——————E—_—,—lc(eeeeeeeetttstststi—S 386 Corporate Restructuring: Merger, Acquistion an, 'd Othe, Fon 18.1 DAIMLERCHRYSLER: A CASE OF CORPORATE MERGER Introduction On May 6, 1998, two of the world’s leading car manufacturers, Daimler-Beny Chrysler, agreed to combine their businesses to formthe third largest automobile comy in the world in terms of revenues, market capitalization and earnings (fifth in terms bel] number of units of passenger-cars and commercial vehicles sold). In the new aia called Daimler Chrysler, (DCX) Juergen E Schrempp and Robert J.Eaton, the CEO,” Daimlerand Chrysler respectively were named co-CEOs. Both appeared Confident ‘hate ti merger would generate various synergies and growth opportunities. Schrempp remarkeg, “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 Gitferent markets and in different parts of the world. By combining and utilizing each other's: strengths, we will have a pre-eminent strategic position in the global marketplace for the benefitofthe 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”. According to Eaton, “Both companies have product ranges with world-class brands thatcomplement each other perfectly. We will continue to maintain the currentbrands and their distinct identities. What is more important for success is our companies share a common culture and mission. both clearly focussed on serving the customer........ have a reputation for innovation and quality. .. By realizing synergies... ideally positioned in tomorrow's marketplace”. Chrysler In 1993, the Chryslerboard hadappointed Robert Eaton, thena senior General Motors (GM) executive, as the new chairman and CEO, following the legendary Lee Laccoca’s retirement. &€tivitiés. He emphasised quality and efficiency, strengthened the balance sheet by nd increased Chrysler's commitment to new product development. By 1995, Chrysler's position had significantly improved. Chrysler reported net earnings of $2.4 billion in 1993, $3.7 billion in 1994 and $2 billion in 1995. In 1997, Forbes which selected Chrysler as the ‘Company of the Year’, mentioned: Starting as a weak number three in a murderously competitive business facing competitors with far greater resources, Chrysler management devised a disciplined strategy out of chaos and rose to the top of the American car industry in Pra al developing a close knit team of talented managers driven by a clear vision. Daimler-Benz When Juergen Schrempp haditaken overas Daimler’s CEO in May 1995, thecompa was facing a crisis. To some extent, Schrempp himself was responsible for this stal®y case Studles _ eoaries 2 i : 387 affairs. TO cite an example, he had supported the . However, price wars, unfavourable exchange rates and globalrecession had resulted in massive losses. Fokker slid into bankruptcy less than three years later. gchrempP however, made up for these mistakes through ruthless restructuring. He : ese divestitures helped in reducing headcount and sharpened the business focus. The Aerospace division alone through lay- offs, attrition and divestiture. Even the Mercedes picid 14,80,000 people in 1991, saw its manpower strength fall to 1,40,000 by 1995. After restructuring Daimler, Schrempp set about revitalizing the culture and promoted what he called “value Each of Daimler’s 23 business units hadto earna return of atleast 12% onthe capital employed (ROCE). improvement with ROCE of 9%. In 1997, Daimler generated revenues of DM 1241 llion and net profits of nearly DM 6 billion. The Merger In the early 1990s, Daimler executives noticed that their traditional markets were becoming saturated and started looking for new growth opportunities. The price of the vaunted in emerging markets. If matters were allowed to drift, Mercedes would remain a niche player and lose its competitive strength. So Daimler began to look fora partner to broaden its appealand give it the scale it needed to retain its technological strengths. After considering various car manufacturers in the world, Daimler executives decided that Chrysler topped the list becauseits productline and geographical reach were both complementary. In 1995, Daimler andChryslerbegan exploratory talks, and discussed ways of dealing with theirweaknesses inthe rapidly growing Asian markets and, toalesserextent, South American markets. They proposed to setup a new, that would operate outside the US and Europe to develop vehicles, build factories, and establish dealer networks in new markets. The talks, however, ran into a stalemate over issues of responsibility and money — who would manage which projects and how the costs would be allocated. Chrysler, however, realized