THE DAIMLERCHRYSLER MERGER:

SHORT-TERM GAINS, LONG-RUN

WEALTH DESTRUCTION?

Matej Blaško, Jeffry M. Netter and Joseph F. Sinkey, Jr.

ABSTRACT
Differences in corporate culture, compensation policies, ownership
structure, and the legal environment pose significant challenges to all
mergers but especially international business combinations. On 6 May
1998 in London, Daimler-Benz of Germany signed a merger agreement
with Chrysler Corporation of the United States. This chapter focuses on
value creation and destruction, and the challenges of an international
transaction. Given the favorable market response to the merger, we review
the potential sources of value creation as well as outline the steps
undertaken to consummate the deal. However, important post-merger
events, such as the Standard & Poor’s decision not to include
DaimlerChrysler in the S&P500 index and the clash of corporate cultures
and compensation schemes, have tarnished the initial luster of the positive
market response and present challenging obstacles to the long-term
success of the transaction. As of this writing, the evidence suggests that
wealth was destroyed rather than created.

Issues in International Corporate Control and Governance, Volume 15, pages 299–329.
Copyright © 2000 by Elsevier Science Inc.
All rights of reproduction in any form reserved.
ISBN: 0-7623-0699-8

299
300 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

1. INTRODUCTION
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 different
markets and 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 benefit of
our 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.
This is much more than a merger; today we are creating the world’s leading automotive
company for the 21st century. We are combining the two most innovative car companies in
the world.
Jürgen Schrempp
Chairman of the Daimler-Benz Management Board.
On May 7, 1998, Daimler-Benz of Germany announced plans to merge with
Chrysler Corporation in the largest international merger in history. Jürgen
Schrempp of Daimler-Benz and Robert Eaton of Chrysler had signed the
combination agreement the day before in London. The combined entity is
called DaimlerChrysler AG and is incorporated under the jurisdiction of the
Federal Republic of Germany. The company’s stock (DCX) trades on all of the
world’s major stock exchanges, including New York, Frankfurt, London and
Tokyo, as well as on the other exchanges in the USA, Germany, Austria,
Canada, France, and Switzerland. In many respects, the DaimlerChrysler
merger is shaping the future of the auto industry and has triggered
consolidation in an industry plagued by overcapacity. Table 1 presents an

Table 1. Industry Overview (1998).

Rumored merger
Largest carmakers Earnings Revenue Car Sales Cash partners

General Motors $2.8 billion $140 billion 7.5 million $16.6 billion Isuzu, Suzuki,
Daewoo
Ford Motor* $6.7 billion $118 billion 6.8 million $23.0 billion Honda, BMW
DaimlerChrysler $6.5 billion $147 billion 4.0 million $25.0 billion Nissan, Fiat
Volkswagen $1.3 billion $75 billion 4.6 million $12.4 billion BMW, Fiat
Toyota Motor Co. $4.0 billion $106 billion 4.5 million $23.0 billion Daihatsu, Hino
Honda Motor Co. $2.4 billion $54 billion 2.3 million $3.0 billion BMW

* In the spring of 1999, Ford Motor acquired Sweden’s Volvo car division for $6.5 billion. Volvo
sold 400,000 cars in 1997. DaimlerChrysler called off merger talks with Nissan. Subsequently,
Renault of France acquired a stake in Nissan. On March 27, 2000, DaimlerChrysler announced
that it will acquire 34% of Mitsubishi Motors.
Source: Naughton (1999) in Business Week, January 25, 1999. Original Business Week sources:
Company reports, Merrill Lynch & Co., Salomon Smith Barney, J.P.Morgan, Wasserstein Perella
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 301

overview of the auto industry, including rumors about mergers that are likely to
follow the largest international merger ever.
This chapter provides an overview of the important elements of the
DaimlerChrysler merger and relates them to the empirical evidence on
mergers.1 Specifically, this study analyzes potential sources of value creation
and destruction, and evidence on how this process has affected the valuation of
the DaimlerChrysler merger. We also discuss some of the important issues that
must be taken into account in cross-border mergers and acquisitions.
Differences in corporate culture, compensation policies, ownership structure,
and the legal environment may pose significant challenges to international
business combinations.
Our findings reveal an initial favorable market response for both companies
to the merger. However, important post-merger events, such as Standard &
Poor’s decision not to include DaimlerChrysler in the S&P500 index and the
clash of corporate cultures and compensation schemes, have tarnished the
initial luster of the positive market response and present challenging obstacles
to the long-term success of the transaction. On balance, as of this writing, the
evidence suggests that wealth was destroyed rather than created.

2. MOTIVATIONS FOR MERGERS

According to Myers (1976), “Mergers are tricky; the benefits and costs of
proposed deals are not always obvious.” 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
riskiness 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:

(1) 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.
(2) Tax motivations include changes that occur in mergers that reduce tax
liabilities. These can include effects from stepping up the basis of the
acquired firms’ assets, amortization of goodwill, tax gains from leverage,
and acquiring tax losses.
(3) Mispricing motivations can occur if bidding firms have information about
target firms that permit them to identify undervalued firms.
302 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

(4) Market-power hypothesis motivations are based on the idea that the
acquiring firms can gain monopoly power in a merger, perhaps by buying
competitors or foreclosing suppliers.
(5) Disciplinary takeovers can create value if acquiring firms recognize
managerial shortcomings in target firms and introduce more efficient
managers.
(6) The earnings-diversification motivation suggests that acquiring firms focus
on diversifying earnings in an attempt to generate higher levels of cash flow
for the same level of total risk. This approach substitutes reductions in
business risk (earnings fluctuations) for greater financial risk (leverage).
Grinblatt and Titman (1998, p. 680) note that diversification can also
reduce the probability of bankruptcy for a given amount of debt and avoid
information problems that arise in using an external capital markets.
For various reasons, mergers also can destroy value. The major theoretical
foundation for such destruction centers on the agency-cost idea that the
interests of managers and shareholders may not be aligned. Thus, managers
may pursue mergers because of motivations other than the ones in the best
interest of shareholders. Examples of motivations for mergers that may destroy
value include mergers resulting from managers’ “hubris” (Roll, 1996),
managerial compensation tied to the size of the firm, and managers’ desire to
make acquisitions in areas where their human capital makes them more
valuable to their own firms.

3. EMPIRICAL EVIDENCE
The empirical evidence on mergers and acquisitions while large is not
conclusive. Event-study evidence on large samples tends to show that, on
average, around a merger announcement target shareholders benefit sig-
nificantly from acquisitions while bidder shareholders are unaffected or lose
slightly.2 The net announcement effects of takeovers (for both target and
bidder) are positive, although the variance of these announcement returns is
large. Various researchers have looked for the source of the gains from mergers
and evidence exists that mergers can create value by reducing taxes, increasing
productivity, improving incentives, or creating synergies.
Another approach has been to examine the long-run performance of firms
after the merger using stock or accounting data. The results from the long-run
performance literature are mixed, in part because of the difficulty of estimating
long-run performance. For example, Loughran and Vijh (1997) examine
benefits to long-term shareholders from corporate acquisitions. They find a
relationship between the post-acquisition returns and the method of payment.
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 303

The analysis suggests that firms completing cash-tender offers earn sig-
nificantly positive excess returns, while the stock mergers appear to destroy
value over the long term. It appears that the method of payment for a target may
provide valuable clues about the manager’s confidence in the quality of a
proposed merger. However, a growing literature has noted that serious
methodological and theoretical difficulties exist in estimating long-run
performance. For example, Lyon, Barber and Tsai (1999) say the “analysis of
long-run returns is treacherous,” while Fama (1998) argues that bad-model
problems are “unavoidable . . . and more serious in tests of long-run returns.”
Thus, the question of the long-run performance of firms after mergers remains
unsolved.
Another approach to the study of the effects of mergers is the case approach.
For example, Kaplan, Mitchell and Wruck (1997) examine two acquisitions
that in the long run did not create value, in large part, they argue, because the
bidder management did not understand the target’s business. Bruner (1999)
analyzes the loss of value in the aborted deal of Volvo and Renault, while Lys
and Vincent (1995) focus on value destruction in ATT’s acquisition of NCR.
Bruner argues that his hypothesis of “path dependence” could complement
hypotheses about value-destroying mergers that originate from managers
themselves. By path dependence, he means that researchers should recognize
that decisions managers have made in the past might constrain their choices in
the future. While Bruner suggests that researchers should look further back in
time than the first announcement of a merger to build a deeper understanding
of the origins of bad deals, path dependence should also affect good deals. On
balance, past decisions can provide a solid foundation for good future deals or
they can become quagmires that doom future transactions. Nevertheless,
Kaplan (1989, 1994) shows that the Campeau acquisition of Federated (even
though it ended in bankruptcy) created value.
In summarizing the empirical evidence on mergers Grinblatt and Titman
(1998, p. 702) state:

Based on an analysis of the empirical evidence we cannot say whether mergers, on average,
create value. Certainly, some mergers have created value while others were either mistakes
or bad decisions. Of course, many of the mistakes were due to unforeseen circumstances
and were unavoidable.

