Mergers and Acquisitions in the Automotive Industry

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Acquisitions and mergers in the automotive industry

Increased globalization of the world economy has led to the merging of companies in related industries in recent years. Various reasons lead companies operating in disparate locations and markets to join into a single operation. Price (1987, and in Fitzgibbon & Seeger 2000) describes a merger simply as the “formal joining or combining of two corporations or business.” The merging of entities that have previously operated separately is motivated by several factors, but three prime reasons are noted for the increasing spate of mergers and acquisitions in the recent past.

One of the prime reasons for the merging of separate operations into a single business entity is synergy (Fitzigibbon & Seeger 2000). The companies coming together appreciate that opportunities exist for much more efficient production that each individual is unable to achieve. Having been in operation for several years, such companies notice areas in which their operations could be complemented by the companies with which they merge.

Another reason that makes companies merge is the desire to increase competitiveness (Fitzigibbon & Seeger 2000). In a continuously globalizing economy, companies with a global presence have the ability to compete more effectively than those whose operations are limited to a single company or limited locations. A larger corporation is able to take advantage of increased economies of scale, which the smaller corporation cannot. Ultimately, the merging companies aim to increase shareholder value (Fitzigibbon & Seeger 2000). When greater competitiveness is achieved as a result of the merger, the companies stock prices increase, thereby benefiting the shareholder.

The way a merger is carried out will depend on the size and financial muscle of the companies involved. Two companies of equal size and strength could merge in an operation that recognizes the equality of the two different organizations as well as each company’s strengths and weaknesses. In such a situation, the merging companies will join together to form a new organization as equals. However, mergers sometimes are not a matter of friendly mutual agreement and sometimes actually involve a hostile takeover.

The Daimler Chrysler AG Merger

In 1999, the Daimler Benz corporation of Germany merged with the Chrysler Corporation (Fitzigibbon & Seeger 2000). In merging, the two companies aimed to create a company with a global presence and to bring the strengths that each company had to the global automobiles market. At first sight, the companies appeared to be equal partners in the merger. Fitzigibbon and Seeger (2000) note that the companies at the time of the merger were almost equal in size.

In addition, the companies appeared ideal for a merger because each had specific strengths which could be complemented by the other. Chrysler, founded and having its main operations in the US, was a company that “emphasized innovation and flexibility” while its counterpart, Daimler Benz, was a company “characterized by structured, hierarchical management and German engineering excellence” (Fitzigibbon & Seeger 2000).

These apparent equal partners were thus ideal for a mutually beneficial merger. In addition, the two companies were among the market leaders in their areas of specialization, and their coming together was supposed to create a truly global company. Owing to the apparent equivalence of the two companies, their merger was vertical and friendly. A brief history of the two companies should help put the merger in perspective.

Daimler Benz

Daimler Benz is a company with a long and prestigious history. Its founders, Gottlieb Daimler and Carl Benz, are acknowledged as the creators of the automobile (“Corporate profile”). They accomplished this invention in 1886 and throughout the existence of the company Daimler Benz has been known as a market leader. The excellence associated with German engineering excellence probably has its roots in the Mercedes-Benz, the car that defines class and is “the world’s most valuable automobile brand” (“Corporate profile”).

Daimler Benz is a market leader today and has a wide range of products. Apart from the Mercedes-Benz cars, the company also produces Mercedes-Benz vans and Daimler Trucks and Buses. Moreover, the company offers financial services under its Daimler Financial Services. Daimler Financial Services provides funds for vehicle financing. In addition, fleet management and insurance services are offered by the company under Daimler Financial services. The trucks and buses from Daimler Benz are among the world’s leading in the range of medium and heavy-duty category. Starting in Germany, Daimler Benz today has a global presence and has plants in Europe, North and Central America, Asia, South America, and Africa (“Company overview”).

The Chrysler corporation

The current global crisis has brought the Chrysler corporation to the forefront, and the company is in the news for mainly the wrong reasons. Along with the other automobile manufacturers in the US, Chrysler is facing such hard economic times that its very survival is at risk. Yet, the Chrysler Corporation is a company with a long history. The company was started in 1925 by Walter P. Chrysler (“Chrysler history”).