very soon that it was too thinly staffed to boost overseas sales by deploying managers around the world. Moreover, due to smaller volumes, its R&D cost per vehicle was higher than that of its formidable rivals, GM and Ford. Clearly, Chrysler was toosmallto take on its bigger rivals. Itmade sense to have apartner. Meanwhile, Daimler was having its own problems. After building a plant in Alabama to assemble the M-class sport-utilty vehicle, many defects/problems appeared during its first year of production, makingitthe most defect-ridden vehicle in its class. The German manufacturer hadto spend vative small car called A-class, because it lost about $180 million in 1997 to retrofit an inno 7 balance when turning around corners at high speeds. The company formed a partnership agreementin 1997 with Swatch to develop atwo-seater, plastic-bodiedcity carcalled Smart. aw— 308 Corporate Restructuring: Merger, Acquisition and Other Forms Butthe co-venture dissolved in acrimony. Meanwhile, larger manufacturers like Toyota ang Volkswagen, were building competitively priced premium cars such as Lexus and Audi. On the positive side, Schrempp had restructured Daimler’s non-auto businesses, adopted ug GAAP accounting principles and listed Daimler on the New York Stock Exchange, This would greatly facilitate any transatlantic deal. The ground realities they faced, motivated Daimler and Chrysler to get back to the negotiatingtable. In January 1997, Schrempp metEaton at Chryslerheadquarters during the Detroit Auto Show. But doubts about the deal again arose when Ford chairman Alex Trotman approached Schrempp in Detroit in January 1998 for a joint venture. Top executives from Ford and Daimler held two days of discussions in London in March. Daimler had never viewed Ford asa possible partner since it was big enough to survive onits own. The London meeting was successful. However, a second meeting, was cancelled at the last minute after Trotman informed Schrempp that the Ford family did not want to lose management control, After the talks with Ford broke down, the negotiations between Daimler and Chrysler proceeded smoothly. On March 2, 1998, Eatonand Schrempp metin Lausanne, Switzerland, to discuss issues like governance and organization structure for the merged entity. In April, working teams went into details and reached agreements on big issues (Computer operations would be centralized the Chrysler way, with a Chrysler executive in charge) to small issues (Business cards would be wider and longer, European style). On May 6, Daimler and Chrysler signed the merger agreement which was announced worldwide the following day. On May 14, the Daimler supervisory board agreed to the merger. In July, the European and American Competition authorities gave their nod. On September 18, Chrysler and Daimler shareholders approved the merger. Chrysler stockholders received 0.547 share of DCX for each share they held. Daimler shareholders held a 57 % stake in the new company. DCX had revenues of $155.3 billion in 1998, and unit sales of 4 million cars and trucks, with a presence across several market segments. Chrysler made moderately priced cars andlight trucks; Daimler made Mercedes luxury cars and heavy trucks. Chrysler was strong in North America, but weak in Western Europe, where Daimler was strong. Chrysler's strengths lay in product development; while Daimler's engineering and technological Capabilities were well established. The merger was projected to generate synergies of nearly $1.5 billion in 1999 and around $3.0 billion in 2000. Much of the cost-savings would come through rationalisation of pu chasing and technology sharing activities. Integration Once the deal was finalized, Schrempp named a management team for the new company. Schrempp would share the title of co-chairman with Eaton for three years (2001) or until Eaton retired. However, management control of DCX seemed to be in the hands of former Daimler executives. The new organization structure for worldwide marketing operations, aimed to generate sales growth while protecting the identity of the company’ssix brands in the passenger car business (A class, M class, CLK convertible, Chrysler t- ee oss e Interpret and Eagle Vision), and four brands in the commercial vehicle Benz, Freightliner, Sterling and Setra). The individual brands were | managed by specific brand managers. In Europe and North America, the two companies decided to maintain separate showrooms. In markets where DCX had a weak presence, guchas Asia, theydecidedto integrate the distribution channels and cut costs by combining different