This essay will be focused on outline and evaluate the motives for Daimler-Benz and Chrysler in their 1998 merger, in the context of the changing world automobile industry. And now, five years after the merger, company’s performance finally this essay finishes with future Recommendations.
This essay will be analyzed DailmerChysler’s plant cost and revenue synergies and learn and joint Development synergies. Under this heading this essay will include benefits from merger, what DailmerChysler did? And analyze whether they achieved or not; analyze of preparation of merger include about their leadership and analyze whether the management was too optimistic and over looked Chrysler’s situation or not. The management decision and culture will be discussed in this essay.
Recommendation will include business deal with Mitsubishi and attracting Asian automobile market. Also this essay will divide the recommendation into short and long term.
1. With the reference to the alternative reasons for merger and acquisitions, outline and evaluate the motives for Daimler-Benz and Chrysler in their 1998 merger, in the context of the changing world automobile industry.
2. Now, five years after the merger, was it a success? Recommend a future strategy for DaimlerChysler.
With the reference to the alternative reasons for merger and acquisitions, outline and evaluate the motives for Daimler-Benz and Chrysler in their 1998 merger, in the context of the changing world automobile industry.
The Company overview
1In May 1998, Germany’s Daimler-Benz AG and USA-based Chrysler Corporation announced the largest industrial merger in history. The result of this merger has been the establishment of the world’s fifth largest carmaker. Today, DaimlerChrysler is one of the world’s leading automotive, transportation and services companies.
Its passenger car brands include Mercedes-Benz, Chrysler, Jeep, Dodge, smart and Maybach. Commercial vehicles areproduced under the Mercedes-Benz, Freightliner, Sterling, Western Star, Setra, Thomas Built Buses, Orion and American LaFrance brands.
DCX, the share short form on the New York Stock Exchange of DaimlerChrysler, offers financial and other services through DaimlerChrysler Services.
With 372,500 employees, DaimlerChrysler achieved revenues of EUR 152.9 billion ($136.1 billion) in 2001.
The political factors are influencing on car industry either direct or indirect way. In both advantage and disadvantage.
* The government is aware of the increases in traffic and have introduced traffic calming measures. The clearest example is that of the London Charging system – such measures are likely to continue.
* Government increase new car and van registration fee tax by 52 % as of January ’04.However, Tax motivations include changes that occur in mergers that reduce tax liabilities.
The automobile sector is highly dependent on the economic environment. Recent years the economic factors pull down all business.
* Some of the economic advantages gained from merger. The merger Operating synergies center around cost reductions or synergies related to Economies of scale or scope, lower distribution or marketing costs, or exclusion of duplicate assets.
* Currency fluctuations impact on manufacturers profitability
* . Daimler Chrysler has a significant occurrence in North America but report in euros and the weaker dollar makes US revenues less valuable. Also it receives 40 per cent of its global revenues from the US but because the Chrysler unit’s cost base in entirely in dollars, the effect of currency fluctuations is less dramatic.
* Share prices in European carmakers fall last week as investors became increasingly concerned about the strength of the euro versus the dollar. European carmakers are losing out to the Japanese in their home market while US auto producers are benefiting from the fall in the dollar.
* A large proportion of consumers are in considerable debt.
* The development of the more environmentally aware consumer; and
* Changing lifestyles – research conducted shows that one in six employees today work for more than 60 hours per week.
* The push for more environmentally friendly cars – vehicles producing less Co2 emissions;
* The importance of technology in vehicle design; and
* The development of internet technologies – approx 40% of UK population are believed to be connected to Internet.
Five forces model
Motivation for merger
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 risk ness 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: Operating synergies, Tax motivations, Mis-pricing motivations, Market-power hypothesis, Disciplinary takeovers, and the earnings-diversification motivation.
The reasons for the Daimler Chrysler merger
The key steps in the merger process included initial discussions on the possibility of the merger, discussions of domination 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, 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.
Daimler-Benz is stronger in luxury and higher-end cars; Chrysler in sport-utility vehicles and minivans; Daimler is stronger in Europe; Chrysler in North America; Daimler’s reputation for engineering complements Chrysler’s reputation for product development; Daimler derives 63% of sales from Europe, while Chrysler depends almost exclusively on North America for 93% of its sales.
The merger was important to Chrysler that any potential transaction maximize value for its stockholders, that it be tax-free to Chrysler’s U.S. stockholders and tax efficient for Daimler Chrysler 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 businesses of Daimler-Benz and Chrysler into one public company.
Now, five years after the merger, was it a success? Recommend a future strategy for DaimlerChysler.
“Our mission is to integrate two great companies to became a world enterprise that by 2001 is the most successful and respective automotive and transport products, and service provider. We will accomplish this by constantly delighting our customer with the quality and innovation of our products and service resulting from the excellence of our process, our people and our unique portfolio of strong brands”
The following factors and static show how they failed to achieve their mission.
* As in most mergers, potential agency problems exist from manager’s decisions on what actions to take in the merger. Some of the potential agency conflicts resulted from the compensation plans in place. As a result, if their employment were terminated within two 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.
* The most contentious issue in the merger related to culture. Different between the German and American culture and how to assimilate them were frequently debated. Particularly the business cultures of the two companies were very different. Inevitably these differences in terms of organisation structure, working styles and costs schemes created tensions after the merger.
* It was the lack of duplication between Daimler-Benz and Chrysler operations and products that strictly limits benefits from the merger today. Still Mercedes air conditioning systems did not get enough cooling capacity to really handle the southwestern US summer heat.