This case analyzes the Daimler-Chrysler merger in the light of the existing
empirical evidence to identify potential areas of value creation and destruction.
Our analysis reveals an initial positive market response followed by substantial
dissipation of market value over the next two years. The verdict on the long-run
success of the deal, however, remains to be seen.
304 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

4. COMPANY PROFILES AND THE REASONS FOR THE

DAIMLERCHRYSLER MERGER

Jürgen Schrempp, Chairman of Daimler-Benz Management Board, has been

behind the dramatic turnaround at Daimler transforming the firm into a
competitive global powerhouse.3 On January 12, 1998, Schrempp visited
Robert J. Eaton, Chairman and CEO of Chrysler Corporation, at an
International Auto Show in Detroit to suggest discussion of a possible merger.
Less than four months later, there was a signed merger agreement. Table 2
presents a Chronology of the DaimlerChrysler merger and the most important
steps taken before the merger closed in November 1998. The key steps in the
merger process included initial discussions on the feasibility of the merger,
discussions of governance 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 (Aktiengesellschaft), 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.4
Several potential reasons exist for the merger. Daimler derives 63% of sales
from Europe, while Chrysler depends almost exclusively on North America for
93% of its sales. As Robert Eaton mentioned:5 “Both companies have product
ranges with world-class brands that complement each other perfectly. We will
continue to maintain the current brands and their distinct identities.” Moreover,
both companies are trying to expand geographically in their respective markets
and immediate growth opportunities will exist by using each other’s facilities,
capacities and infrastructure. Auto industry experts (see Table 3) also
welcomed the merger, although analysts from firms that were not involved in
the merger (Goldman Sachs and CSFB advised Daimler-Benz and Chrysler)
were more cautious in their forecasts and recommendations of long-term
performance. The DaimlerChrysler merger prospectus (1998a, p. 47), states:
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 305

During the course of (merger) discussions, representatives of Chrysler stated that it 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 DaimlerChrysler 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.

Table 2. Chronology of the DaimlerChrysler Merger.

January 12, 1998 Jürgen E. Schrempp, Chairman of the Daimler-Benz Management Board,
in U. S. for North American International Auto Show in Detroit, visits
Robert J. Eaton, Chairman and Chief Executive Officer of Chrysler
Corporation, to suggest discussion of possible merger.
February 12–18, Initial discussions on possible merger within small group of representatives
1998 and advisors from both companies.
March 2, 1998 Robert J. Eaton and Jürgen E. Schrempp meet in Lausanne, Switzerland to
discuss governance and business organization structures for a possible
merger.
March–April, 1998 Working teams prepare possible business combination in detail.
April 23–May 6, Working teams negotiate business combination agreement and related
1998 documentation.
May 6, 1998 Merger agreement signed in London.
May 7, 1998 Merger agreement announced worldwide: Daimler-Benz and Chrysler
combine to form the world’s leading automotive, transportation and
services company.
May 14, 1998 Daimler-Benz Supervisory Board agrees to merger.
June 18, 1998 Daimler-Benz management team visits Auburn Hills.
June 25, 1998 Chrysler management team visits Stuttgart.
July 23, 1998 European Commission approves merger.
July 31, 1998 Federal Trade Commission approves merger.
August 6, 1998 Announcement that DaimlerChrysler shares will trade as “global stock”
rather than American Depositary Receipts (ADRs).
August 6, 1998 Daimler-Benz and Chrysler mail Proxy Statement/Prospectus to
shareholders.
August 27, 1998 Daimler-Benz and Chrysler management teams meet in Greenbrier, West
Virginia to discuss post-merger plans.
September 18, 1998 Chrysler shareholders approve merger with 97.5% approval.
September 18, 1998 Daimler-Benz shareholders approve merger with 99.9% approval.
November 6, 1998 Chrysler issues 23.5 million shares to corporate pension plan to qualify for
pooling-of-interests accounting treatment.
November 9, 1998 Daimler-Benz receives 98% of stock in exchange offer.
November 12, 1998 DaimlerChrysler merger transaction closes.
November 17, 1998 Day One: DaimlerChrysler stock begins trading on stock exchanges
worldwide under symbol DCX.

Source: DaimlerChrysler (1998a). Merger Prospectus.

306 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

Representatives of Daimler-Benz indicated (in addition to the previous) that the surviving
entity of any combination be a German stock corporation, thereby enhancing the likelihood
of acceptance of the transaction.
The Chrysler Board unanimously approved the merger and recommended the
transaction as fair to and in the best interests of Chrysler’s stockholders. The
board suggested several factors that led to its approval:6 (1) the likelihood that
the automotive industry will undergo significant consolidation, resulting in a
smaller number of larger companies surviving as effective global competitors;7
(2) the two companies’ complementary strengths: 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;
(3) the opportunities for significant synergies afforded by a combination based
not on plant closings or lay-offs, but on such factors as shared technologies,
distribution, purchasing and know-how; (4) expected benefits of $1.4 billion in

Table 3. Analyst Ratings at the Time of Merger.

Credit Suisse First Boston (Nicholas Colas, Susanne Oliver, November 20, 1998)
Valuation: EPS: 1998 estimate 11,00DM; 1999 estimate 12.44 DM.
Abstract: We believe that the merger of Chrysler Corporation and Daimler-Benz has created the
world’s most formidable competitor in the automotive industry. In our view, DaimlerChrysler
represents an attractive investment opportunity, with a superior industry position, a very strong
balance sheet and significant cost savings potential. We are introducing a price target of U.S.$101,
representing 15% upside potential from the current price.
Goldman Sachs Investment Research (Keith Hayes, Hugh Campbell, October 5, 1998)
Valuation: EPS: 1998e U.S.$5.98; 1999e U.S.$7.25
Abstract: Preparing for the 21st Century. Proposed merger would create global powerhouse able
to confront changes underway in world automotive industry. Three-year estimated cost benefits of
$3 billion create immediate earnings momentum. Complementary strengths in terms of product,
geography and organizational skills.
Merrill Lynch (Stephen Reitman, November 27, 1998)
Valuation: Accumulate; Long Term: Neutral.
Abstract: Upgrade of Intermediate opinion.
BT Alex.Brown (Mark Little, November 12, 1998)
Merger of equals. DaimlerChrysler holds a global presence in an industry that is fast consolidating.
This offers advantages through economies of scale, purchasing and shared skills, but none of this
guarantees greater profitability. DaimlerChrysler is well placed to withstand the economic
downturn that we are expecting and our current forecast blended valuation looks fair. We therefore
initiate coverage with a market perform recommendation.

Source: Company reports

The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 307

the first year of merged operations, and annual benefits of $3 billion within
three-to-five years. The Chrysler Board also outlined several potential risks,
including the difficulties inherent in integrating two large enterprises with
geographically dispersed operations incorporated in different countries, and the
risk that the synergies and benefits might not be fully achieved.
Daimler-Benz’s Management Board also unanimously approved the merger.
Four material factors appeared crucial to its approval: (1) Daimler’s
strengthened competitive position through an immediate expansion of its
automotive product range and a geographic expansion in the U.S., which
reduced the risk associated with the dependency on the premium segment of
the automobile market; (2) the enhanced liquidity for Daimler’s stockholders
by creating the third largest automotive company in the world in terms of
revenues, market capitalization and earnings; (3) the potential short-term
synergies in purchasing, distribution, and research and development; and (4)
the potential long-term synergies in the development and growth of markets.

