Merger of Daimler-Benz and Chrysler

Submitted to
Salauddin Rajib Ph.d.
Assistant Professor
Chairman
Department of Accounting and Information Systems
Jahangirnagar University.

Submitted by
Tarikul Islam
ID:2624
Batch: 3rd
Department of Accounting and Information Systems
Jahangirnagar University

Course: Financial Management 2

Submission Date: 22-05-2016
 Table of Contents
Executive Summary....................................................................................................................................... 3
Reasons for Merger of Equals.................................................................................................................... 5
Process .......................................................................................................................................................... 7
Financial Analysis .......................................................................................................................................... 8
Daimler-Benz 1997:................................................................................................................................... 8
Financial Position .................................................................................................................................. 8
Debt Ratio: ............................................................................................................................................ 8
EPS:........................................................................................................................................................ 9
Earnings Before Interest and Tax: ......................................................................................................... 9
Return on Capital Employed (ROCE): .................................................................................................... 9
Tax Rate:................................................................................................................................................ 9
Stockholders Equity: ............................................................................................................................ 9
Dividend per Share:............................................................................................................................... 9
Cash on hand:........................................................................................................................................ 9
Chrysler 1997: ......................................................................................................................................... 10
Financial position: ............................................................................................................................... 10
Earnings Per Share: ............................................................................................................................. 10
Debt to Equity Ratio: ........................................................................................................................... 11
Turnover Ratio: ................................................................................................................................... 11
Earnings Before Interest and Tax: ....................................................................................................... 11
Tax Rate:.............................................................................................................................................. 11
Stockholders Equity: .......................................................................................................................... 11
Dividend per Share:............................................................................................................................. 11
Cash on hand:...................................................................................................................................... 11
DaimlerChrysler AG 1998: ....................................................................................................................... 12
Financial Position: ............................................................................................................................... 12
Growth rate:........................................................................................................................................ 12
Cost of debt:........................................................................................................................................ 12
Debt Ratio: .......................................................................................................................................... 12
Tax Rate:.............................................................................................................................................. 13
EPS:...................................................................................................................................................... 13
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Earnings Before Interest and Tax: ....................................................................................................... 13

 Stockholders Equity: .......................................................................................................................... 13
Dividend per Share:............................................................................................................................. 13
Comparison ................................................................................................................................................. 14
Debt to Equity Ratio: ............................................................................................................................... 14
EPS:.......................................................................................................................................................... 15
Earnings Before Interest and Tax: ........................................................................................................... 16
Dividend per Share:................................................................................................................................. 16
Tax Rate: ................................................................................................................................................. 17
Failure of Merger ........................................................................................................................................ 17
Mismanagement ......................................................................................................................................... 20
Conclusion ................................................................................................................................................... 22
References .................................................................................................................................................. 23

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 Executive Summary

Chrysler Corporation, which was the most profitable automotive company in the
world in mid 1990s. Light truck, van and large sedan was their highest selling
products. Revenues were higher than ever in their history. Chrysler took risk of
producing cars that reflects American spirit of being bold and pioneering. In an
import dominated market they fought with their products like the Dodge Ram, the
Jeep Grand Cherokee and the LH Sedan Series. American people showed huge
interest in Chryslers vehicles and its market share rose to 23% in 1997. As we all
know about the theory of Economies of Scale with the increase in market share
and revenues their product development cost minimized to only 2.8% of total
revenue, when other competitors like Ford had 6% and General Motors had 8%
product development cost. The reason behind their minimized cost were integrated
design teams and suppliers who had very low possibility of Forward integration.
Specially Chryslers marketing department continue to estimate and fulfill
consumer tastes, which gave them success after success.

Chrysler always considered itself as the bold and risk taker. It recovered itself from
the edge of bankruptcy, not once not twice but four times since the World War 2. It
earned its reputation as comeback kid because of its boom-bust revenue flow.
American governments decided bailouts or large scale research and development
cutbacks. Chrysler was ready to face the situation of volatile American business
cycle as they had $7.5 billion cash and a full collection of best-selling products in
1997.

