1 INTRODUCTION Both mergers and acquisitions are attempts from companies just in order to combine their strengths so to achieve synergistic benefits. Two companies combine to form a new company in a merger. In an acquisition, one company takes over the other in terms of ownership or management. Mergers and acquisitions can create economies of scale, in which costs of similar functions can be reduced. Cost per unit of output can reduce as well with increased output bringing down the cost per unit to be produced. Investors are happy with the notion that the merger or acquisition will give the company added strength and benefits. One plus one makes three: this equation is the special alchemy of a merger or acquisition. The key behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies a main reasoning behind M&A. This rationale is particularly alluring to companies when times are tough. Companies that are strong will act to buy other companies to create a more competitive, cost-efficient company. The companies that will come together hope to gain a greater market share or achieve greater efficiency. These are the potential benefits, because of which target companies will often agree to be purchased when they know they cannot survive alone. http://www.investopedia.com/university/mergers/ In today's challenging business environment, companies must continuously acquire knowledge and expertise, gain new product and service capabilities, and expand market share in order to attain a critical mass in an increasingly competitive and volatile economy. A number of companies are turning to mergers and acquisitions (M&As) to help achieve these objectives. Determining whether to purchase another business, or to merge to form a large and perhaps quite different company, is one of the most important decisions and management is called upon to make. The right acquisition at the right time can be a shortcut to expansion, increased profitability, and a new direction for the business. With a single act, the acquiring company may accomplish growth which would have been impossible or which, at the very least, would otherwise have taken many years of investment and hard work. However, a bad decision can be fatal, often stretching the acquirer's financial, managerial and other resources beyond their capacity, causing the entire structure to fail. An acquisition decision is, therefore of extreme importance. Even if growth through acquisition or merger is a good idea, choosing the right acquisition candidate and completing the acquisition process are difficult and risky steps. Most acquirers evaluate numerous potential acquisition candidates for each transaction they actually consummate in order to be successful (Joseph M Morris, 1998). For many companies, the acquisition itself is the easy part; the more difficult task is to successfully integrate the newly acquired company within the organization. Beyond the tactical aspects of determining which employees will now report to whom and which facilities will remain open and which will close, a merger or acquisition involves integrating more strategic aspects, one of the most important of which is the creation of a corporate culture (Jossey Bass, 1998). From nineteen ninety onwards there is an increasing trend of mergers and acquisitions. Due to globalization it has also encouraged cross border mergers. This report looks at the merger in an automobile company, Daimler-Benz with Chrysler, which took place in 1998.
1.1 DAIMLER-BENZ AND CHRYSLER: THE MERGER On May 7, 1998, Daimler Benz and Chrysler announced their merger agreement, in a $48 billion share-for-share exchange affected with a new global registered share facility with a new name DaimlerChrysler (DCX). The merger became effective in November 1998 and on the 17th of that month, through a business combination of Daimler Benz and Chrysler to create a global, diversified manufacturer and distributor of automobiles, diesel engines, aircraft, helicopters, space and defense systems and other products and services. The DaimlerChrysler AG Global Registered Shares (GRS) simultaneously began trading on twenty-one markets around the world, including Frankfurt and New York. The shares are traded, quoted and settled in U.S. Deutschmarks or Euros in Frankfurt and dollars in New York. Daimler shareholders got about 55% of the new company and Chrysler shareholders got about 45% because Daimler's market capitalization was greater than Chrysler's. (G. Andrew, 2003)
1.2 COMPANY BACKGROUND: DAIMLER-BENZ Daimler Benz was founded in 1895 in Stuttgart, Germany, and by the 1980s; it had become one of its largest industrial companies with 1997 revenues of DM 124 billion. Its market capitalization was $36 billion on December 31, 1997 and net sales were over $68 billion. The company had over 550,000 shareholders with its shares distributed across 14 stock exchanges around the world, including the New York Stock Exchange (NYSE) as ADRs since 1993
( Radebaugh, Gebhardt and Gray 1995). Daimler-Benz and its consolidated subsidiaries operated in four business segments: Automotive (Passenger Cars and Commercial Vehicles), Aerospace, Services and Directly Managed Businesses World scope Database Global Researcher (Update 36, April 1999). Daimler-Benz was primarily active in Europe, North and South America and Japan. In 1997, approximately 33% of Daimler-Benz' revenues was derived from sales in Germany, 25% from sales in other member states of the European Union and 21% from sales in United States and Canada.