5. CONFLICTS OF INTEREST
As in most mergers, potential agency problems exist from manager’s decisions
on what actions to take in the merger. For example,
In considering the recommendation of the Chrysler Board, stockholders of Chrysler should
be aware that, as described below, certain members of Chrysler’s management and the
Chrysler Board may have interests in the Chrysler Merger that are different from, or in
addition to, the interests of Chrysler stockholders generally, and that these interests may
create potential conflicts of interest.
DaimlerChrysler (1998a) merger prospectus, p. 68.
Some of the potential agency conflicts resulted from the compensation plans in
place. Subject only to the consummation of the merger and his continued
employment, Robert Eaton receives $3.7 million in cash payment, 628.3
thousands DaimlerChrysler ordinary shares ($66 million) and stock apprecia-
tion rights with respect to 2.27 million DaimlerChrysler ordinary shares. Four
other Chrysler officers receive cash payments, DaimlerChrysler shares, and
options. Moreover, Chrysler’s executive officers (a group of 30 persons) have
employment-continuation agreements for a period of two years following any
event that constitutes a change in control. 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.
308 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

6. MERGER-ANNOUNCEMENT EFFECTS
Table 4 (Panel A) documents the stock market reaction to the merger
announcement for both Daimler-Benz and Chrysler, which are similar to the
results from earlier studies of mergers. Specifically, Chrysler’s shares recorded
a 30.9% abnormal return and, somewhat in contrast to large-sample studies that
find negative or zero returns to bidders, the shares of Daimler-Benz realized a
positive excess return of 4.6%. The combined market capitalization of Daimler
and Chrysler was $95.2 billion8 at the close of NYSE trading on May 7, 1998,
which was $10.2 billion greater than the combined market value of the firms
before the merger announcement. The increase in firm value is consistent with
the predicted expected benefits of $1.4 billion in the first year of merged
operations, and annual benefits of $3 billion within three-to-five years.9

7. VALUATION ISSUES
In a stock-swap merger, the exchange ration must be determined. The exchange
ratio may be determined according to the firms’ book values, market values,

Table 4. Announcement Effects (Abnormal Returns) of the DaimlerChrysler

Merger and Subsequent Events.

Panel A: Abnormal Returns to Daimler-Benz and Chrysler around the merger announcement

Chrysler Daimler-Benz
Abnormal USD Abnormal DM
Event Date Event description return t-stat return t-stat

May 6, 1998 The merger agreement signed in 18.7% 13.5 5.93% 2.96
London
May 7, 1998 Worldwide announcement of the 10.5% 7.57 –1.25% –0.90
merger
May 6–7, 1998 Combined 2-day return 30.9% 15.0 4.57% 1.82

Abnormal returns (ARs) computed as market-adjusted returns. S&P500 and DAX30 indexes were
used to adjust Chrysler and Daimler-Benz returns, respectively. USD refers to U.S. Dollar, and
DM stands for Deutche Mark. To compute t-statistic, we used standard deviation of ARs during
the year 1997. The methodology follows Ruback (1982), and Bruner et al. (1999) and adjusts for
the autocovariance of returns:
SD() = [*VAR(ARt) + 2(  1)COVAR(ARt,ARt–1)]; t-stat = AR()/SD(); where  = number of
days in the event window
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 309

Table 4. (Continued)

Panel B: Post-merger abnormal returns to DaimlerChrysler (DCX) for some important events

DaimlerChrysler
Abnormal
Event Date Event description return t-stat

Top Executives resignations*

December 4th, 1998 DaimlerChrysler’s Executive Vice- –1.75% –0.97
President of Manufacturing Dennis
K. Pawley announced retirement
February 5th, 1999 Senior Vice-President of –1.70% –0.95
comunications for DCX, Steven J.
Harris, was hired by General
Motors Corp.
March 2nd, 1999 Two top engineering executives at –4.25% –1.80
DCX, Chris Theodore and Shamel (2-day return,
Rushwin, resigned to take similar March 1st to
positions at Ford Motor Co. March 3rd close)
News related to the loss of S&P500 status and merger talks with other automakers
October 1st, 1998 Standard&Poor’s announces that it –14.6%** –7.1
won’t include DaimlerChrysler in
the S&P500 Index
January 11–13, 1999 Rumors about DaimlerChrysler –5.98% –2.5
deal to acquire an equity stake in (2-day return)
Nissan Motor Co.
March 10th, 1999 DCX breaks talks with Nissan. 5.04% 2.1
Nissan shares fell 10.9%
March 7, 2000 News about DaimlerChrysler’s –2.2% –1.3
potential bid for a 30% stake in
Mitsubishi Motor Corp.

Abnormal Returns (ARs) computed as Datastream-world-market-index adjusted returns.

(*) In addition to these resignations, DaimlerChrysler has been hit by loss of other top executives:
Robert Lutz, who retired as Chrysler’s Vice Chairman in June after playing a key role in the
company’s turnaround; Rex Franson, President of Chrysler Financial Corporation resigned in
January; William Glaub, CEO of Chrysler Canada died November 26, 1998. And finally, Robert
Eaton, former CEO and Chairman of Chrysler, has agreed to retire after 3 years to the merger.
(**) U.S.-dollar return to Chrysler shares (midpoint of SEAQ quotes) from the close on September
30, 1998 to October 2nd, 1998, adjusted by S&P500.
Sources: News: Associated Press, AFX News, PR Newswire, Wall Street Journal, Business Wire.
Prices: Datastream Inc.
310 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

sales, earnings, or some other characteristic. Table 6 shows the shares of former
Daimler-Benz, Chrysler, and the combined entity based on these character-
istics.
One possible approach is to apportion the ownership rights to the former
shareholders using the market values of the two companies the day before the
merger announcement. As market values change quickly and reflect new
information (including leaks from the merger talks), average market values
computed over a longer time-period represent a better alternative. The market
value of Daimler-Benz on May 5, 1998, one day before the merger

Table 5. DaimlerChrysler Stock-Price Performance.

Panel A: Market capitalization of Daimler-Benz and Chrysler around the merger announcement

Date Chrysler Daimler-Benz Combined

May 5, 1998 (1 day prior to the merger news) $26.8 billion $58.1 billion $84.9 billion
May 6, 1998 (the merger agreement signed in London) $31.6 billion $61.8 billion $93.4 billion
May 7, 1998 (wordwide announcement) $34.6 billion $60.6 billion $95.2 billion

Chrysler had 647.3 million and Daimler-Benz 569.3 million of shares outstanding. Closing prices
of Chrysler (C) shares and Daimler-Benz ADRs (DAI) on NYSE were used to compute the
respective market capitalization.
Source: Wall Street Journal.

Panel B: Post-merger market capitalization and returns of DaimlerChrysler (DCX)

Buy-and-hold returns since May 5, 1998 (the merger)

DCX Market
Date Cap DCX (e) DCX ($) S&P500($) DAX30(e) DSWorld($)

May 5, 1998 $84.9 billion

– 1 day prior to the merger news
October 26, 1998 $77.8 billion –13.8% –8.4% –3.8% –11.8% –8.5%
– DCX starts trading as ‘when-issued’ security
March 14, 2000 $62.8 billion –15.5% –26.1% + 21.8% + 46.4% + 30.0%
– almost two years later

DCX denotes DaimlerChrysler; S&P500 is S&P500 Composite Index; DAX30 is a major stock
index in Germany; DSWorld is a composit world stock-market index compiled by Datastream Inc.
Euro-returns for DCX(e) and DAX30; U.S.dollar returns for DCX($), S&P500 and DSWorld.
DCX(e) euro-returns equivalent to DM (Deutche Mark) returns.
Source: Wall Street Journal, Datastream Inc.
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 311

Table 5. (Continued)

Panel C: Stock price performance of DaimlerChrysler

since 26th October 1998, when DCX shares started trading (initially as ‘when-issued’
security)

U.S. dollar-returns for DCX($), S&P500($), and DSWorld($); Euro-returns for DAX-30(e).
Source: Datastream Inc.

Table 6. Contributions of Daimler-Benz and Chrysler to DaimlerChrysler

AG.

Share of DaimlerChrysler derived from

Characteristic Daimler-Benz Chrysler

Market Values (as of May 5th, 1998) 68.4% 31.6%

Actual Exchange Ratio* 58.6% 44.6%
Total Revenues (year ended December 31, 1997) 52.9% 47.1%
Net Assets (year ended December 31, 1997) 56.1% 43.9%
Net Income** (year ended December 31, 1997) 46.7% 53.3%

* This means that, based on the actual stock exchange ratio, the old Chrysler shareholders received
44.6% of DaimlerChrysler shares. ** Goldman Sachs figures in DaimlerChrysler (1998a) merger
prospectus, pp. 64.
Source: Company reports – DaimlerChrysler (1998a), and NYSE Daily Stock Price Record
(1998)
312 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

announcement, was $58.1 billion, whereas Chrysler’s market value was about
half that value at $26.8 billion. Based on these market capitalizations,10
Chrysler’s share of the combined company would be 31.6%.
The actual exchange ratios for the DaimlerChrysler shares were set at
1:1.005 for Daimler-Benz shareholders and 1:0.6235 for Chrysler share-
holders. Splitting DaimlerChrysler among the former Daimler and Chrysler
shareholders according to these exchange ratios put the Chrysler’s share of the
new company at 41.4%. Thus, Chrysler shareholders received a 31% premium
over the closing prices of their shares on May 5, 1998 (NYSE).

