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THE DAIMLERCHRYSLER EMULSION

A case study on failure of DaimlerChrysler Merger

Utkarsh
Thilak Kumar
Varun Das
Manisha Bhujang
Abhishek Harlalka

INTRODUCTION SETTING STAGE AND PURPOSE

Daimler-Benz
In 1885 Daimler, together with
Maybach began work on the first
engines that were designed
specifically for use in motor
vehicles.
Daimler-Benz

Chrysler

Weakness

Weakness

Lacked a Global
Business Model
High Production
Costs

Strengths
Mercedes is the
most popular
luxury brand
A strong dealer
network
Ranked #17
globally

New Opportunities were

identified
Increase sales
New markets
Reduce costs
Realize economies
of scale for the new
entity

MAY 1998
Daimler and Chrysler
decides to merge
Create
DaimlerChrysler

Inadequate Dealer
Network in Europe
Financial Distress in
1980s

Looking Ahead
Synergies of about USD 1.4
billion
Integrating two companies into
one as the only challenge

Strengths
Low-end/subcompact cars and
trucks
Big auto
manufacturer in
North America
Mini-vans, Jeep
and Dodge trucks

Why this merger?

Create synergies within all areas of the company.

Bring Daimler-Benz into compliance with NAFTAs rule-oforigin regulations.
Begin using diesel engines in cars sold in the American
market.
Enter the sub-compact market in Japan by purchasing a
stake in Mitsubishi
CHRYSLER
The Chrysler was a 6-cylinder automobile, designed to provide customers
with an advanced engineered car, but at a more affordable price than

THE MERGER HOW IT TOOK PLACE?

January 1998

May 1998

July 1998

September 1998

Nov 1998

Schrempp and Eaton met to

discuss the merger

Merger agreement signed

and made public

Approval of European
Commission and Federal
Trade Commission

Major chunk of
shareholders of both the
companies approve the
merger

Merger completed

MOTIVE FOR MERGER

FOR DAIMLER-BENZ
Access to U.S market
Reduce cost of
production
Fear of loosing their
competitiveness

SHARED
Better capacity utilization
Technology transfer
Increased purchasing power
Cost saving

FOR CHRYSLER
Access to European
market
Improve
R&D
capabilities

Daimler-Chrysler
Merger of Equals
Largest Industrial Merger
Ever
Horizontal Merger
Market Capital
US $92 Billion
The merged entity ranked 3rd in
the world in terms of revenues,
market capitalization and
earnings, and 5th in the number
The board of of
management
units sold. consisted of
18 members
8 from Daimler-Benz, 8 from Chrysler and
2 responsible for Aerospace & Services
division.
The BoM formed Chairmans Integration Council to
promote the integration of two companies.

THE MERGER ANALYSIS

Merger Combined two strong

Companies
A leader of innovation
Strong
Existing
Products
Brands
Record
Revenue
and
Increasing Market Shares

Strengths

Opportuni
ties
Quality and engineering
Skills
Distributions into key
markets
New distributions of networks

Combined two different

Cultures
Employees have been
leaving at a high rate
Harder to inspire Vision

Weakness
es

Threat of New
Entrants Low

High investment
and experience
required

Buyer Power
High

No switching
costs

Differentiation
between models
hardly notable
Threat of Existing
Competition
High

Ford, GM,
Toyota, Nissan

Threats
Does not have corporate
brand identity
Competitors
Behind in the research and
marketing of hybrid autos

Threat of
Substitutes

Two wheelers

Public Transport

BENEFITS OF THE MERGER

Combined revenues of $130 billion and market capitalization of $92 billion
Became fifth largest automaker in the world in number of vehicles sold, third largest in sales
Making DaimlerChrysler the most innovative competitor the industry
Combining and utilizing each others strengths, will have the pre-eminent strategic position in the global marketplace

Supplier Power
High

Major and highly

important
suppliers have
higher power

POST-MERGER : TROUBLED TIMES, EVENTS THAT LED TO FAILURE

Board of
Management
reduced from 17 to
14 members (Two
Chrysler executives
removed)