On the other hand, Daimler Benz 1997 was a very successful year. They had a
wide variety of products Passenger cars: Mercedes-Benz, Smart, Trucks Europe,
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NAFTA and Vans Europe. Commercial Vehicles: Drive Trains Europe, Buses
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Europe, Commercial Vehicles Latin America, Unimog, Civil Aircraft and
Helicopters, defense and Civil systems. Aerospace industry: Aero engines, Military
Aircraft, Satellites, Space System Infrastructure, Financial Services and It services.
Of which Rail Systems, Automotive and Diesel Engines are directly managed by
them.

In 1997 their total revenue rose by 19% (124 billion). Operating profit rose by 79%
(4.3 billion) and net income increased by 15% (3.2 billion) excluding one-time tax
effects.

The outlook is bleaker three years after the merger of equals with Daimler-Benz.
The financial data reflected that Chrysler Group is on the path to hemorrhage $3
billion in the year 2001. Its U.S. market share shrunk to 14%, earnings reduced by
20% and the lost their independence to the Stuttgart based company. Once best-
selling products like the minivan, the Jeep SUV and super charged pickup truck
went under heavy competition from Toyota, Honda, General Motors and Ford.
They continued to produce few passenger cars of note, save the NEON and
Limited-release Viper and Prowler.

Daimler Chrysler CEO Jurgen Schrempp, What happened to the dynamic, can-do
culture I bought?

Eventually This merger came to an end at last at a cost one and half billion dollars.

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 Reasons for Merger of Equals

Auburn Hills, Michigan, company headquarters of Chrysler, on July 17, 1997 the
CEO Bob Eaton walked in and gave the speech of his life. Instead of describing the
rapid growth of last 4 years, he warned the trouble coming in the next years. What
he told adapted from the nonfiction bestseller The Perfect Storm, a tale of three
fishermen caught at the confluence of three potent storms off the Canadian coast,
warned that a triad of similar factors threatened to sink Chrysler in the coming
decade. Eaton said, I think, there may be a perfect storm brewing around the
industry today. I see a cold front, a noreaster and a hurricane converging on us all
at once. The cold front was chronic overcapacity, the noreaster was a retail
revolution that empowered buyers and the hurricane was a wave of environmental
concerns that threatened the very existence of the internal combustion engine.

Read The Perfect Storm, and you will learn, Eaton implored the assembled
executives, that when a seventy-two-foot boat tries to climb a hundred-foot wave
and doesnt make it, it slides back down the face of the wave, out of control and
plunges into the trough, stern first. Sometimes the boat bobs back up. Sometimes it
doesnt. In the book, the lesson was that theres only one way to survive the
perfect storm. Dont go there. Be somewhere else, Eaton said. And dont do it
alone.

Daimler-Benz, meanwhile, was looking for a partner. Its luxury vehicles had
captured less than just 15 of American Market in spite of booming U.S. economy.
It had a labor intensive vehicle production method. It required twice the number of
workers per car than the Toyotas luxury car division Lexus. So the solution is
economy of scale to survive in the capital-intensive market. So they started looking
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for an American company that can help overcome this. Low design costs,
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extensive American dealership network, remarkable efficiency and with an annual
profit of $2.8 billion Chrysler appeared as perfect choice for Daimler Benz.

Eaton the CEO of Chrysler announced on May 7th, 1998 that Chrysler would
merge with Daimler-Benz. They made a $37 billion stock-swap deal, the largest
ever trans-Atlantic merger, Chrysler would not fight upcoming challenges any
longer. Daimler-Benz CEO Jurgen Schrempp hailed the union as a merger of
equals, a merger of growth and a merger of unprecedented strength. The new
company would have a work force of 442000 employees and market
capitalizations around $100 billion. They would take advantage of synergy saving
in sales, design, research and development, purchasing and distribution. Eaton
inaugurated the trading of the new stock at New York Stock Exchange, DCX, he
predicted, Within five years, well be among the Big Three automotive companies
in the world.