7.1. Financial Analysis and Due Diligence

While companies looking for a merger partner often begin with an in house
analysis, eventually the complexity of financial, legal, accounting, and taxation
issues require outside consultants. The following section focuses on the
financial analyses and diligence performed by the advisors to the involved
parties in DaimlerChrysler merger.
Daimler-Benz retained Goldman Sachs (GS) and Chrysler hired Credit
Suisse First Boston (CSFB) to act as its financial advisors. In determining the
exchange ratio, GS and CSFB considered several valuation techniques
including discounted cash-flow techniques, P/E multiples, comparable-com-
panies analysis (based on equity analyst price targets), and other techniques.
Financial advisors reviewed publicly available business and financial informa-
tion from third parties as well as financial forecasts provided by Daimler and
Chrysler.
CSFB prepared and presented a fairness opinion to the Chrysler’s board. It
based its opinion on a variety of financial and comparative analyses using
numerous assumptions with respect to Chrysler, Daimler-Benz, industry
performance, and general business, economic, and market conditions. CSFB
maintained that because of complex considerations and judgments used in its
analyses,11 the opinion is not susceptible to decomposition. Nevertheless, below
we briefly describe the component parts of its opinion.
CSFB reviewed the stock price performance of the merging companies and
compared them with the performance of the other U.S. and European auto
manufacturers.12 The high, low, and average share prices were considered and
CSFB concluded that the proposed exchange ratio for the DaimlerChrysler
shares represented a premium for the former Chrysler shareholders ranging
from 15% to 37%. CSFB also reviewed the equity analysts’ price targets from
selected investment research reports. The exchange ratio represented a
premium of 16% over the mean target prices.
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 313

To estimate the present value of stand-alone Chrysler, a discounted

(unlevered) free-cash-flow analysis was performed for the years 1998 to 2002.
The analysis defines unlevered free-cash flows as unlevered net income plus
depreciation plus amortization less capital expenditures less investment in
working capital. With projections influenced by vehicle sales, the level of retail
incentives, and the success of new product models, two separate business
scenarios were considered: a base case and a sensitivity case. CSFB also
performed a similar analysis for every business segment of Daimler-Benz and
observed that the exchange ratio represented a premium of approximately
14-to-16% over the ratios of equity valuations based on discounted cash
flows.
Operating and stock-market data were used to analyze Chrysler relative to
peer companies.13 The EPS (earnings per share) multiples for the selected
companies ranged from 8.0-to-9.5. Correspondingly, CSFB performed a
similar analysis for every business segment of Daimler-Benz. Based on the EPS
analyses, the exchange ratio represented a discount of approximately 17%
under to a premium of 15% over the ratios of comparable companies’ equity
valuations.
Goldman Sachs, as a financial advisor to Daimler-Benz, also recommended
the proposed transaction and deemed the exchange ratio to be fair to Daimler’s
stockholders. Similar to CSFB, GS reviewed, among others, the Combination
Agreement, the Annual Reports to stockholders and other SEC filings14 for the
prior 5 years, including interim reports to stockholders, and internal financial
analyses.
Financial advisors also considered premia (discounts) in similar transactions.
CSFB analyzed precedent strategic-business, merger-of-equals (MOE) combi-
nations. Its analysis indicated that the exchange ratios were negotiated within
a narrow band around the implied pre-announcement stock- market ratios. For
the twelve precedent MOE transactions,15 where each of the constituent
companies had even representation on the combined company’s board of
directors, the premiums ranged from 0.5% to 21.7%. GS analyzed comparably
sized transactions and performed a transaction premium analysis on 40 earlier
mergers larger than $10 billion. The premium paid in these transactions, as
compared to the price one-day prior to the announcement date, ranged from a
low of –5% to a high of 95.1% with a median of 27.3%.
The initial discussions put forth several criteria for the merger.16 However,
some of these criteria seem to be at odds with each other. One of the important
issues of the merger transaction was that it had the optimal ability to be
accounted for as a pooling-of-interests. The Chrysler Board expressly
recognized that17 “purchase accounting treatment would have no impact on
314 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

cash generation or on the business logic for the transaction, although it would
reduce reported earnings because of the need to account for and to amortize
goodwill (the excess purchase price over book value).” Table 7 provides
DaimlerChrysler’s unaudited pro-forma combined consolidated statement of
income. The pooling-of-interests accounting is at odds with tax-efficiency as
purchase accounting would increase the firm value by decreasing the present
value of future tax liabilities. However, popularity of pooling-of-interest
accounting led regulators to mandate purchase accounting for all U.S. mergers.
We may thus expect that international mergers may incorporate combined
entities in countries with more lenient accounting regulations.

7.2. Fees to Financial Advisors

Daimler-Benz contracted GS to act as its financial advisor to the merger, and

agreed to pay $35 million in fees, plus an additional fee equal to 0.25% of the
increase in the market capitalization of DaimlerChrysler during the six-month
period following completion of the merger. This fee is limited to be at least $5
million but not greater than $25 million. Daimler-Benz also agreed to
reimburse GS for all expenses and indemnify it against certain liabilities.
Chrysler engaged CSFB, and agreed to pay CSFB a fee of $35 million for
its services, plus an additional fee equal to 0.11% of the change in Chrysler’s
fully-diluted equity, market value on December 31, 1997 compared to the fully
diluted value of the DaimlerChrysler shares received by Chrysler’s stock-
holders, subject to a maximum of $20 million. In addition, Chrysler agreed to
reimburse CSFB for all out-of-pocket expenses, including the fees and
expenses of its legal counsel and any other advisor retained by CSFB.

8. LEGAL STRUCTURE OF THE COMBINATION

To achieve various goals, such as pooling-of-interest accounting, and
compliance with certain regulations required a fairly complicated legal
structure for the Daimler-Benz-Chrysler merger. Table 8 illustrates the
transaction as well as the resulting structure.18 Baums (1999) describes the
details of the legal structure and problems arising from defective regulatory and
legal environment, and we limit our discussion to the most important points.
Several factors attributed to the legal complexity of merger. Interestingly, no
true merger between Daimler-Benz AG and Chrysler Inc. ever happened.
Although, a direct merger of Chrysler into Daimler-Benz would significantly
simplify the transaction, it would have dissolved Chrysler as a legal entity,
which would require a costly transfer of assets into a new U.S. subsidiary. The
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 315

Table 7. DaimlerChrysler’s Combined Consolidated Statement of Income.

UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT
OF INCOME
(pooling-of-interest method)
For the Year Ended December 31, 1997
(in millions, except per share amounts)

Historical Pro-Forma

Daimler-Benz Chrysler (e) Combined Combined

DM DM DM USD (e)

Revenues 124,050 105,205 229,255 127,131

Cost of sales (98,943) (84,879) (183,822) (101,936)
Gross margin 25,107 20,326 45,433 25,195
Selling, administrative and other (17,433) (9,703) (27,136) (15,048)
expenses
Research and development (5,663) (2,972) (8,635) (4,788)
Other income 1,620 1,620 898
Income before financial income and 3,631 7,651 11,282 6,257
income taxes
Financial income, net 618 251 869 482
Income before income taxes 4,249 7,902 12,151 6,739
Tax benefit relating to a special 2,908 2,908(a) 1,613
distribution
Income taxes 1,074 (3,038) (1,964) (b) (1,089)
Total income taxes 3,982 (3,038) 944 524
Minority interest (189) (189) (105)
Net income 8,042 4,864 12,906 (c) 7,158

Pro forma combined earnings per share

Pro forma combined basic earnings 13.29 (c)(d) 7.37
per ordinary share
Pro forma combined diluted earnings 13.16 (c)(d) 7.30
per ordinary share

(a) Reflects the non-recurring tax benefit relating to the Special Distribution.
(b) Includes non-recurring tax benefits of DM 1,962 relating to the decrease in valuation
allowance as of December 31, 1997, applied to the German operations that file a combined tax
return.
(c) Excluding the non-recurring income tax benefits, net income and pro forma combined net
income would have been DM 3,172 ($1,759) and DM 8,036 ($4,456) and pro forma combined
basic and diluted earnings per share would have been DM 8.28 ($4.59) and DM 8.21 ($4.55),
respectively.
(d) The assumed weighted average number of ordinary shares outstanding for basic and diluted
earnings per share were 970.8 million and 983.6 million, respectively.
(e) Translated at the rate of exchange of $1.00 = DM 1.80
Source: Company reports – DaimlerChrysler (1998a).
316 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

Table 8. A Graphic Illustration of the Legal Structure of the Merger.