The founder was a famous machinist and in three short years had expanded the company by acquiring Dodge and creating two additional divisions, DeSoto and Plymouth. From small beginnings, the company became famous for embracing innovation and by the 1930s had developed a Chrysler model that used the revolutionary Airflow design, a motor vehicle that attempted to use the available knowledge of aerodynamics. These attempts at application of advanced engineering did not however bear fruit, but the company was able to withstand many pressures, including the lean times that were brought on by the depression.

Survival during the depression years is credited to the company’s abilities to successfully market the Dodge and Plymouths vehicles. These vehicles were reasonably priced, making them appeal to the public (“Chrysler history”).

The company enjoyed enormous growth in the period after WWII and only faced a major crisis in the 1970s when the world oil crisis destabilized many in the automobile industry. Troubles for Chrysler during this period were deep, and it had to seek federal support to save it from bankruptcy. Government support, amounting to $1.5 billion, saved the company from bankruptcy, and henceforth the company enjoyed massive growth. By the time of the merger discussions with Daimler Benz, the company was in a strong position in the US market and had developed global markets, thus making the merging of the two companies to form DaimlerChrysler seem like a union of equal partners (“Chrysler history”).

Stakeholders in the merger

The merger of Daimler Benz and Chrysler was hailed as “a merger of equals” (“Chrysler history”). In fact, Fitzigibbon and Seeger (2000) note that the merger took much publicizing with Chrysler at the forefront trying all it could to guarantee its loyal workers that what the two companies were getting into was a marriage, a marriage of equals. The word marriage was carefully chosen by the management of Chrysler, who had discovered that a number of stakeholders were uncomfortable with the merger and therefore needed to be reassured.

In the merger process, Chrysler’s employees were major stakeholders because of a unique culture that Fitzigibbon and Seeger (2000) note had developed at the Chrysler Corporation. At Chrysler, employees had played a critical role in saving the company from bankruptcy in the 1980s. While the company was seeking federal support to save it from imminent bankruptcy, the employees accepted wage cuts and accepted to forego benefits that they were entitled to in a bid to keep the company afloat. This act of sacrifice made the employees major stakeholders who needed to be satisfied when an issue as big as a merger came up for discussion.

In addition to employees, the dealers and customers that the company dealt with were another important group of stakeholders that needed to be satisfied. The company had established Chrysler as a uniquely American car so that, as part of its advertising and marketing campaign, it created the impression that purchasing a Chrysler was in itself an act of patriotism (Fitzigibbon & Seeger 2000).

As part of the attempt at playing the patriotism card, Chrysler had been calling for a limitation on the number of Japanese vehicles making it to the US market. Moreover, the company, to be truly representative of the American people, tried to supply cars to all sectors of the population. Thus, it had cars for the military (the Jeeps) and cars for the middle and lower classes of the population. The dealers and customers, while appreciating the necessity of the merger and seeing the possibility of new opportunities coming up were generally apprehensive and needed reassuring (Fitzigibbon & Seeger 2000).

For the customers, the German connection presented a particularly vexing situation for Chrysler. While the latter was supposed to be representative of American patriotism, Daimler Benz was known to have been a supplier of military equipment to Nazi Germany. This was likely to antagonize not only patriotic Americans but the huge numbers of Jews among the American population (Fitzigibbon & Seeger 2000).

Concerns of other stakeholders

While Chrysler was giving assurances on the viability of the merger to the stakeholders in the US, concerns were being raised by stakeholders in Germany. Part of the campaign by the CEO of Chrysler, Robert J Eaton was to reassure the employees that the merger would not lead to job losses. To convince a largely skeptical workforce, the CEO teamed up with the CEO of Daimler Benz, Jurgen Schrempp to address the press on the compatibility of the two companies.