Three years later DaimlerChryslers market capitalization was $44 billion, which
was roughly equal to the value of Daimler-Benz before the merger. Its stock has
been banished from S&P 500 and Chrysler Groups share value reduced to one
third relative to pre-merger values. Mercedes-Benz and Smart Car Division
disclosed operating profit of EURO 830 million in 3rd quarter 2000. On the other
hand, Chrysler Group has lost money at an alarming rate. In the same time, it lost
$512 million.
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 Process

Both companies called Special Meeting for voting approval necessary to

merge
Both companies former stockholders became stockholders of a company
incorporated in Germany
Both meeting was successful & approved by stockholders and management
bodies
After merger transaction, former Daimler-Benzs & Chrysler corporations
stockholders owned respectively 58% & 42% of DaimlerChrysler AGs
ordinary shares.

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 Financial Analysis

Daimler-Benz 1997:

Financial Position

Particulars Amount

Capital stock DM 2584 million

Accrued Liabilities DM 36.4 billion

Financial liabilities DM 39.3 billion

Additional Paid-in Capital DM 5247 million

Fixed Asset DM 41 billion

Operating Profit DM 4.3 billion

Capital Expenditure DM 6.9 billion

Cash Flow from operating activities DM 11.2 billion

Retained Earnings DM 26508 million

Liquid Fund DM 212 billion

Debt Ratio:
Debt Equity Ratio was 63:37.
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EPS:
Basic Earnings Per Share (EPS) 15.59.

Earnings Before Interest and Tax:

Earnings Before Interest Tax or EBIT was 3631 million.

Return on Capital Employed (ROCE):

Return on Capital Employed or ROCE 10.2 %.

Tax Rate:
Tax rate 30%.

Stockholders Equity:
Stockholders Equity was 31.4 billion.

Dividend per Share:

Dividend per Share was 0.32 and were distributed as 1.6 per 5 shares.

Cash on hand:
Cash and cash equivalent were 5833 million.

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Chrysler 1997:

Financial position:

Particulars Amount

Capital stock 4679 million

Accrued Liabilities 42797 million

Financial liabilities 15322 billion

Fixed Asset 12595 million

Net Profit 2025 million

Revenues 53195 million

Retained Earnings 6280 million

Liquid Fund 8125 million

Earnings Per Share:

Earnings per share or EPS was 4.15

EPS =

$2.805 billion
=
67590360

= $4.15
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Debt to Equity Ratio:
Debt to Equity ratio was 67:33

Turnover Ratio:
Turnover Ratio was 1.0121:1

Sales
Turnover Ratio =
Total asset

61147
=
60418

=1.0121:1

Earnings Before Interest and Tax:

Earnings Before income tax or EBIT was 5563 million.

Tax Rate:
Tax rate 38%.

Stockholders Equity:
Stockholders Equity was 757 million.

Dividend per Share:

Dividend per Share was $1.

Cash on hand:
Cash and cash equivalent were 7848 million.

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DaimlerChrysler AG 1998:

Financial Position:

Particulars Amount

Capital stock 3005 million

Accrued Liabilities 40634 million

Financial liabilities 47440 million

Additional Paid-in Capital 8535 million

Fixed Asset 58208 million

Operating Profit 10082 million

Capital Expenditure 9569 million

Cash Flow from operating activities 1960 million

Liquid Fund 22380 million

Growth rate:
Growth rate was 2.9%.

Cost of debt:
Cost of debt was 30%

Debt Ratio:
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Debt ratio was 69:31.

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Tax Rate:
Tax rate was 45%.

EPS:
Basic Earnings Per Share (EPS) 5.75.

Earnings Before Interest and Tax:

Earnings Before Interest Tax or EBIT was 9567 million.

Stockholders Equity:
Stockholders Equity was 35629 million.

