Daimler-Chrysler case

Answer to question 1:
The merger of Daimler-Benz and Chrysler surprised the business world back in 1998 when they
announced their merger of equals made in heaven. This major cross-border transaction, with an
equity value of $36 billion, was the largest merger of its kind to date. Some of the motivations
and justifications behind the deal were obvious, which included: diversification of product
offerings, expansion of global market presence, operational cost synergies, diversification of risk,
economies of scale (EOS), technology sharing, global sales network, global manufacturing
capacity, turning competition into cooperation, advanced managerial technique, disciplined
corporate governance, less likelihood of takeover target, shares swap and favorable tax structure,
management incentives, strengthened cash position.
I would rank order these justifications in terms of their contribution to the corporate advantage of
the combined company as: 1. Expansion of global market presence; 2. EOS; 3. Operational cost
synergies; 4. Diversification of product offerings; 5. Diversification of risk; 6. Turning
competition into cooperation; 7. Global sales network; 8. Global manufacturing capacity; 9.
Disciplined corporate governance; 10. Management incentives; 11. Strengthened cash position;
12. Technology sharing; 13. Less likelihood of takeover target; 14. Advanced managerial
technique; 15. Shares swap and favorable tax structure.
In the Daimler-Chrysler merger, expansion of global market presence was the most important
justification. The combined company was theoretically provided with access to more customers.
This was true if the individual companies had been demonstrably successful in separate markets.
Before the merger, Chrysler and Daimler-Benz were essentially regional producers: Chrysler
with the third-largest market share in North America (Exhibit 1), Daimler-Benz controlling the
luxury market in Europe (Exhibit 2). Consequently, the Daimler-Chrysler merger allowed the
combined company to access markets in both Europe and North America. The merger also
allowed the combined company to target broader and more responsive buyers since the business
partner already had a foothold in the market and thus minimized the risks. EOS were another
important justification here especially in R&D and procurement, which were very prominent
features of auto manufacturing. EOS were facilitated by the platform concept, in which a
common chassis and major components were shared across brands and models. As the life cycles
of cars shortened, the car manufacturers looked to the platform approach to reduce R&D costs
per car. Meanwhile, car manufacturers were also planning to use B2B portals on the Internet as a
procurement tool in order to reduce their supplier costs and increase response speed. On contrary,
the benefits realized through shares swap versus cash deal and favorable tax structure were
transient. Sometimes it could conceal the potential risks around the financial position of the
combined company. Another justification that contributed least of corporate advantage was the
advanced managerial technique, which was undermined by the cultural mismatches between the
senior management teams from each side of the combined company. The cultural differences
could be so drastic that the time and expense of merging surpassed any possible financial
benefits. Besides, advanced and coherent managerial technique was least important because the
success of the merged company was often heavily attributable to straightforwardness and
honesty among all levels of employees in the organization.

Answer to question 2:
Distribution: The post-merger distribution was expected to dramatically reduce costs and realize
the economies of scale. Mercedes-Benz had a huge global sales network, covering North
America, South America, Asia and Africa, in addition to its 63% of sales from its European
dealers. Executives from the combined company expected to leverage this strong network to
streamline the selling costs. Besides, this would also create a simplified distribution channel and
brand specialization. Daimler's distribution network would boost Chrysler's expansion in Europe,
while in the U.S., Chrysler would provide logistical and service support for Mercedes-Benz.
However, the fact was three executives were running Chrysler vehicles, Mercedes-Benz brand
and distribution of Chrysler car and trucks in international markets in a wholly separate way. The
complementary resources and capabilities on both sides did not arrive at the economies of scale
and scope. In the first quarter of 2000, just about 2 years after the merger, operating profit
decreased by 3%.
Marketing: Initially, the market reaction to and the executives expectation on the merger were
very favorable regarding the complementary products and marketing skills which were critical
sources of value creation in DaimlerChrysler. However, evidence showed that these positive
expectations dissipated very quickly. Marketing survey revealed that the Mercedes-Benz brand
image significantly surpassed Chryslers in service, comfort, safety, prestige, and technology.
Daimler-Benz executives were very concerned about brand dilution. Therefore, they decided to
sacrifice the synergies to protect the most valuable assets by issuing an internal guideline which
stipulated the clear separation of both brands. Consequently, Chrysler did not have a suitable car
that could be marketed in European or developing markets.
Production: At the beginning, executives suggested building the M-class SUV in Chryslers
Austrian plant to supply the capacity expansion in Europe. It was appealing to the extent that the
economies of scale and scope could be achieved due to the potential commonalities between the
M-class and the Grand Cherokee as well as the cost advantage compared to an additional line in
the Alabama plant. However, there was very little overlap between the product lines of the two
companies. Chrysler was selling SUVs, minivans and trucks. In contrast, Mercedes was selling
luxury sedans and sports cars. On one hand, the two companies were complementary and the
combined DaimlerChrysler would be able to offer cars to the full spectrum of buyers. On the
other hand, the lack of overlap also indicated there werent any easy cost savings to be found by
eliminating duplication. Moreover, the separatist attitude mentioned above in Marketing carried
over into manufacturing. The strong self-protection of their own brands made the joint platforms
impossible and economies of scale and scope exceptionally hard to achieve.
R&D: During the 1990s, new product development emerged as the critical organizational
capability differentiating car manufacturers. Designing, developing and manufacturing new
automobile was a hugely complex process involving every function of the firm and close
collaboration among senior management teams. DaimlerChrysler executives expected the merger
as a means of achieving improved functional integration and accelerated product development
cycles. They also emphasized the importance of knowledge sharing across company boundaries.
However, as time went on, knowledge islands developed within DaimlerChrysler, which lacked
connection to other parts of the company. For example, Chryslers operation and DaimlerBenzs
strategy were served by separate in-house consulting groups.