functions like logistics, warehousing, technical training and after sales service. James and marketing for the Zetsche, a highly regar management of Mercedes-Be! managementof the commercial Setra (buses), aS wellas sales of Freightlit corde, Doda | pusiness (Mercedes- Holden, asenior Chrysler executive became responsible forbrandmanagement Chrysler, Dodge, Plymouth and Jeep brands worldwide. Dieter ‘ded Daimler manager was made in charge of the global brand nz and Smart cars. Kurt Lauk became head of global brand I vehicle brands — Mercedes-Benz, Freightliner, Sterling and iner and Sterling products. Theodor Cunningham wasasked to co-ordinate the worldwide integration of common systems andprocesses. The geographic region responsibilities were divided among Holden (North America), Zetsche (Europe, Asia, Africa, Australia) and Cunningham (Latin America). DCX also announced plans toestablish aMarketing Integration Council, consisting of Cunnimgham, Holden, Lauk andZetsche. The Council became responsible forestablishing central marketing services, irst class and stay a lengthy reports ande) \d liked to keep their meetings sho! and setting volume and profit targets. In the pre-merger phase, Daimler had assumed that the cross border nature of the transaction would not create any special problems. Daimlerfelt agreeingon the broad terms of the merger was more important and attached greater importance to efficiency and planning. However, during differences became the most critical issue. Daimler was characterize king while Chrysler encouraged . A ili id resilience. Having almost gone creativity and represented American adaptability an Ei cell ; bankrupt before its celebrated 1979 bailout, ithad turned around under . ee " then Eaton, to become ol ‘ost efficient car companies in the world. Daim! ‘a meanwhile. ‘had long represented the epitome ofGerman industrial might andwas one ofthe 5 n quality and engineering. There were major disparities in pay best examples of Germs “ ‘es Daimlerhad avery egalitarian pay structure. structures between the a handsomely. Eaton, ea meda total compensation of $10.9 Inthe US, CEOS were Lita what ‘Schrempp did. Situationssuch asan American milion in 1997, significa atl reporting toaGerman manager whowas earninghalf his manager being Poste ms the other hand, Chrysler could cut pay only at the risk of losing salary became tick bs oempP mootedthe idea of overcoming the problem through a low itstalentedmanag ‘rformance-based bonus. Basic pay would be lower than what basic salaly antl to, with more variables such aS stock options. Germans wi yerexecutives were usedtohigher pay, the Germansseemedto relish their while ee travel fit top class hotels over the weekends. The perks- They ‘iso used 10 tended discussions. But, the Americans See aiittle paperwork an rt. The Americans favoured perio!Corporate Restructuring. Merger, Acquisition and Other fe 390 7 ————_—— 7 it tion, whereas the Germans laid Painstakin \ fast-paced Sean eaiedealicin general, the Germans perceived the Ametege® | a ae inne Americans feltthe Germans were stubborn. DCX tog Heat ctbethioe the cultural dissimilarities. Germans were encouraged tot ¢ initiatives tnatrees classes on cultural awareness. Americans were asked to Make Toe dressandalsoa hd the Germans were urged to experiment more freely. The meta a lesley by their German counterpart's skill in English. To reciprocate, many Americans began taking lessons in German. Problem begins it initiatives to bridge the cultural differences, Problems in implementin raat bev 7 be noted irom the Middle of 1999. In September 1999, Thoma sua rm the president of the US operations, who had Playedanimportant role inChryster's un the early 1990s, resigned. Stallkamp had apparently argued that the merger must go ahead slowly. Many Chrysler executives were upset by Stallkamp’ 'S resignation ag he was considered to be the only senior executive Prepared to stick his neck out to Protect the Americans’ turf from the Germans. With Eaton expected to leave by early 2000, the ‘i 5° 1999, DCX announced that Sales had risen 12% driven by strong demand for eaten Benz's S-Class luxury cars and Chrysler's Jeep Cherokee. Vehicle sales in sa ently America and Europe were Strong. Schrempp expressed Satisfaction that the merg: ‘ i i Korea. Of Japan. In June, it spent $428 million to acquire a 10% stake in Hyundai of South Towards the middle Of 2000, the Opinion that the integration Process had though slightly defensive about the pro: judged on the basis of the stock which | markets were increasingly coming See tun into problems. Schrempp remained