This compatibility was emphasized by alluding to the complementary roles that the two companies could play. The two companies were shown to be ideal for the merger because Mercedes Benz, from its beginnings had specialized in the production of automobiles for the “high and luxury range market” while Chrysler had mainly concentrated on the medium-range vehicle and the companies could therefore be considered to be rationalizing their operations (“Industrial relations aspects of the Daimler-Chrysler merger 1998).

With the CEOs guaranteeing that no job losses would occur as a result of the merger, the two main trade unions that were affected, IG Metall of Germany and the United States Auto Workers Union supported the merger. While the umbrella trade unions expressed support for the merger, some individual unions were more cautious. Caution was expressed by IG Metall’s Baden-Wurtemberg regional office, which felt that job losses were inevitable.

Inside Daimler Benz itself, the council for the protection of workers right sought to obtain a written assurance from the company that the merger would not adversely affect the workers. To achieve this, the company sought to have the company extend the workers’ job guarantee “from the end of 2000 to the end of 2002” (“Industrial relations aspects of the Daimler- Chrysler merger 1998). The requested guarantee was, however, not given. Instead, assurances were given that the outsourcing of services and mergers would not in any way affect the employability of those already in employment.

The terms of the merger

From the outset, the merger between Daimler Benz and Chrysler was presented as a friendly union of two equal partners. As part of the process of preparing the various stakeholders for the merger, various attempts were made in the press and public forums to drum support for the merger and the term “marriage of equals” was specifically coined to clear doubts in the minds of many stakeholders who remained skeptical (Fitzigibbon & Seeger 2000).

When the financial details of the merger were revealed, however, there were immediate doubts about the equality in the marriage. For one, it would have been expected, since the parties were equal partners, that a Chrysler share would have been valued the same as a Daimler Benz share. However, initial financial details showed that “the exchange ratio was set at.547 Daimler Chrysler stock for each Chrysler share” (Fitzigibbon & Seeger 2000) thereby effectively devaluing the shares of the Chrysler shareholders.

While the merger was supposed to make both companies use their different strengths to complement each other, Chrysler had emphasized that the two companies would “retain their individual brands and market focus” so that the merger then became a source of strength and not a dilution of the effectiveness of either party (Fitzigibbon & Seeger 2000). As part of the terms of the merger, it was agreed that the company, in appreciation of its American and German ownership, would be run by two chairmen – one would be located in Michigan, USA, and the other one in Stuttgart, Germany (Fitzigibbon & Seeger 2000).

Moreover, these chairmen would have the privilege of shuttling between the two cities while the “Board of Management meetings would be conducted on a bi-continental basis and there would be a blending of management into this new global entity DaimlerChrysler” (Fitzigibbon & Seeger 2000).

The merger process was done in a short period and was completed in May 1998 (Fitzgibbon & Seeger).

How successful was the merger

The conditions and the reasons given for the merger of Daimler Benz and Chrysler were ideal and presented the rosy picture of a future of massive growth from a company that was combining the strengths of two companies that already had a global presence. Things, however, turned out quite differently.

One of the main reasons that made Daimler Benz get attracted to Chrysler was the latter’s profitability (Zalubowski 2009). By the time of the merger, Chrysler was among the three main automobile manufacturers in the US and seemed set on the route of growth that would be improved by merging with Daimler Benz. Chrysler’s profitability, however, took a bashing in the years following the merger, and it had to cede the number three position to Toyota (Zalubowski 2009). Where profits had been the norm, losses set in, and the climax was the 2006 loss of $1.5 billion which made the company announce that it was considering selling Chrysler.

In fact, Fitzigibbon and Seeger (2000) show that decline for the new company started almost immediately after the merger. The sales figure for Chrysler, which must have played a significant role in attracting Daimler Benz had been increasing and in October 1998 had reached 226,197 units. This was an increase of twenty percent over the sales in the same period in 1997 (Fitzgibbon & Seeger).