Answer to question 3:
Better-off test: The vision of the merger was to explore the viability of a massive joint venture
between Daimler-Benz and Chrysler to sell cars and trucks in Asia, Eastern Europe, and Latin
America. During the deal announcement, Daimler-Benz and Chrysler said that together they
would create tremendous synergies. The plan was for Chrysler to use Daimler parts, components
and even vehicle architecture to sharply reduce the cost to produce future vehicles. But problems
surfaced when the luxury division, Mercedes-Benz, whose components Chrysler would use, was
reluctant to share with its mass-market partner. In the meantime, after a year on a project codenamed "Q-star," the executives found out that neither company had a strong presence in those
developing markets. The problem was that the two companies were trying to combine their
weaknesses but not strengths. The only way such a venture could ever work would be to combine
operations in markets where both were powerful which was not the case at that time. Therefore,
the merger did not improve the value of its business units over and above what they could
achieve on their own which was explicitly reflected in the stock market (Exhibit 3).
Ownership test: Chrysler had problems looming for several years, which was why Robert
Eaton, its chairman, was keen to fold it into Daimler-Benz. But the merger had made things
worse or in fact the companies did not merge: Daimler gobbled up Chrysler and mismanaged it
ever since. The anticipated synergies had not materialized partly because of the decision to keep
the European and American operations, Mercedes-Benz and Chrysler, working separately. The
mission to deliver the merger synergies was not easy. Germans tried to impose their management
and manufacturing style on Chrysler without even thinking about getting benefits from the
exchange of best from every company. Therefore in the end nearly nothing was shared and
economies of scale were barely realized, although the company said it planned to reach the goal
of $1.4 billion in cost savings in 1999. The company executives decided that they were better off
keeping the German and American auto businesses separate. Therefore, the combination of the
two companies did not produce a greater competitive advantage than an alternative arrangement
like alliances.
Organization test: Corporate cultures could limit the feasibility of organizational effectiveness.
Executives frequently discovered this in post-merger integration situations, as was the case at
DaimlerChrysler. The German side was acting as if it was still alone, partly for fear of sullying
the imperious Mercedes brand with the rugged Chrysler image. Differences in culture between
the two organizations were largely responsible for this lack of effectiveness. Operations and
management were not successfully integrated as equals because of the entirely different ways
in which the Germans and Americans operated: while Daimler-Benzs culture stressed a more
formal and structured management style, Chrysler favored a more relaxed and freewheeling
style. As a result of these differences and the German units increasing dominance, performance
and employee satisfaction at Chrysler took a steep downturn. There were large numbers of
departures among key Chrysler executives, while the German unit became increasingly
dissatisfied with the performance of the Chrysler division. Chrysler employees, meanwhile,
became extremely dissatisfied with what they perceived as the source of their divisions
problems: Daimlers attempts to take over the entire organization and impose their culture on the
whole firm. Therefore, DaimlerChrysler was not able to organize the combined cross-border
business in a way that allowed it to maximize value creation of capture from common ownership.

Answer to question 4:
The merger was a sensible move but was poorly managed. The cross-border problems surfaced
throughout the deal negotiations and lasted until the integration began. These problems were
aggravated by a justifiable feeling among those on the American side that this was no merger of
equals, but rather a deal in which Daimler-Benz culture dominated. Besides, Daimler-Benz was
known as a conservative, slow-moving corporation while Chrysler was known for being fast,
flexible, informal, and risk taking. The big difference between cultures meant that operations and
management could not be integrated. As a result the management teams resisted to work together
and were not willing to compromise so that Daimler and Chrysler had not combined any beyond
some administrative departments, such as finance.
To bring a better outcome to this merger, I would like to propose some key changes:
Carefully perform the integration: The whole situation would have been much easier had the
deal been between two German companies. The solution to post-merger integration, for instance,
is to be ruthless over efficiency and planning across the border and functions. When it is time to
merge the operations, processes and cultures of the two companies, they should focus on
revalidating all of the plans that has been developed since the beginning of the deal and it should
be an iterative process. For example, revisiting of the established incentives plans should be
performed immediately and tied to the outcome of the integration completion. The purpose is to
drive the integration deep into the organization and hold everyone responsible for successful
execution. It is very critical to boost the morale of employees from the very beginning.
Commit to one culture: Every organization has its own culture, values and assumptions that
govern how people act and interact every day. The cultural differences do exist and raise a lot of
clashes in terms of communication, management and the shareholder interest. Executives from
the combined company need to manage the culture actively. They should create an organizational
structure and decision-making principles that are consistent with the desired culture. The
company's leaders should take every opportunity to role-model the desired behaviors and
consider carefully the fit with the new culture in making decisions. One-on-one meetings with
the top managers from each function could be a useful way to turn those leaders into corporate
ambassadors who will reinforce the new culture with their teams and peers. Inevitably it will take
time to explain the benefits of the decision-making system to the new colleagues, but in no way
would it work if management just simply mandates it.
Put customer over brand: When DaimlerChrysler was trying to achieve the economies of scope
and scale, they had to face with the reality of brand equities, positioning, and meaning on both
sides of the company. They should always put customers needs first instead of spending too
much time and resources protecting the luxury brand against another brand from the partner.
They should synthesize the two brands into a single cohesive platform that adds value from the
perspective of the customer and also achieves the cost synergy. They should work to find as
many brand commonalities as possible that could be employed to help bring them together and
let customers select which one they like more.

Exhibit 1. Geographic spreads of Chrysler and DaimlerBenz

Exhibit 2. Market segments and product overlap

Exhibit 3. Share price pre and post merger