op! oe ic spects for the merger, “At present, the Feecabk appreciate is not where it should be. But thaeee 391 thepoint. The pointis, we a solid company... We are nowinone ci J t ompany. It's working well. »Meanwhile, DCX faced some serious problems in the key North American iy Competition from Japanese and European manufacturers had resulted in shrinking margins for Chrysler's mini-vans and sports utility vehicles. Chrysler had miscalculated the demand fortheiraging mini-vans. When itintroduced its new model, its price was perceived to be too high in relation to the old vans which had flooded the market. So, Chrysler had to offer big incentives forvehicles soldin 2000. During the second half of 2000, Chrysler lost $1.8 billion. Inhindsight, Chrysler's fundamentals had probably been much weaker at the time of the merger, than widely perceived. As 2000 progressed, it became evident that Schrempp's decision to allow Daimler and Chrysler to operate separately, had put paid to any plans to generate synergies. As the Economist put it: “When they merged, Daimler-Benz and Chrysler said that together they would create tremendous synergies. That these have not materialised is partly because of the decision to keep the European and American operations, Mercedes-Benz and Chrysler, working separately, after full integration plans became bogged down. The German side is acting asf itis still alone, partly for fear of sullying the imperious Mercedes brand with the rugged Chrysler image. At one level, arm's length operations might have made sense. But insiders say this strategy has been taken to extremes.” According to an expert quoted in Business Week: ‘They're erring bed much onthe side ofcaution... Ifthey continue to operate as separate companies, theywon’ 'tachieve the same kind of global reach as Ford, which shares some parts among its upscale brands with the lower-cost Ford brand”. Business Week, would later remark, “Both the Germans and the ‘Americans have been out of synch(ronisation) from the start. The {wo proud management teams resisted working together, were wary of change and weren't willing to compromise. (i i ing beyond some administrative departments, Daimler and Chrysler nee auceeereaer Seeuithvedwanlod their buyers might feel such as finance and public Sa ‘American auto maker, Chrysler resentedthe implication cheated they shared parts witht! Fs late 2000, DCX's market capitalisation was less than that its technology was inferior. TY any Chrysler executives had let the company, that of Daimler-Benz befor® Oger was progressing while some had been fired. The Gissatisfied with the way ee the upper hand with Schrempp even admitting that the Germans seemed to be a a sales pitch to make the deal palatable to the Americans. So, marriage of equals was oe hen Schrempp announced plansto scrap the automotive and itdid notcome as@ SO EE nies had set up after the merger and replace them bya tightly sales councils the two co consisting only of Germans. This committee was empowered to knit executive committe sions and co-ordinate production and marketing activities across make all key st" 2 Schrempp hoped the move would speed up decision-making on many the group's divi haring of technology among Chrysler, Daimler, Mitsubishi and Hyundai. issues including Iso fired Jim Holden and replaced him with Dieter Zetsche as CEO of the sohremPP fe Costcutting initiatives were renewed and suppliers asked to reduce prices Chrysler tel: Quality improvements, particularly for trucks were introduced at a by 5% !Corporate Restructuring: Merger, Acquts 392 programes were rationalised and co-ordinated efforts inti. emphasise that Chrysler's cars were “cool”. Zetsche also started atternpts to strana,” relationswith the dealers. Initiatives to share platforms andparts amongChrysler, Mere Hyundaiand ‘Mitsubishi gatheredmomentum. Daimler however, understood that the Americar, stillhad an important role to play in managing the US operations. Partly by design argent bycircumstances, aGerman—American Managementteam began to evolve. Key merbe., ofthe management team, ‘Schrempp, Zetsche and Wolfgang Bernhard were Germangt« Controller), Gary C Valade (Global procure : ‘Americans like James Donlon (Corporate / ; and supply chief), Thomas Sidlic (Procurement and supply chief of Chrysler) and Richarg Schaum (Head of Product Development and Quality) were also given important toes Zetsche himself: ‘admitted theneed forinsights fromthe Americansin the efforts totum aroung Chrysler: “I would be the first to say that I'm not smarter than the people who are here” ‘As Business Weekreported, “Forallthe