Dividend per Share:

Dividend per Share was 2.75

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 Comparison
Debt to Equity Ratio:

Chrysler 1997

Debt
33%

Equity
67%

Equity Debt

Figure: Debt to Equity Ratio Chrysler 1997

Daimler-Benz 1997

debt
37%

Equity
63%

Equity debt
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Figure: Debt to Equity Ratio Daimler 1997

 DaimlerChrysler AG 1998

Debt
30%

Equity
70%

Equity Debt

Figure: Debt to Equity Ratio DaimlerChrysler AG 1998

EPS:

EPS
18
15.59
16

14

12

10

8
5.75
6
4.15
4

0
Daimler 97 Chrysler 97 DaimlerChrysler AG
EPS
15

Figure: EPS in $
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Earnings Before Interest and Tax:

EBIT
12000

10000 9567

8000

6000 5563

4000 3631

2000

0
Daimler 97 Chrysler 97 DaimlerChrysler AG

EBIT

Figure: EBIT in Million

Dividend per Share:

DPS
3
2.75

2.5

1.5

1
1

0.5 0.32

0
Daimler 97 Chrysler 97 DaimlerChrysler AG

DPS
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Figure: DPS in $
Tax Rate:

Tax Rate
50%
45%
45%
40% 38%

35%
30%
30%
25%
20%
15%
10%
5%
0%
Daimler 97 Chrysler 97 DaimlerChrysler AG

Tax Rate

Figure: Tax rate

Failure of Merger

There was a remarkable meeting of the minds at the senior management level.
They look like us, they talk like us, they are focused on the same things and their
command of English is impeccable. There was no culture clash there.

After the merger DaimlerChryslers integration team spent millions of dollars on

cultural sensitivity. In these workshops topics like Sexual Harassment in the
American Workplace and German Dining Etiquette, the larger rifts in business
practice and management sentiment remain unchanged.

James Holden, Chrysler president from September 1999 to November 2000,

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described what he saw as the marrying up, marrying down phenomenon.

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Mercedes was considered as the fancy and special brand. Chrysler on the other
hand wee the poorer and blue collar automotive company with cars like Chrysler,
Dodge, Plymouth and Jeep. This caused an undercurrent of tension. In addition to
this, American workers earned appreciably more than German workers, often four
times higher.

Some Daimler Benz executives publicly declared that they, would never drive a
Chrysler which just fumed the fire of dislike and distrust. Mercedes-Benz division
chief Jurgen Hubbert said to Suddeutsche Zeitung, My mother drove a Plymouth
and it barely lasted two and a half years.

Irate Chrysler managers responded to the comment with jabs of their own. Bob
Lutz, vice-chairman told the Detroit Free Press that The Jeep Grand Cherokee
earned much higher consumer satisfaction ratings than the Mercedes M-Class

With so much attacking words flying around public news channels, it is clear
cultural clash has consumed the anticipated synergy savings. The clash has been on
a union between two companies having different wage structures, corporate
hierarchies and values. The core problem was Chrysler and Daimler-Benz were
founded under diametrically opposite premises. Chrysler had an American excess
and brand value of assertiveness and risk-taking cowboy aura and all of these
under a cost controlled environment. Mercedes-benz with German engineering
discipline and uncompromising quality. If these two brands ever share platform or
features they would have lost their intrinsic values. So the clash existed between
products as well as employees.

Distribution and sales remained separated. Mercedes-Benz dealers proved averse

to include Chrysler vehicles in the retail shops. The logic is simple, to protect the
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image of uncompromising quality of Mercedes-Benz. This affected Chrysler

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Groups market in Europe. Its market shares in Europe remained 2%. Potentially
profitable like Dodge Neon and the Jeep Grand Cherokee remained side lined to
give chance to Mercedes A-Class compact and M-Class SUV, respectively.