Panel A:

Source: DaimlerChrysler (1998a) merger prospectus pp. 11–13. Also reproduced in Baums (1999)
Baums (1999) describes the legal structure of the merger and what follows draws on his research.
Interestingly, no true merger (in a legal sense) between Daimler-Benz AG and Chrysler Inc. ever
happened. Instead, Oppenheim KGaA, a private German bank, established a wholly-owned
subsidiary Oppenheim AG, now renamed “DaimlerChrysler AG”. This subsidiary made a public offer
to the Daimler shareholders asking them to swap their shares for Oppenheim stock. Subsequently,
Daimler-Benz AG merged with Oppenheim AG. All holdings of Daimler-Benz (Mercedes-Benz,
DASA, etc.) were effectively transferred to Oppenheim AG. As to the American side, a U. S.
Exchange Agent (trustee) collected the Chrysler shares by means of a reverse triangular merger. In
the second step, the trustee exchanged Chrysler shares for Oppenheim shares and distributed them to
former Chrysler shareholders. Chrysler Inc. was renamed DaimlerChrysler Inc. and survived as a
legal entity and a wholly owned subsidiary of the Oppenheim AG (DaimlerChrysler AG).

Panel B: Result of the merger:

Source: DaimlerChrysler (1998a) merger prospectus pp. 11–13. Also reproduced in Baums (1999)
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 317

resulting structure has kept Chrysler Inc. (later renamed DaimlerChrysler Inc.)
as a legal entity, which is now a wholly owned subsidiary of DaimlerChrysler
AG. Baums (1999) also describes regulatory obstacles that exist in this and
other direct cross-border mergers.

9. OWNERSHIP STRUCTURE AND THE LARGEST

STOCKHOLDERS

DaimlerChrysler was the first automotive company with a genuinely global

ownership structure at the time of merger. Initially, stockholders were located
equally in the United States (44%) and Europe (44%). German stockholders
held 37% of shares. Three core stockholders owned 27% of DaimlerChrysler
shares outstanding, 17,000 institutional investors held 49%, and 1.3 million
retail investors held 24%. At the time of merger, insiders controlled
approximately 3% of ordinary shares.19 However, as of December 31, 1999, the
members of the Supervisory Board and the Board of Management as a group
owned 426,668 ordinary shares, which represented 0.04% of all outstanding
shares.20
However, on March 15, 1999, the company announced that the percentage of
DaimlerChrysler shareholders in the United States fell to 25% from 44% in
November 1998, when the merger closed.21 DaimlerChrysler indicated that the
decline was a consequence of Standard & Poor’s decision not to include the
resulting German company in the S&P500 index. This move forced many
mutual funds that track the S&P500 Index to unload the stock, which could
have a potentially adverse effect on DaimlerChrysler’s cost of equity. We
discuss the S&P decision later in the study.
The three largest stockholders include Deutsche Bank of Germany, the
Emirate of Kuwait, and Kirk Kerkorian/Tracinda Corporation of Las Vegas,
Nevada. In its 1996 and 1997 Annual Reports, Daimler-Benz AG disclosed that
Deutsche Bank AG and the Emirate of Kuwait had shareholdings representing
approximately 23% and 13% of the ordinary shares, respectively. The largest
Chrysler stockholder, Tracinda Corporation, owned approximately 11% of the
outstanding shares of Chrysler common stock. Prior to the merger, Mr.
Kerkorian (Tracinda Corp.) agreed to vote all of these shares in favor of the
approval and adoption of the merger. In December 1998, Deutsche Bank AG
announced it would spin off more than $24 billion in industrial holdings
including DaimlerChrysler by forming separate limited partnerships to manage
each block of shares, all controlled by a new unit called DB Investor (Miller
(1998b) in Business Week).
318 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

10. DIFFERENCES IN CORPORATE CULTURE

Although the managements of Chrysler and of Daimler-Benz expect the transactions will
produce substantial synergies, the integration of two large companies, incorporated in
different countries, with geographically dispersed operations, and with different business
cultures and compensation structures, presents significant management challenges. There
can be no assurance that this integration, and the synergies expected to result from that
integration, will be achieved as rapidly or to the extent currently anticipated.
DaimlerChrysler (1998a) merger prospectus (p. 24).
Unless Daimler imposes its culture on the new company and takes complete charge, don’t
be surprised if the deal fails.
Jeffrey E. Garten
Dean of the Yale School of Management, (Garten, 1998, p. 20)
The success of this cross-border merger depends on the management’s ability
to create a single corporate culture and strategy. Robert Eaton and Jürgen
Schrempp emphasized the evolutionary process of combining the two
companies that exhibit a plethora of differences. Although the combination of
Daimler-Benz and Chrysler was designed as a merger of equals, Daimler-Benz
has been the more-equal partner and is imposing its own corporate imprint on
the merged company. For the moment, DaimlerChrysler keeps dual operational
headquarters in Stuttgart, Germany and Auburn Hills, Michigan. However,
Jürgen Schrempp is expected to take over the whole company after his co-CEO,
Robert Eaton, retires after 3 years.22 The centralization of control and decision
making is necessary to mesh the now-competing marketing, engineering, and
manufacturing departments. Daimler’s Schrempp understands that the central-
ization of headquarters is inevitable if the management does not want to repeat
mistakes of other cross-border acquisitions. Renault’s failure with American
Motors and Sony Corp’s lack of control over CBS Records and Columbia
Pictures are good examples. The links between the companies of different
countries may collapse on serious corporate culture, control, and strategy
differences.
Labor unions and financial institutions play a major role in German
corporate governance. According to German Co-determination Law (Mitbes-
timmungsgesetz), the Supervisory Board23 (Aufsichtsrat/Board of Directors)
consists of ten shareholder and ten employee representatives. German
Metalworkers’ Union (IG Metall) invited a representative of the United Auto
Workers (UAW) to take one of the three IG Metall’s positions and represent
Chrysler’s labor union on this board. This system is at odds with the U.S.
governance system with a predominantly independent Board of Directors.
When downsizing occurs because of the overcapacity in the global auto
industry, management will be faced with politically sensitive issues about how
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 319

to apportion layoffs between America and Europe. However, these concerns

were not a topic of the pre- or post-negotiation talks, as the company
announced that it added 13,000 employees in 1998, bringing its global
workforce to 434,000.

11. COMPENSATION POLICIES

Another area with potential for culture clash is compensation philosophy and
policy. When the merger was consummated, both the Chrysler and the Daimler-
Benz’s compensation systems disappeared. A scheme of performance-based,
stock-appreciation rights replaced the respective option plans. These rights
carry the benefits of an option, but no shares change hands. Holders instead get
a cash payout equal to the difference between the strike price and the stock
price on the day of exercise. A global-standard pay system will include 80–250
top executives, while the pay of the other 440,000 employees will be set by
region and will be competitive with similar companies operating in the same
environment.24 However, given the UAW presence on the board of directors,
workers at Daimler’s Alabama plant may get a pay boost too. There is also
some evidence that their U.S. labor costs are only about half of those in
Germany.
Many U.S. firms lose top talent once acquired by a European firm. The social
and cultural environment makes European executives more egalitarian and
unwilling to pay top dollar to keep star employees. European politicians and
workers are much less tolerant of high profits and pay than their American
counterparts. Though many other multinational corporations pay their manag-
ers according to their country affiliation, it is increasingly harder for them to
keep the same management-level executives on different pay structures. The
average total compensation of the U.S. chief executives ($1.1 million) far
outpaced the rest of the world in 1998. Although Europe is moving toward U.S.
pay practices, the compensation ranged only from $400,000 in Germany to
$650,000 in Britain, with the base pay being the largest part of the total
compensation.25
The compensation differences are best illustrated by the recent pay packages
of the two co-CEOs. For 1997, the $11.5 million salary of Robert Eaton
dwarfed the $2 million take-home pay of Jürgen Schrempp. Since Eaton is
unlikely to take a pay cut, managerial compensation most likely will converge
upwards and be linked to stock-price performance. Although the company is
required to comply with both the SEC and German regulations, Daimler-
Chrysler, as a German corporation, is under no obligation to disclose its
executive’s pay packages. The 1998 Annual Report (p. 29) says only that the
320 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

aggregate amount of compensation to all members of the Supervisory Board

(Aufsichtsrat) and the Board of Management (Vorstand), as a 37-person group,
was 43 million Euro ($46 million). This amount includes compensation
payments by the former Chrysler Corp., with the exception of one-time
payments due to the business combination. In addition, the company set aside
24 million Euro ($26 million) to provide pension, retirement and other benefits
to this group. For comparison, in 1996 and 1997 Daimler-Benz reported
DM28.9 million ($17 million) and DM30.6 million ($16 million) in
compensation and retirement payments to its Management and Supervisory
Boards.