Cost cutting
strategies were
adopted

26,000 employees and

1,000 contractual
workers fired in 2001

No synergies
through platform
amalgamation

Cultural issues were

prevalent

Non-product
spending cut by
over 58%

FINANCIAL PROBLEMS
Q3FY00 operating loss at USD 512 million
EPS down by 75%, while GMs EPS was up by 22%
Expecting dwindling sales, 7 plants were made idle
Share price hit an all-time low

Industry volumes
falling, introduction
of fewer products

No more disclosure
of information of
merger synergies
(received badly by
analysts)

However, by 2000,
stock prices were
on the decline

Low level contact

between the two top
level management
guys

German replaces an
American as Chryslers
president
In May 2006,
Daimler sold
Chrysler to
private equity
firm Cerberus
Capital for
3.74 billion

ANALYSIS OF FAILED MERGER

Lack of Cultural Integration

Lack of Leadership

Mismanagement

CLASH OF CULTURES
Daimler-Benz
Daimler saw itself as the foremost innovator of the
automobile industry with a rich engineering and
quality heritage.

Chrysler
Chrysler was a trendsetter for new designs, short
development times referring to its organizational
flexibility and a sense for market opportunities

CLASH OF CULTURES
The comparison of cultures

Additional Problems

Chryslers managers were described as creative, agile

and flexible. But they did not have the same strong
shared experiences and neither rich heritage nor the
extended record of success compared to Daimler-Benz.

Communication was another area where the merger had

problems. There were major differences about what
needed to be communicated and how it should be
communicated.

HR Role

HR played a minor role in planning and implementation of the

Daimler Chrysler merger
Short-term Intercultural training offered by the company limited
to the Do and Dont in encounters between Germans and
Americans
Culture sensitivity workshops

German Dining Etiquette

English/German courses

Meeting Protocols

Personal Interaction

Tom Cervone observed in his speech: In Europe, and in

particularly Germany, the expectation was if you tell
them what it is you want, then theyll act that way.
It was completely different from what we were doing
at Chrysler. We had a much more in-depth way of
communicating with employees. But we didnt
realize until it was too late, that we could not
Hofstede's
cultural
dimensions
communicate
the same
thing across the world and
theory
Power
- Germany(70),
that Distance
everybody
would receive U.S.A(50)
it the same way.

Fewer women in higher positions - Germany

Individualism - U.S.A(91), Germany(67)
Masculinity Vs Feminity - Germany (69), U.S.A(62)
Uncertainty Index - Germany (7), U.S.A(87)
Long term orientation - U.S.A(56), Germany(23)

CLASH OF CULTURES
Different Working Styles - Freewheeling
vs Bureaucratic
Challenges of integrating the entrepreneurial style of U.S.
business with conservatism of a German company proved
more difficult than expected
Daimler Disciplined, Conservative, Process Oriented
Chrysler Spontaneous, Informal, Team Oriented
Disparity in pay structure
Different compensation and incentive systems
Chrysler top executives earned far more than their German
counterparts
Employees focused more on the cultural differences rather
than similarities
Bob Eatons annual salary amounted to USD 9.7 million,
while Schrempp
had to
content
with USD 1.3 million
Separatist
Attitude
The
Wehimself
and They
Mentality
Internally there was a clear separation of both brands and
combined Mercedes-Benz/Chrysler dealerships were
prohibited
Getting the two companies to cooperate and work toward a
common goal was a major challenge
Mercedes [was] universally perceived as the fancy,
special brand, while Chrysler, Dodge, Plymouth, and
Jeep [were] the poorer, blue collar relations Robert
Lutz, Former Vice Chairman, Chrysler, February 23,
2001
If we are to produce the M-Class here as well, we
will need to create a separate quality control section

At first, the German management granted

Chrysler the freedom to do what they had
always done.
Daimler-Benz wanted to simply
advantage of Chryslers efficiency.

take

But a number of Chryslers key players had

left
the
corporation
and
remaining
employees
were
demoralized
and
demotivated.
Within 19 months two American CEOs were
dismissed and German management took
over.
Daimler-Benz tried to administer the
Chrysler division as if it was a German
company.
From Chryslers point of view, instead
making use of new synergy effects, and
instead of gaining competitive advantages
over the competitors, the merger with
Daimler-Benz drove Chrysler into chaos.