The A-class with 95 horse power and 12-foot-long compact with a retail price of
approximately $20000. Other European competitors like Opel, Volkswagen,
Renault and Fiat had a price range of $9000-$16000. Consumers were ready to pay
extra money for Mercedes engineering and safety. They faced real problem when
it failed an emergency test conducted by a Swedish TV station in 1999. A-Class
was both overpriced and under-engineered compared to its competitors in
European compact market. The Dodge Neon had a price of only $13000, similar
mechanical specifications and a record of reliability, could have been a perfect
competitor. Brand bias we can say is the reason which prevented this from
becoming reality.

Joint purchasing and manufacturing efforts were hampered due to different product
development philosophies. Daimler-Benz remained stick to its founding credo of
quality at any cost and Chrysler remained price friendly products. Supply-
procurement tactics and factory staff requirements is fundamentally disconnected
by this. While visiting Jeep factory in Graz, Austria, Hubbert said, If we are to
produce the M-Class here as well, we will need to create a separate quality control
section and double the number of line workers. It simply cant be built to the same
specifications as a jeep. However, was eventually built in Graz without following
Hubberts manufacturing standards.
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 Mismanagement

In autumn 2000, DaimlerChrysler CEO Jurgen Schrempp told German financial

daily Handelsblatt Let it be known to the world, I had always intended Chrysler
Group to be a mere subsidiary of DaimlerChrysler. The Merger of Equals
statement was necessary in order to earn the support of Chryslers workers and
American public, but it was never reality. The next day The Financial Times
relayed the news to the English speaking world.

To make sure of the news from the day one Daimler-Benz was the majority
shareholder of the united company. So the Supervisory Board was dominated by
Daimler-Benz. The name DaimlerChrysler and Parallel management structures
under co-CEOs at two different headquarters lent credence to the merger of
equals notion.

It is clear that Jurgen Schrempp and Bob Eaton never coordinated to determine the
fate of Chrysler. From the year 1998 to 2001 Chrysler was neither Taken over nor
got equal status. It was like hanging into the no mans land. The managers behind
developing Chryslers Cowboy bravado were either suspended or gone to
retirement. Those who still remained were felt ineffective, feeling of withdrawn
and eclipsed by Daimler staffs. Others decided to go for General Motors and Ford
for a better secured future. The German pressure faded American dynamism. But
Germans had little strength to impose its own managers. Daimler-Benz expressed,
Eaton went weeks without speaking with Jurgen. He preferred to maintain lower
level contact. Jurgen, meanwhile, was afraid of being labeled a takeover artist. He
left Chrysler alone for too long.

So, why he did that? A well-placed Executive told, Jurgen Schrempp looked at
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Chryslers past success and told himself there is no point in trying to smash these
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two companies together. Some staff was pulled together but they said operationally
lets let the Chrysler guys continue to run it because they have done a great job in
the past. What they didnt take into account was that immediately prior to the
consummation of the merger or shortly thereafter, enough of the key members of
the former Chrysler management team left. They saw the forest but they didnt
realize that removing four or five key trees was going to radically change the eco
system in the forest. It was a misjudgment.

The Chrysler was waiting for Daimler to take step. The step came too late.
Actually 11 months after the retirement of Eaton. Schrempp set a German
management team on November 17, 2000. But it was too late for Chrysler. It lost
huge amount of cash in between.

Co-CEO Bob Eaton was seemed detached, withdrawn and was not passionate
about Chrysler. Schrempp encouraged him to act like a co-chairman and step to
the podium. Two of their key vice-presidents, engineer Chris Theodore and
manufacturing specialist Shamel Rushwin left and joined their competitor Ford.
President Peter Stallkamp. Eaton had really checked-out about a year before he
left. The managers feared for their careers, and in the absence of assurance, they
assumed the worst. There were a good eighteen months when we were being
hollowed out from the core by the Germans inaction and our own paralysis.