12. POST-MERGER EVENTS

We also look at several other post-merger events with a direct impact on the
future operations and ownership structure of DaimlerChrysler. We analyze
three major post-merger events: (1) the decision of Standard & Poor’s not to
include DaimlerChrysler in the S&P500 Index, (2) the departure of Chrysler
top executives after the merger, and (3) merger talks with Nissan and
Mitsubishi Motor Corp.. The stock-price movements associated with these
three events are reported in Panel B of Table 4.
On October 1, 1998, before the merger was completed, Standard&Poor’s
announced its decision not to include DaimlerChrysler in S&P500 index. The
S&P 500 dropped Chrysler on the last day its shares were traded. The S&P
Index Committee commented:
The S&P500 covers leading companies in leading industries and reflects the importance of
the U.S. markets and economy. Investors see the index as the key benchmark for the U.S.
markets. Moreover investors recognize that companies and markets in one country perform
differently from companies or markets in other countries. Our action today affirming that
the S&P500 represents the U.S. market and companies is a reflection of how investors
manage their investments.
David M. Blitzer (1998), Chairman of the S&P500 Index Committee

The market reaction to Chrysler shares upon this announcement was negative.
Chrysler suffered an abnormal return of –14.6% on the announcement day
(actual return of –16.3%).27 Chrysler’s daily volume was increasing sub-
stantially in the weeks after the announcement, presumably in response to the
fact that index funds would not need DCX shares.28 Even though Co-chairman
Robert J. Eaton tried to persuade S&P to reverse its decision, S&P spokesman
Will Jordan said that was unlikely. “It’s a German company, it pays taxes in
Germany, it’s incorporated in Germany. Our long-standing policy is that non-
U.S. companies will not be added to the S&P U.S. indexes. It’s fairly
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 321

straightforward,” Jordan said.29 As we discussed earlier, a major consequence

of this decision was a reduction in the number of U.S. shareholders in
DaimlerChrysler, making it more of a German company. In response,
DaimlerChrysler has continued a campaign to be included in the S&P500
Index. The latest lobbying effort occurred in comments by Chairman Schrempp
at a press conference on July 29, 1999, called to discuss the poor earnings,
which we report in the next section.
Another post-merger event was the rumored merger with Nissan. Following
the merger with Chrysler, Jürgen Schrempp and other DaimlerChrysler
executives started to search for other suitable partners to expand their Asia
operations. In January 1999, they started preliminary merger talks with Nissan
of Japan. Around January 11, 1999, rumors spread about the intentions to
acquire an equity stake in Nissan and the DCX shares fell by 6% (two-day
abnormal return, t-stat = –2.5). The talks continued until March 10, 1999, when
the ‘no-merger’ decision was announced. At this time, there was an abnormal
return of 5% to DCX shares, while Nissan’s shares fell by 10.9%. The market
apparently thought this merger would be bad for DaimlerChrysler.
Unsuccessful negotiations with Nissan didn’t convince DaimlerChrysler to
abandon its intentions to expand operations in Asia. On March 7, 2000,
Japanese business daily Nihon Keizai Shimbun30 reported that Japan’s
Mitsubishi Motors Corp. was at a final stage of negotiations with Daimler-
Chrysler for a tie-up, which would include the German-U.S. acquiring a
30-percent stake in Mitsubishi. DaimlerChrysler’s stock price fell by 3.4% on
that day, although the abnormal return is not statistically significant.31
Mitsubishi spokesman has initially dismissed talk of an alliance as ”reporters’
speculation”.32 However, on March 27, 2000, DaimlerChrysler announced that
it agreed to buy a controlling 34% stake in Mitsubishi Motors Corp. for $2
billion. Collaboration between Mitsubishi Motors and DaimlerChrysler would
create the world’s third-largest carmaker, after General Motors and Ford Motor
with a combined annual sales of 6.5 million units.33
Finally, and perhaps most importantly, several top Chrysler executives and
engineers have departed since the merger. The major defection was that of
57-year old Dennis Pawley, who left DaimlerChrysler in December 1998. Mr.
Pawley, vice president of manufacturing and leader of Chrysler’s turnaround,
left for a consulting firm. In February 1999, a top corporate spokesman went to
GM. In March 1999 the senior vice-president of international marketing and
minivans, and the senior vice president for platform engineering went to Ford
in similar positions. In July 1999, Craig Winn, a leading engineer and vice-
president for Jeep platform engineering, left for GM.
322 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

While, as Robert Eaton pointed out, departures of executives is normal after

a merger, the differences in culture and compensation from the two
international partners may have exacerbated departures after this merger. The
AP (March 2, 1999) reported that U.S. executives have “complained privately
that the Daimler half of the company has taken a firmer grip on the new
company.” Perhaps another piece of evidence of the culture problems in
integrating the companies came from the actions of Schrempp after the
defections. At news conference in Stuttgart called to promote the increased
earnings of the new company, Schrempp became agitated by the questions from
the U.S. media about the defections and said in an angry tone: “We don’t need
their know-how, you can quote me.”
Panel B of Table 4 shows the DCX stock-price movements at the time of
these resignations. In every case the abnormal return was negative, although not
statistically significant.

13. POST-MERGER PERFORMANCE

The post-merger performance of DaimlerChrysler has been extremely
unfavorable. Tables 5B and 5C depict the post-merger market capitalization
and the stock-price performance of DaimlerChrysler. Shares of Daimler-
Chrysler underperformed by a wide margin all three indices examined: (1)
Germany’s main index, the DAX30; (2) the S&P500 Index; and (3) the
DSWorld, a composite world stock-market index compiled by Datastream Inc.
Although the currency that should be used to measure returns to ‘global’ stock
is still an open question, DCX stock has underperformed both the DAX30 euro-
returns (61.9%) as well as the S&P500 dollar-returns (47.9%).34
Since the day after the merger announcement (May 7th, 1998) Daimler-
Chrysler market capitalization has declined by 34.0% (until March 14, 2000),
which contrasts to + 34.5% return to GM shareholders and –12.3% return to
Ford35 over the same period. These findings are consistent with Laughran and
Vijh (1997) predicting negative post-acquisition returns to long-term share-
holders in the stock mergers. The lackluster performance may be traced to
several events discussed earlier namely departures of executives and the
decision of Standard&Poor’s not to include DaimlerChrysler in its S&P500
index. Mishaps in operations may have also contributed to the decline. On July
29, 1999, DaimlerChrysler reported lackluster second-quarter earnings and its
stock price fell 8.8%. The New York Times (July 30, 1999, p. c1) reported the
earnings had been hurt by weaker than expected results from the Chrysler
division (heavy losses in Asia and Latin America), the weak Euro, and losses
on the Smart car in Europe.
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 323

Even more telling is a wealth-relative measure (see Loughran & Ritter

1995). Chrysler shareholders, who liquidated their positions in Chrysler right
after the merger announcement (May 7, 1998) and invested in the S&P500
index, would have earned 50.5% more than long-term Chrysler shareholders
who held their subsequent DCX shares until March 14, 2000. Although it still
may be too early to judge the ultimate value-creation in this merger, because
potential future synergies might be realized, we provide evidence that much of
the initial merger-announcement returns dissipated. Thus, it appears, as of this
writing, that the merger has destroyed rather than created wealth.

