merger, Daimler-Benz tried to administer the Chrysler division as if
it was a German company. This approach was foredoomed to fail right from day one
on. When it comes to cross-border or cross-cultural M&As, you must not disregard
the cultural differences inherent. One corporate culture cannot simply suppress and
replace the other one. A consensus has to be reached and the foundation for a new
culture, based on elements of both cultures involved, has to be laid. In the case of
DaimlerChrysler, both parties were never truly willing to cooperate wholeheartedly
and to accept changes and to make compromises in order to make this merger of
the two companies a success.

21. In order to avoid the failure of cross-border M&As, it is of very high importance
to consider the pivotal aspects even before the actual merger takes place.
(a) It is important to take into account in which areas where there will be
cultural discrepancies and how they will influence day-to-day work.

(b) Will there occur communication problems due to language barriers and
how will they be solved?

(c) How should different leadership styles be managed and applied?

(d) Moreover, is it crucial to identify and to precisely define common goals

and to elaborate certain norms and regulations for business processes.

(e) Furthermore, a good and far-reaching communication strategy is

indispensable.

22. To conclude the presented article, it must be summed up that the merger of
Daimler-Benz and the Chrysler Corporation was not foredoomed to failure right from
the beginning, but rather occurred due to cultural differences and wrong
management decisions. If both parties had put all cards on the table from day one
on, if they had combined their strengths to pursue a shared goal, if they had paid
more attention to the cultural discrepancies and therefore managed the post-merger-
integration process successfully, they would have had great chances to generate
vital synergy effects and become a leading figure in the world’s car industry. The
discussed merger of the two car manufacturers Daimler-Benz and the Chrysler
Corporation is a perfect illustration of how cultural differences in cross-border M&As
can deter-mine the success or failure of such a merger. In this case the two once
successful companies did not succeed in joining their strengths and complementing
each other’s weaknesses to overcome a crisis together. But hopefully this example
of failure will serve as a lesson to learn from for future cross-cultural M&As.
 REFERENCES

1. International Joumal of Management Vol. 24 No. 2 June 2007

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3. THE DAIMLERCHRYSLER MERGER– A CULTURAL MISMATCH? Julia

Hollmann, Aletéia de Moura Carpes, Thiago Antonio Beuron; Rev. Adm. UFSM,
Santa Maria, v. 3, n. 3, p. 431-440, set. /dez. 2010.

4. Negotiation Failure - Case of Daimler-Chrysler Kwesi Atta Sakyi; Advances in

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