* Chrysler’s troubles come from issues unrelated to the merger, such as the price wars in the United States, where Ford and GM have pumped up sales with costly incentives such as zero percent loans, and an aging model line-up.
* In reality, however, it proved a troubled union tarnishing Mercedes’ reputation, producing huge losses at Chrysler – and destroying shareholder value. The share price took a fall in late 1998: Though the performance of DaimlerChrysler in 1998 exceeded the expectation of market, DCX has under performed the Dow Jones Industrial average by 11% and under performed the MSCI EU index by 3% since the beginning of the year. And just in time for the jubilee, subsidiary Mitsubishi has shocked the markets with a half-year loss that is even more devastating than expected
DailmerChysler’s plant cost and revenue synergies and learn and joint Development synergies
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.
From jointly purchasing commodity parts and components used by both companies. In the last two and a half years, Chrysler has relied on cost savings, including job cuts and supplier squeezing, to reverse losses, which had dragged the whole group into the red. Daimler Chrysler Corporation entered into a joint venture with Metaldyne Corporation to operate Daimler Chrysler’s New Castle (Indiana) machining and forging facility, this employee agreement would have resulted in a reduction to employee costs of $50.2 million.
From benchmarking and mutual learning process. E.G: Mercerdes-Benz engineers built the Chrysler 300M in a German factory using less time and less factory space than Chrysler in its real plants.
What could management have done in terms of Preparation of the merger?
The management was too optimistic and over looked Chrysler’s situation therefore they have faced some disadvantages.
40% of all vehicles sold in America are Asian products (Toyota, Honda, Nissan, etc.), largely because of perceived value. Chrysler has failed to recognize this situation in its marketing strategy and is therefore ignoring the largest market for new cars.
Use Chrysler as a value brand and to expand it in the European car market. Expanding American brand in European car market it harder for management. Because In Europe there are so many car manufactures to compete than any other continent.
Pushed forward several new projects While Daimler-Benz was seriously declined. The demand for was still decline in developing countries because people in developing county can’t afford to buy, but after the merger management increased their products price. Luxury vehicles account for 15% of all vehicles sold, yet Chrysler is not even in the game participating! Not everyone wants or can afford a Mercedes.
What could management have done in terms of handling of culture integration?
The links between the companies of different countries collapsed on serious corporate culture, control, and strategy differences. Also they did not decide what to do with culture; they just decide to compromise it.
The company has several crises on hand, but the worst is the crisis of leadership. Therefore it causes them to change their management team very often.
The co-chairmen, Bob Eaton and Jurgen Schermpp had a very good understanding, despite their different personality. Whereas Schrepp had always been the more active manager with almost no limits. Eaton was much more moderate and willing to take them backseat. He did not play an active role in explaining the merger.
The American did not have assigned aides and formulated their decisions by talking directly to engineers or other specialists. A German decision worked its way through the bureaucracy for final approval by top management. The Americans allowed mid-level employees to proceed on their own initiative, some timework without waiting for executive-level approval. 3
Management decisions and staff changes.
The merger and its related organizational changes created a lot of uncertainty with Chrysler; the result of that it had too many management board members, unstable organization structures.
Replaced staffs have laced experience in production and financial issues. However, Appointment of Dieter Zetsche- as a CEO of Chrysler was given good result in the history of the company
Daimler Chrysler and Mitsubishi announced an alliance to design, develop, produce and distribute passenger cars and light commercial vehicles. Daimler Chrysler acquires a 43 percent holding in Mitsubishi Fuso Truck and Bus Corporation. They will gain the following benefits from this deal.
* This deal should help to strengthen Mitsubishi’s market position in Europe and DailmlerChrydler’s position in Asia.
* Direct access to Asia – one of the world’s fastest growing commercial vehicle markets.
* Considerable potential for synergies through joint development and commonality of parts and major components
Short term: Newly appointed COO of Mitsubishi Motors corporation and manage the turn-around -a ‘Kamikaze command’ Eckrodt had to operate in a very different culture context, his control over was limited due to the 34% stake. If he succeeds in his given job, and program it must lead Daimler Chrysler in productive and positive results.
Firstly, they must win back investors’ confidence and that means realistic forecasts and, in the end, selling more cars with attractive profits. Secondly, integration must continue.
Long term: merger with other companies if possible.
Using the Daimler Chrysler merger as a case study, these essays has focused on outline and evaluate the motives for Daimler-Benz and Chrysler in their 1998 merger, in the context of the changing world automobile industry. And now, five years after the merger, company’s performance finally this essay finishes with future Recommendations.
The initial market reaction to the merger was negative for both firms, the returns since then have been negative and well below market directory. These analyzed were in part one in this essay.
This essay analyzed DailmerChysler’s plant cost and revenue synergies and learn and joint Development synergies. Under this heading this essay include benefits from merger, what DailmerChysler did and amylase whether they achieved or not; the analyze of preparation of merger include about their leadership and analyze whether The management was too optimistic and over looked Chrysler’s situation or not. The management decision and culture were discussed in this essay.
Recommendation includes business deal with Mitsubishi and attracting Asian automobile market. Also this essay was dividing the recommendation into short and long term.
* Johnson, G ; Scholes K, Exploring Corporate Strategy, Prentice Hall, 6th edition with text and case, 2003.
* Hill, C. and G. Jones (1998), Strategic Management: An Integrated Approach, 4th edn, Houghton Mifflin Company, Boston
* Matej Blaï¿½sko, Jeffry M. Netter and Joseph F. Sinkey, Jr. (2000) The DaimlerChrysler merger: short-term gains, long-run wealth destruction?