14. SUMMARY AND CONCLUSIONS

Using the DaimlerChrysler merger as a case study, this paper has focused on
value creation and destruction, and various challenges of an international
transaction. Although the initial market reaction to the merger was favorable for
both firms, the returns since then have been negative and well below market
indices. We analyze both the initial value creation and the subsequent
destruction of value. The former traces to product lines that meshed well,
Daimler’s movement into the American market and Chrysler’s movement into
the European market, and complementary engineering and marketing skills. In
contrast, the latter reflects, among other things, Standard & Poor’s decision not
to include DaimlerChrysler in the S&P500 index and the clash of corporate
cultures and compensation schemes. On balance, we provide evidence that the
initial positive market returns have dissipated.
Although globalization is one of the buzzwords in international finance and
economics, an interesting and important question is: Can a company truly be
global? Differences in corporate culture, compensation policies, ownership
structure, and the legal environment can be viewed as “barriers to entry” to a
global environment. While all these factors affect mergers of domestic firms,
the factors are magnified and pose important challenges to international
business combinations. Important post-merger events shaped the value
destruction in DaimlerChrysler’s case. Standard & Poor’s decision not to
include DaimlerChrysler in the S&P500 Index was the most likely reason
behind an important repercussion: the desertion of DaimlerChrysler’s U.S.
shareholders from 44%, right after the merger, to about 22% two years later,
possibly leading to an increase in DaimlerChrysler’s cost of equity. In addition,
the departures of executives from Chrysler (not Daimler), perhaps caused by
the clash of corporate cultures and compensation schemes, illustrate potential
roadblocks to aspiring multinational firms becoming truly global companies.
324 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

Table 9. Board of Management (Vorstand)

The current members of the Board of Management, their respective ages as of March 31, 1999, their
areas of responsibility, the year in which they were appointed and the years in which their terms expire,
respectively, are as follows:

Year
Year term
Name Age Area of responsibility Appointed expires

Jürgen E. Schrempp 54 Chairman 1998 (19871) 2003

Robert J. Eaton 59 Chairman 1998 (19922) 2001
Dr. rer. pol. Manfred 56 Aerospace & Industrial Non- 1998 (19951) 2003
Bischoff Automotive
Dr. rer. pol. Eckhard 48 Corporate Development & IT- 1998 (19961) 2003
Cordes Management (including responsibility
for MTU/Diesel Engines and
Automotive Electronics)
Theodor R. Cunningham 52 Sales and Marketing Latin America 1998 (19872) 2003
(all automotive brands) and Chrysler
Truck Operations
Thomas C. Gale 55 Product Strategy, Design and 1998 (19852) 2003
Passenger Car Operations Chrysler,
Plymouth, Jeep, Dodge
Dr. jur. Manfred Gentz 57 Finance and Controlling 1998 (19831) 2003
James P. Holden 47 Brand Management Chrysler, 1998 (19932) 2003
Plymouth, Jeep and Dodge & Sales
and Marketing North America (all
automotive brands) & Minivan
Operations
Prof. Jürgen Hubbert 59 Passenger Cars Mercedes-Benz, 1998 (19971) 2003
Dr. phil. Kurt J. Lauk 52 Commercial Vehicles & Brand 1998 (19971) 2003
Management Commercial Vehicles
Dr. jur. Klaus Mangold 55 Services 1998 (19951) 2003
Thomas W. Sidlik 49 Procurement & Supply for the 1998 (19922) 2003
Chrysler, Plymouth,Jeep and Dodge
brands & Jeep Operations
Thomas T. Stallkamp 52 Passenger Cars and Trucks Chrysler, 1998 (19902) 2003
Plymouth, Jeep, Dodge
Heiner Tropitzsch 56 Human Resources & Labor Relations 1998 (19971) 2003
Director
Gary C. Valade 56 Global Procurement and Supply 1998 (19902) 2003
Prof. Klaus-Dieter 57 Research and Technology 1998 (19971) 2003
Vöhringer
Dr.-Ing. Dieter Zetsche 45 Brand Management Mercedes-Benz, 1998 (19971) 2003
smart & Sales and Marketing Europe,
Asia, Africa, Australia/Pacific (all
automotive brands)
1
Year first appointed to the Board of Management of Daimler-Benz AG.
2
Year first appointed as an officer of Chrysler Corporation.
Source: DaimlerChrysler (1998b).
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 325

Table 10. The Supervisory Board (Aufsichtsrat/Board of Directors).

The incumbent members of the Supervisory Board of DaimlerChrysler AG, their respective ages as of
March 31, 1999, their principal occupation and the year in which they were first elected or appointed to
the Supervisory Board are as follows:

Year
First
Elected/
Name Age Principal Occupation Appointed

Hilmar Kopper 64 Chairman of the Supervisory Board 1998 (19902)

of Deutsche Bank AG
Chairman
Karl Feuerstein1 58 Retired Chairman of the Corporate 1998 (19902)
Works Council, DaimlerChrysler
Group and the Central Works
Council, DaimlerChrysler AG
Deputy Chairman
Robert E. Allen 64 Retired Chairman of the Board and 1998 (19943)
Chief Executive Officer of AT&T
Willi Böhm1 59 Senior Manager, Wage Office, Wörth 1998 (19932)
Plant, DaimlerChrysler AG
Sir John P. Browne 51 Chief Executive Officer of BP Amoco 1998 (19982)
p.l.c.
Manfred Göbels1 57 Chairman of the Senior Managers’ 1998 (19932)
Committee, DaimlerChrysler Group
Erich Klemm1 44 Chairman of the Central Works 1998 (19882)
Council, DaimlerChrysler AG
Rudolf Kuda1 58 Head of Department, Executive 1998 (19782)
Council, German Metalworkers’
Union
Robert J. Lanigan 70 Chairman Emeritus of Owens-Illinois, 1998 (19843)
Inc.
Helmut Lense1 47 Chairman of the Works Council, 1998 (19932)
Untertürkheim Plant, DaimlerChrysler
AG
Peter A. Magowan 56 Retired Chairman of the Board of 1998 (19863)
Safeway, Inc.; President and
Managing General Partner of San
Francisco Giants
Herbert Schiller1 44 Chairman of the Corporate Works 1998 (19962)
Council, DaimlerChrysler Services
(debis) AG
Dr. rer. pol. Manfred Schneider 60 Chairman of the Board of 1998 (19932)
Management of Bayer AG
Peter Schönfelder1 49 Member of the Works Council, 1998 (19902)
Augsburg Plant, DaimlerChrysler
Aerospace AG
G. Richard Thoman 54 President and Chief Operating Officer 1998 (19983)
of Xerox Corporation
Bernhard Walter 57 Chairman of the Board of Managing 1998 (19982)
Directors of Dresdner Bank AG
326 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

Table 10. (Continued)

Year
First
Elected/
Name Age Principal Occupation Appointed

Lynton R. Wilson 58 Chairman of the Board of BCE Inc. 1998 (19943)

Dr.-Ing. Mark Wössner 60 Chairman of the Supervisory Board 1998 (19982)
of Bertelsmann AG
Bernhard Wurl1 54 Head of Department, Executive 1998 (19792)
Council, German Metalworkers’
Union
Stephen P. Yokich1 63 President of International Union 1998
United Automotive, Aerospace, and
Agricultural Implement Workers of
America (UAW)
1
Representative of the employees.
2
Year first elected to the Supervisory Board of Daimler-Benz AG.
3
Year first elected to the Board of Directors of Chrysler Corporation.
Source: DaimlerChrysler (1998b).

On balance, we conclude by echoing and expanding on the words of Myers

(1976): “Mergers are tricky; the benefits and costs of proposed deals are not
always obvious”. To wit, we add: International mergers are even trickier; the
benefits and hidden costs of these combinations are even less obvious.

NOTES
1. The comparative evidence derives mainly from large sample studies. We are aware
of three other separate studies of the DaimlerChrysler merger: (1) using the same public
data we use, Bruner, Christmann, Spekman, Kannry and Davies (1999) have developed
a Darden case as a negotiation exercise on the price of the acquisition and other details
of the acquisition, (2) Baums (1999) describes the legal structure of the merger, and (3)
Karolyi (1999) describes multi-market trading in this first ’global’ share and documents
how almost 95% of its order flow migrated back to Germany. K. L. Miller (1998a) in
Business Week (November 16, 1998) provides a good overview of the merger.
2. Maquiera, Megginson and Nail (1998) find no evidence that conglomerate stock-
for-stock mergers create financial synergies or benefit bondholders at stockholders’
expense.
3. Daimler-Benz turned net losses of $3.5 billion in 1995 to net profits of $4.4 billion
in 1997 under Schrempp. Business Week (January 11 and 25, 1999) profiles
Schrempp.
4. Information in this section is from the DaimlerChrysler merger prospectus
(1998a) and company Annual Reports. Bruner, Christmann, Spekman, Kannry and
Davies (1999) present an extensive review of the companies’ operations.
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 327