Moreover, the sales figure constituted a substantial proportion of the American automobile market – by this time Chrysler had slightly over sixteen percent of the market share. With the merger, the sales went down by four percent in the following year while Chrysler’s market share had fallen to fifteen percent. The deterioration continued so that by 2000 Chrysler’s market share had fallen to thirteen percent (Fitzigibbon & Seeger 2000). Perhaps to indicate the future that this merger held, DaimlerChrysler, responding to the losses of the initial years, undertook a major restructuring exercise that led to the loss of 26,000 jobs.

That the merger was not working was also almost immediately evident in the contribution of Chrysler to the company’s operating profit. When the companies merged in 1998, Chrysler contribution to DaimlerChrysler revenue was 48 percent. This, however, fell to 45 percent the following year. By 2000, losses in dollar terms had reached $1.3 billion. Most of these losses were being attributed to the reduced demand for Chrysler vehicles in the American market, thereby further complicating matters for the Chrysler group (Fitzigibbon & Seeger 2000).

In addition to reduced sales and profitability, the DaimlerChrysler merger led to a fall in the values of the shares of the new company. Fitzigibbon and Seeger (2000) note that by the time of the merger in 1998, Chrysler’s shares traded at $70 per share. Immediately after the merger, the shares rose sharply and had reached $100 in 1999. However, by 2000, the share prices had nosedived to $53 and further fell to $48 in 2001. For the shareholder, this means that the value of the shares had fallen by over 35 percent.

Why the merger failed

Various reasons have been given for the failure of a merger that was supposed to create a company that would not be surpassed by any other in the automobile industry. While the CEOs of the two companies have conceded that observance of due diligence would have saved the company, observers in the automobile industry are of the opinion that the merger was doomed to fail right from the start.

Krebs (2007) is of the opinion that the merger “was built on sand, not on solid rock foundation”. According to Krebs (2007), the merging companies dealt with one another dishonestly. While the union was variously described as a marriage and partnership of equals, observers maintain that Daimler Benz actually took over Chrysler so that the latter was never treated as an equal partner and that the former’s only intention was to dominate Chrysler and probably remove it from the market.

While that is the position held amongst observers in the American automobile market, Dudenhoffer (2007) agrees in part but notes that the two companies merged only in name but continued to operate on separate platforms. This presented a huge challenge and was fertile ground for failure. When the two companies failed to use the platform of unity that the merger brought to them, it effectively means that the companies could not make use of the economies of scale that merging should have provided.

As an indication that the companies only merged in name but not in practice, Dudenhoffer (2007) observes that the companies failed to use “common parts and components” so that where Chrysler was faced with serious problems it could not rely on support from other “parts of the company”. Dudenhoffer (2007) further notes that the two companies continued to operate as separate entities because of the difference in the types of automobiles that they were producing and failed to appreciate that it would be possible to utilize the same platform to service both the divisions handling premium cars and those handling production of higher-volume productions.

He gives the example of Toyota, which uses the same platform to produce the premium model, Lexus and other brands that are for the mass market. The same has been done by VW and Porsche, thereby making the manufacturing divisions play complementary roles. At DaimlerChrysler, there developed arguments from the merged partners. Dudenhoffer (2007) highlights the differences by noting that Daimler Benz declined to use parts from Chrysler claiming that such use would compromise the quality of the vehicles they produced.

Chrysler, on its part, refused to use the parts from Mercedes-Benz, claiming that such use would make the car too expensive and therefore unaffordable. Further complicating the situation for the merger was the continued expansion of cars that presented better alternatives to what DaimlerChrysler was offering. Like the other US companies, DaimlerChrysler continued to produce vehicles that were gas guzzlers while companies like Toyota and Nissan were producing cars that were more economical to run. Dudenhoffer (2007), while acknowledging that this is a problem within the whole of the US automobile industry, notes that the motor vehicle manufacturers have tended to concentrate on SUVs and pick-ups when the market forces have been pointing to the demand for fuel-efficient cars.

Apart from the dishonesty that has been seen as afflicting the merger from its very beginning, analysts have also noted some cultural differences in the running of the two companies that made the running of the merged company the source of conflicts. While Dudenhoffer (2007) observes that the Germans and Americans are proud people who would like to run the show without reference to one another, another angle is introduced by the management styles that were employed in the two companies. Daimler-Benz is a company that was run through “methodical decision-making” (“Daimler, Chrysler and the failed merger 2008).