talkaboutthe Germans invading the executive ranks of Chrysler, Schrempp has sent only a pair of workout guys to handle the biggest workout in the automotive world. Forthe rest of the team, he is relying on Chrysler veterans who have been plucked from relative obscurity following a rash of high-ranking defections The presence of SO many Americans points to something else: a tacit acknowledgement oy the Germans that they have a lot to learn about the workings of a mass-market giant like Chrysler.” Future Outlook The German-Americai profits per vehicle than other major car manufacturers. In declined sharply by 90% to $500 million on a sales turnover of $64.2 billion. In 2001, expected to lose at least $2 billion. Chrysler's US market share has been shrinking (13.5% in September 2001, from 16.2% in 1998) and is in danger of losing the No. 3 position inthe US to Toyota. In August, 2001, Chrysler spentan average of $2,389 per vehicle in customer incentives, more than that of GMor Ford. Zetsche’s plans to move towards an everyday low pricing strategy have not materialised. Following the September 11 attack on the WTC frst GM and then Ford started offering free financing on their cars. Chrysler had to follow suit. On February 26, 2001, DCX announcedit would make a loss in the range of Euro 22-2 6 billion. Schrempp however, remained optimistic that by2003, the company would be making profits in the range Euro 8.5 —9.5 billion. On October 31, 2001, Standard Poor downgraded DCX'screditrating, makingitthe weakest among the Bigthree. The DCX shareatterpeaking at$108 in January 1999 traded atabout$35.as on October 31,2001. Inthe first three quate’ 02001, Chryslerlost an estimated $1.7 billion. But the strong performance ofthe Mercedes” Benz luxury carbusiness is expected to generate the targeted operating profitof during the year. Meanwhile, DCX’s supervisory board has passed a vote of confidet leadership by extending his contract by two years and that of his, close all who heads the Mercedes-Benz car division also by two years. Schrempp fey, furious pace. Marketing n team faced stiff challenges in 1998; Chrysler had made more 2000, Chrysler's operating profit itis nce in SehrempP's ly, Jurgen Hubbett remains confidentstudies a— epic 393 thatthe implementation of the merger, though incomplete will proceed smoothly. The choice ofa German like Zetsche to manage Chrysler seems to have brightened the prospects for the American partner. Zetsche's good relationship with Stuttgart may result in faster access to German technology for Chrysler cars. The first Chrysler vehicle to use Mercedes rts extensively will be the Crossfire, a two-seat roadster to be launched in 2003. Zotsche has indicated plans to install a wide array of Mercedes parts in Chrysler cars by 2004. Many formidable challenges still remain for DCX. As a recent report in the Economist, has summed up: “Daimler has to integrate two struggling companies and in the process reform itself. The stately product-development process that suffices for a luxury brand has tobe speeded up for the more competitive markets that Mercedes, Chrysler and Mitsubishi now find themselves in. Mr Schrempp is a tough boss who clawed his way up from garage mechanic, fixing lorry engines, to the top rank of German business. Now belatedly, he needs. to get to grips with the nuts and bolts of what is, in effect, a three-way merger.” Problems remain to be addressed in critical areas such as componentsharing. According to Hubbert, “One million Mercedes customers a year are willing to pay a premium for something that is. better than what the competition is delivering. We have to be very careful to make sure they feel that what they're getting for their money is unique.” Indeed, this will be a tricky issue as the premium Mercedes charges is crucial to the well-being of the group. DCX just cannot afford to do anything that will hurt the image of its Mercedes cars. Source:EMCC casestudies, http:/Avww.eurofound.europa.eu/emec/publications/2004/0489en3.pdf References 1. Daimler, Chrysler and the Failed Merger, March 10, 2008 — Business Management Article, http://www.casestudyinc. com/Aricles/daimler-chrysler-merger-case-study him! 2. httpy/www.eurofound.europa.eu/emec/publications/2004/ef0489en3. pat 3. www.casestudyine.com/Articles/daimler-chrysler-merger-case-study him! QUESTIONS FOR DISCUSSION 1. Briefly discuss the developments that led to the merger deal between Daimler and Chrysler. : 2 ail “snd elaborate the benefits of DaimlerChrysler merger. : db d prospects of the merger of Daimler and Chrysler. 3. Discuss the problems ant