5. In Canada NewsWire Ltd., May 7, 1998. Merger agreement signed . . .”

6. DaimlerChrysler merger prospectus (1998a, p. 50).
7. See Table 1 for an industry overview.
8. Panel A of Table 5 shows the market capitalization of Daimler-Benz and Chrysler
around the merger announcement.
9. We calculate the announced benefits correspond to the actual abnormal increase in
combined value: ($1.4 bill. + $3 bill in 5 years forever discounted at 10%) * (1–0.3
current tax rate on distributed earnings in Germany) = $14 billion.
10. Using closing prices of Daimler-Benz’s ADRs and Chrysler shares on the NYSE
on May 5, 1998.
11. DaimlerChrysler merger prospectus (1998a)
12. General Motors Corporation, Ford Motor Company, Bayerische Motoren Werke
AG, Fiat SpA, PSA Peugeot Citroen, Renault SA, Volkswagen AG and Volvo AB.
13. General Motors Corporation and Ford Motor Company.
14. Securities and Exchange Commission (SEC) Annual Reports forms 10-K
(Chrysler) and 20-F (Daimler-Benz).
15. For example, BancOne Corp. and First Chicago NBD Corp; Travelers Group Inc.
and Citicorp; TransCanada Pipelines Ltd. and Nova Corp.; Grand Metropolitan PLC
and Guinness PLC; Bell Atlantic Corp. and NYNEX Corp; Sandoz Ltd. and Ciba Geigy
Group.
16. DaimlerChrysler merger prospectus (1998a, p. 47).
17. The quote and other details of the transaction are from the DaimlerChrysler
merger prospectus (1998a, p. 51).
18. The structure of transaction is described in DaimlerChrysler merger prospectus
(1998a, pp. 11–13).
19. DaimlerChrysler merger prospectus (1998a) disclosed that directors and
executive officers of Chrysler and their affiliates beneficially owned an aggregate of
1.26% of the Chrysler Common Stock outstanding (including shares under option) as of
July 20, 1998.
20. DaimlerChrysler annual report (1999) as filed with SEC, form 20-F.
21. The proportion of U.S. holders has decreased further. As of Feb. 15, 2000, only
about 22% of DaimlerChrysler ordinary shares were held by U.S. holders. Ibid.
22. See Table 9 for the composition of DaimlerChrysler Management Board.
23. See Table 10 for the composition of DaimlerChrysler Supervisory Board.
24. See Orr (1999) in Forbes magazine (May 17, 1999) for a discussion of
DaimlerChryslers’s and international patterns in compensation policies.
25. Ibid.
26. This Chrysler return is computed from Datastream’s SEAQ prices. The
Chrysler’s raw return computed from NYSE closing prices was –10.1%. The (S&P500)
market-adjusted abnormal return to Chrysler shares was –7.04% (t-stat = –5.1).
27. The NYSE trading volume in Chrysler shares on October 1, 1998 was 3.3 million
shares – not significantly different from the average daily volume during the previous
three months (3.6 million shares, (volume) = 1.7 million shares).
28. S&P dropped Chrysler from the its S&P500 index on the last day (November 12,
1998) Chrysler shares traded on the NYSE. On that day, the NYSE trading volume
reached 51.76 million shares (about 8% of all Chrysler shares), which is 14.4 times of
the average daily volume during the three months before S&P’s announcement.
328 MATEJ BLAŠKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

29. See Akre (1999) in The Associated Press State & Local Wire, March 25, 1999.
Lexis-Nexis.
30. As Reported on CNNfn news: “Daimler, Mitsubishi in talks?”, March 6, 2000,
9.47 pmET. Original source: Reuters.
31. The S&P500 was down 2.56%, DAX was up 0.93%, and the DSWorld-market-
index was down 1.2%. It is interesting to point out that DCX’s stock price was
positively correlated with S&P500 index ( = 0.74) since the beginning of year 2000,
and negatively correlated with German DAX30 index ( = –0.80).
32. Mariko Ando report for CBS MarketWatch. Source: CNNfn.com
33. The New York Times. NYTimes.com. March 27,2000.
34. The difference between buy-and-hold returns to DaimlerChrysler and an index,
May 5th, 1998 (before the merger announcement) until March 14, 2000 (as of this
study). These returns would be even worse if measured on a post-announcement basis.
35. Ford Motor Co. has also been involved in a merger during this time period. In the
spring 1999, Ford bough Sweden’s Volvo car division for $6.5 billion.

REFERENCES
Baums, T. (1999). Corporate contracting around defective regulations: The Daimler-Chrysler
case. Working paper.
Blitzer, D. M. (1998). Chairman of the S&P500 Index Committee as quoted by Business Wire Inc.
report (Oct. 1, 1998). Lexis-Nexis.
Bruner, R. F. (1999). An analysis of value destruction and recovery in the alliance and proposed
merger of Volvo and Renault. Journal of Financial Economics, 51, 125–166.
Bruner, R., Christmann, P., Spekman, R., Kannry, B., Davies, M., & Daimler-Benz, A.G. (1999).
Negotiations Between Daimler and Chrysler. Darden Graduate School of Business
Administration Case UVA-F–1241.
Garten, J. E. (1998). Economic Viewpoint: Daimler has to steer the Chrysler merger. Business
Week, (July 10), p. 20.
DaimlerChrysler (1998a). Merger Prospectus. Chrysler Corporation Proxy Statement (For a
Special Meeting of its Stockholders to be held on September 18, 1998) and Daimler-
Chrysler AG Prospectus; SEC filing – Form F–4 – Registration statement under the
securities act of 1993. As filed with the Securities and Exchange Commission on August
6, 1998.
DaimlerChrysler (1998b). Annual report, as filed with the SEC on March 31, 1999, Form 20-F.
DaimlerChrysler (1999). Annual report, as filed with the SEC on February 28, 2000, Form 20-F.
Daimler-Benz (1997) and (1996). Annual reports.
Fama, Eugene, (1998). Market Efficiency, long-term returns and behavioral finance. Journal of
Financial Economics, 49, 283–306.
Grinblatt, M., & Titman, S. (1998). Financial Market and Corporate Strategy. Irwin/McGraw Hill:
Boston.
Hooke, J. (1997). M&A: A practical guide to doing the deal. John Wiley & Sons, Inc.
Kaplan, S., Mitchell, M., & Wruck, K. (1997). A Clinical Exploration of Value Creation and
Destruction in Acquisitions: Organizational Design, Incentives, and Internal Capital
Markets. Working paper University of Chicago and Harvard.
Kaplan, S. (1989). Campeau’s Acquisition of Federated: Value Created or Value Destroyed?
Journal of Financial Economics, 25, 191–212.
The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction? 329

Kaplan, S. (1994). Campeau’s Acquisition of Federated: Post-Bankruptcy Results. Journal of

Financial Economics, 35, 123–136.
Karolyi, G. A. (1999). DaimlerChrysler AG, The First Truly Global Share. Fisher College of
Business, Ohio State University. Working paper, WP–99–13.
Loughran, T., & Vijh, A. M. (1997). Do long-term shareholders benefit from corporate
acquisitions? Journal of Finance, 52(5), 1765–1790.
Loughran, T., & Ritter, J. R. (1995). The New Issues Puzzle. Journal of Finance, 50(1), 23–51.
Lyon, J. D., Barber, B. M., & Tsai, C-H. (1999). Improved methods for tests of long-run abnormal
stock returns. Journal of Finance, 54, 165–201.
Lys, L., & Vincent, L. (1995). An analysis of value destruction in AT&T’s acquisition of NCR.
Journal of Financial Economics, 39, 353–378.
Maquieira, C. P., Megginson, W. L., & Nail, L. (1998). Wealth creation versus wealth
redistributions in pure stock-for-stock mergers, Journal of Financial Economics, 48,
3–33.
Miller, K. L. (1998a). The Auto Baron. Business Week, (November 16), 82–90.
Miller, K. L. (1998b). Deutsche Bank: Big noise, little impact. Business Week, (International
edition, November 16). Lexis-Nexis.
Myers, S. C. (1976). Introduction: A Framework for Analyzing Mergers. In: S. C. Myers (Ed.),
Modern Developments in Financial Management (pp. 633–645). New York: Praeger.
Naughton, K. (1999). Industry Outlook 1999: Manufacturing – Autos. Business Week, (January
11), 112–113.
Naughton, K. (1999). The Global Six. Business Week, (January 25), 68–72.
NYSE Daily Stock Price Record (1997) and (1998). New York Stock Exchange. Standard &
Poor’s.
Orr, D. (1999). Compensation policies: Damn Yankees. Forbes, (May 17), 206–207.
Roll, R. (1986). The Hubris Hypothesis of Corporate Takeovers. Journal of Business, 59,
197–216.
Reed, S. F., & Lajoux, A. R. (1995). The Art of M&A A Merger and Acquisition Buyout Guide (2nd
ed.). Washington: McGraw Hill.
Ruback, R. S. (1982). The Effect of Discretionary Price Control Decisions on Equity Values.
Journal of Financial Economics, 10(1), 83–105.
Yates, B. (1996). The Critical Path: Inventing an Automobile and Reinventing a Corporation.
Boston: Little, Brown and Company.