Chrysler, on the other hand, as demonstrated by the management’s efforts to sell the idea of the merger to not only the shareholders but to the employees as well, is a company that was run much more openly. As a company that took pride in innovation, Chrysler encouraged the participation of all the employees in the decision-making process. This openness and creativity was not the desired way of doing things at Daimler Benz and was bound to cause problems when the latter attempted to run its operations the way it ran the German ones.

This difference in the administrative was bound to show itself in the form of resentment by the American workforce. In effect, this would hinder the “realization of synergies” and further prevent the merged company from realizing its objectives (“Daimler-Chrysler and the failed merger 2008). The inability of the merged company to realize synergies is noted by Fitzigibbon and Seeger (2000), who note a trend that developed soon after the merger that was bound to cause problems for the merger.

As a result of the merger, the PR department at Chrysler was made almost redundant. While the union was supposed to be a marriage of equal partners, the PR department at Chrysler soon learnt that all the company’s communications would be cleared through Germany.

Managers at Chrysler were frustrated by this development with the result that a number of senior officials at Chrysler, including those that had participated in the discussions that preceded the merger, actually quit their jobs. The departure of those previously in managerial positions not only demoralized those that were left behind but also caused the emergence of a situation in which management decisions were no longer made in a coherent manner, further denting the image of the new company and curtailing its efficacy (Fitzigibbon & Seeger 2000).

Further doubts about the ability of the merger to deliver were expressed in the months following the merger when it emerged that Chrysler was being treated as an entity separate from the merged group. This created the impression that DaimlerChrysler was one thing and Chrysler a separate entity in the organization and was being treated as a separate entity so that the losses that would be incurred from the market failure of Chrysler would be treated separately from losses from the rest of the group.

The creation of the DaimlerChrysler corporation had one consequence that was to contribute substantially to the failure of the merger. Since the company was run from both the US and Germany, it was not included in the Dow Jones Industrial Average, and with the losses that it suffered a few years after inception was no longer among the top US companies. This led to a fall in the share value of the company relative to the values of the competition (Fitzigibbon & Seeger 2000).

Conclusion

DaimlerChrysler was created through a friendly vertical integration process. To all intents and purposes, two equal partners seemed to be coming together to create a company that would be the undisputed market leader in the automotive industry.

While good intentions seem to have driven this merger, there was a lack of complete honesty in the way the merger was handled. While Chrysler went to great lengths to assure its various stakeholders that all was well, it is also evident that a number of issues were left unaddressed, and these created the recipe for future problems. The merger was bringing together two companies that had different cultural and operational philosophies as well as different histories. While officials of the merging companies emphasized the strengths of their separate companies, they failed to recognize that the merger presented serious challenges that needed to be addressed. As a result, the strengths of the merger were over-emphasized while the weaknesses were largely ignored.

Part of the merger campaign mounted by Daimler Benz and Chrysler was the creation of metaphors that were supposed to aid in passing the messages of the merger to the shareholders. Fitzigibbon and Seeger (2000) note that the metaphors that were used for this campaign were not clearly thought out so that when unexpected issues arose, the metaphors were found to be unable to address these.

Terms like a marriage of equals failed to make sense when it emerged that Daimler Benz was having the greater say in the management of the merged organization. In the end, what was supposed to be the biggest automobile association in the world failed to develop to the levels envisioned mainly because of the confusion that characterized it in the formative stages. As noted by Fitzigibbon and Seeger (2000), the merged company ended up being a “confusion of American and German values and identities.

References

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Fitzigibbon, J.E & Seeger, M.W. (2000). Audiences and metaphors of globalization in the Daimler Chrysler ag merger. Communication studies 53(1), 40+

“Industrial relations aspects of the Daimler-Chrysler merger” (1998). Caroline. Web.

Krebs, M. (2009). Daimler-Chrysler divorce final with name change. Edmund AutoObserver. Web.

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