1.3 COMPANY BACKGROUND: CHRYSLER Chrysler was incorporated under the laws of the State of Delaware on March 4, 1986, and is a surviving corporation following merger with number of its operating subsidiaries, including a predecessor corporation which was originally incorporated in 1925. Net sale in 1997 was $61 billion, and its market capitalization was $23 billion on December 31, 1997. 135,000 shareholders held the shares worldwide and its shares were traded worldwide, including Frankfurt, Berlin and Munich in Germany. Chrysler and its consolidated subsidiaries operated in two principal industry segments: Automotive Operations and Financial Services. Automotive Operations included the research, design, manufacture, assembly and sale of cars, trucks and related parts and accessories. Substantially all of Chrysler's automotive products were marketed through retail dealerships, most of which were privately owned and financed. Financial Services included the operations of Chrysler Financial Corporation and its consolidated subsidiaries, which were engaged principally in providing consumer and dealer automotive financing for Chrysler's products. Chrysler was manufacturing, assembling and selling cars and trucks under the brand names Chrysler, Dodge, Plymouth and Jeep, and related automotive parts and accessories, primarily in the United States, Canada and Mexico. Chrysler was producing trucks in pickup, sport-utility and van/wagon models, which constituted the largest segments of the truck market. In 1997, although most of its vehicles were selling in North America, but it also participated in other international markets through its wholly owned subsidiaries in Argentina, Brazil, Venezuela, Taiwan, Korea, Japan, Thailand, Egypt, Austria, Italy, France, Belgium, the Netherlands and Germany, a joint venture in Austria, and through minority-owned affiliates located in china and Egypt.
1.4 REASONS FOR DAIMLER CHRYSLER MERGER: Jurgen Schrempp, the CEO of Daimler-Benz touted the merger between Daimler-Benz and Chrysler as being a "merger of equals (Gibney,Frank Jr,1999). It was the largest industrial merger in history and was being analyzed by the world to see if the Germans and Americans could regain their global prominence and compete more effectively with the Japanese. At the time of the merger, Chrysler was the most profitable of the Big Three U.S. automakers (Pfeffer,Jeffrey, 2003) The merger was motivated by the following reasons. One, Chrysler wanted to re-enter the European market with a strong position. Two, there was too much U.S. manufacturing capacity with a large number of smaller plants and it was estimated that the merger would force some these plants out of business. One of Jurgen Schrempp long-term goals after merging with Chrysler was to strengthen the companies' position in the growing Asian market. Integrating some of the lean and flexible ways of Chrysler into the traditional, engineering- driven Daimler-Benz culture was seen as a major benefit of the merger. Chrysler was known for its approach, where speed and ingenuity were prized. Teams of engineers, designers, production and marketing people were organized around common platforms. Freed from corporate bureaucracy they could produce imaginative designs quicker and much more efficiently. On the other hand, Chrysler could use some of the German self-discipline and engineering and quality focus. "One of the real benefits to us is instilling some discipline that we knew we needed, but weren't able to inflict on ourselves," said a Chrysler executive (Daimler Chrysler Crunch Time,September, 1999).