During 1998 to 2000 Chrysler was challenged by Honda, Toyota, GM, Ford and
Nissan. Honda Odyssey to Dodge Caravan, Toyota Tundra to Dodge ram and
SUVs of Ford, Nissan, GM and Toyota to Jeep was almost replaced. In response
Chrysler had only little innovation and price advantage which only started in the
second quarter of 2001. Challenged by rivals in their most popular products like
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SUV and Light truck, it couldnt respond well enough. The market never waited
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for Chrysler to respond, it worked on its own way, ultimately throwing Chrysler
out of market.

Conclusion
The merger was intended to bring synergy savings, which is only possible when
both companies produce and distribute products more efficiently than before.
Cultural clash and poor management structure which is also very poorly integrated
made the bright future into a catastrophe. Ultimately the merger were broken in
2002 costing billions of dollars.

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 References

Waller, David. Wheels on Fire: The Amazing Inside Story of the DaimlerChrysler Merger.
London: Hodder & Stoughton, 2001, p.108.
Vlasic, Bill and Bradley Stertz. Taken for a Ride: How Daimler-Benz Drove off with Chrysler.
New York: Harper Collins,
2001, p. 92.
"Kerkorian accuses Chrysler of cash hoarding" The Detroit News. Detroit, (4/12/97), Business
Section, p. 3.
"DaimlerChrysler AG" Standard & Poors Stock Reports. New York: Standard & Poors, Inc., July
21, 2001.
"Schrempps Fehler" Sueddeutsche Zeitung. Munich, Germany, (12/07/01), page 6.
"Vlasic, Bill and Bradley Stertz" Taken for a Ride: How Daimler-Benz Drove off with Chrysler.
New York: Harper Collins,
2001, p. 174.
Ibid, p. 175.
"Daimler-Benz AG" Standard & Poors Stock Reports. New York: Standard & Poors, Inc., July
21, 1997.
CNN Financial News Broadcast: February 2, 1999. Transcript available at:
http://cnnfn.cnn.com/1999/02/01/europe/daimler/.
Grsslin, Jrgen. Jrgen Schrempp and the Making of an Auto Dynasty. New York: McGraw-
Hill, 2000, p. 155.
"Daimler-Chrysler Merger Takes Shape," Detroit Free Press. Detroit (5/8/1998), p. 3.
"DaimlerChrysler AG" Standard & Poors Stock Reports. New York: Standard & Poors, Inc., July
21, 2001.
"Chrysler Head Ousted in Shakeup," Milwaukee Journal Sentinel. Milwaukee (11/17/00),
Business, p. 1.
Interview with Robert Lutz, Former Vice-Chairman, Chrysler, and Exec VP, GM, and current
President of the North American Division, Ford, February 23, 2001.
Grsslin, Jrgen. Jrgen Schrempp and the Making of an Auto Dynasty. New York: McGraw-
Hill, 2000, p. 162.
Oldag, Andreas. "Spiel mit dem Feuer," Sueddeutsche Zeitung. Munich (3/17/2001), p. 12.
"DaimlerChrysler Execs Trade Barbs," Detroit Free Press. Detroit (3/19/2001), p. 5.
"Charges of $3.9B to Fix Chrysler's Woes". CNN Europe. London, (2/26/01). See article at:
http://europe.cnn.com/2001/BUSINESS/02/26/daimlerchrysler/
"Vlasic, Bill and Bradley Stertz" Taken for a Ride: How Daimler-Benz Drove off with Chrysler.
New York: Harper Collins, 2001, p. 300.
Grsslin, Jrgen. Jrgen Schrempp and the Making of an Auto Dynasty. New York: McGraw-
Hill, 2000, p. 217.
"DaimlerChrysler will seine Autos gnstiger verkaufen," Handelsblatt. Frankfurt, Germany,
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(10/30/00), p. 3.
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 Interview with Robert Lutz, Former Vice-Chairman, Chrysler, and Exec VP, GM, and current
President of the North American Division, Ford, February 23, 2001.
"Two U.S. Executives Leave DaimlerChrysler," USA Today. (3/1/1999). Money Section, p.2.
CNBC Financial News. Television Interview. January 9, 2001.

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