1.5 EARLY ATTEMPTS AT MERGERS:
Daimler-Benz Edzard Reuter, the previous Daimler-Benz Chairman, had pursued the vision of an integrated technology concern. Under his leadership the company had expanded into financial services, the aircraft industry (Fokker, Dornier), a large conglomerate itself (household goods, automation technology, office automation and railway equipment). When Schrempp took over in May 1995, financial performance of the company had seriously declined. Taking shareholder value management to heart, his first task was to rationalize and streamline the Group's non-auto businesses. At the same time, he pushed forward several new projects in the car business. In preparation for a major change of strategic direction Schrempp had Daimler-Benz adopt US GAAP accounting principles and listed the company on the New York Stock Exchange. Furthermore, he reorganized Daimler-Benz into a holding company, thereby providing the structural conditions for merging with a large player. However, groundwork for possible acquisitions and mergers had already been laid in the early 1990's before Schrempp had become Chairman of Daimler-Benz. Mercedes-Benz executives feared that their traditional upscale car range was reaching the limits of its market potential. Studies completed at that time indicated that Mercedes-Benz, which had sold just above 500,000 cars in 1993, would never be able to grow beyond sales of one million units annually. The company's traditional markets were mature and its Mercedes-Benz brand cost too much for customers in developing countries. Maintaining the premium status of the brand entailed restricted expansion. This could mean that the company might lose its competitive strengths in new technologies. Suppliers no longer wanted to grant Daimler-Benz the exclusive use of breakthroughs like intelligent cruise control systems for more than a few months. They instead preferred to get their money back faster by selling the latest technology to bigger producers such as Volkswagen or General Motors.
1.6 Chrysler Chrysler made an impressive comeback from near-bankruptcy in the late 1970's. A special Federal Loan Guarantee Program supported by the U.S. government rescued it. In the early 1980's the company reinvented itself by streamlining its manufacturing operations. It reduced the white-collar force by half and the blue-collar force by a quarter. Furthermore, drastic price cuts for parts and services were negotiated - establishing Chrysler as the industry benchmark standard for buying parts and components. Before the merger Chrysler was more profitable than Daimler-Benz - earning $ 2.8 billion in 1997 on $ 61 billion in sales, whilst Daimler-Benz had earned $ 1.8 billion on $ 69 billion in sales. In 1987, the company acquired Renault's U.S. car operations, American Motors. An attempt to merge with Fiat failed in 1990, as did a hostile takeover bid by billionaire investor Kirk Kerkorian. In 1995 Chrysler and Daimler-Benz held talks about how to jointly expand their position in the Asian growth market. As these talks did not come to any conclusions, Chrysler developed its 'Lone Star' strategy, a low investment growth approach to foreign markets. Rather than build factories abroad the company would try to export cars that it produced in North America. But Chrysler discovered that it was too thinly staffed to deploy the managers needed around the world to speed up such sales. At the same time Chrysler was feeling the pressure from the demands of advanced technology. R&D cost Chrysler more than its U.S. competitors because it made fewer vehicles over which to spread the cost.
1.7 PROBLEM STATEMENT The concept of merger and acquisition is very in today as most of the companies and sectors are performing it. Daimler Benz and Chrysler the automobile giants merged to form Daimler Chrysler. The researcher is keen to study post merger analysis and the problems faced as consequence of the merger.
1.8 RESEARCH QUESTIONS What was the post merger analysis of the merger? What were the problems faced as the result of the merger?
1.9 SIGNIFICANCE I was unable to locate any work done on mergers and acquisitions in automobile industry that's combined together. This research will be conducted considering the aspect of mergers and acquisitions in an automobile industry between Daimler Benz and Chrysler.
1.10 SCOPE OF STUDY The scope of the study is to evaluate the Daimler Chrysler merger. The research will focus on Daimler Benz and Chrysler the biggest giant in auto mobile industry. The research aim to analyze the post merger analysis and the problems faced as consequence of the merger
1.11 OBJECTIVES A clear and well developed objective makes all tasks easy. Since this research deals with the merger and acquisition in automobile industry between Daimler Benz and Chrysler, the objective of this study is as under:
The objective is to study is:
Post merger analysis Synergies and economy of scale Post merger business model Stock price before and after the merger Integration of accounting procedure Comparing market share of Daimler Chrysler with its competitors
Problems faced as the consequence of merger Top management layoffs Coordination problems Communication problems Cultural conflicts merger Decline in stock prices after merger Decline in sale in Chrysler division.