MISMANAGEMENT

Merger of Equals, Really?

How do you pronounce the name of the German-American car company? Its Daimler, Chrysler is
silent
Friendly takeover
Winning over American public and employees.
Top executives of Chrysler left demotivated and demoralized employees German management took over
Chrysler division
If real intensions of Daimler-Benz were known earlier, this merger would not have taken place.

"The Merger of Equals statement was necessary in order to earn the support
of Chrysler's workers and the American public, but it was never reality
- Juergen Schrempp (DaimlerChrysler CEO ) in 2000 in a Newspaper interview

Opposite management thinking

Authoritative Germans vs. Creative Americans
German replaces an American as Chryslers president

Lack of governance
Juergen Schrempp and Bob Eaton did not follow coordinated course of action during transition phase
Low level contact between the two top level management guys
The American dynamism faded under subtle German pressure
Chrysler started drifting into no mans land
It bled cash for almost an year, owing to mismanagement

LEADERSHIP

Robert Eaton

Core member in making Chrysler what it was

during the 90s
An enthusiast for the merger but suddenly fell
away Self alienation Act like a co-chairman and
step up the podium
Untimely retirement announcement At the
beginning of the merger left employees in lurch
Lack of proactiveness Failed leadership - Chrysler
needed him the most he detached Appeared
Daimler was dictating terms
He had really checked out a year earlier before he
Jrgenleft
Schremmp
Arrogant
Failed to get employees (German and American)
work together
Failed
collaboration
attempts
with
Asian
automobile markets

LEADING CHANGE

Lack
of
Comm
unicat
ion

Ineffecti
ve
Planning

Poor
Guiding
Coalitio
n

Lack
of
Trust

Leadership mismanagement

Daimler-Benz tried to administer Chrysler division as a

German company disregarded Chryslers core
operational values
Top leaders of both the companies showering illcomments at each others products - would never
drive a Chrysler
My mother drove a Plymouth and it barely ran
for two-and-a-half years
Brand bias Dodge Neon and Jeep Grand were
sidelined for less cost effective and troubled Mercedes
A-class and M-class

No
Focused
Vision

Inacti
on

LEARNINGS
The culture
Integration strategy is
influenced by basis
for the merger and
the cultures of the
organisations

When a true merger of equals is intended, the greatest

attention should be paid to successful cultural integration

Adequate due
diligence of target
companies is of
paramount
importance

In cross-border M&As, it is of very important to take into

account in which areas it will come to cultural
discrepancies and how they will influence day-today work.
It is also crucial to identify and to define precisely common
goals and to elaborate certain norms and regulations for
business processes.

Leadership
effectiveness is very
critical for better
integration

Chryslers leadership should not have been so detached

and aloof, as this created a sense of doubt and uncertainty
in their employee base. The Daimler leadership could
have made an effort to dispel the impression that
American dynamism faltered under steady German
Pressure.

The objective and

intention of a
merger or acquisition
should be welldefined and clearly
stated.

In the year 2000, Jrgen E.Schrempp, the CEO of

DaimlerChrysler, stated officially that he had never had
the intention of a merger of equals. And he added that if
the real intentions of Daimler-Benz had been publicly
known right from the beginning, the merger of the two car
manufacturers would never have taken place.

RECOMMENDATIONS

Proper Due diligence is required before the merger

Clear and specific post-merger Integration strategy should be
in place starting from Due diligence
The planning of merging the two cultures should be done
right from the due diligence phase rather than starting it after
mergers.
Appointing an integration manager
The integration manager should be wholly responsible for the
integration of the two companies.
The integration manager would be responsible for the
creation and delivery of an integration plan.
The acquired company should report to integration manager.
They can ask all sorts of questions regarding the new culture
which the acquired company has to adopt to.
Restructure as fast as possible and layoff the employees
with respect and dignity
Get the people from two organizations to solve problems
and hold them responsible for results
Small teams containing members from both the organizations

ANALOGS AND ANTILOGS FOR FAILED MERGERS DUE TO CULTURAL DIFFERENCES

ANALOGS
Sprint/Nextel
Sprint acquired rival Nextel for $35 billion
but had to written down 80% of the value
of the Nextel. That failure is widely
attributed to a culture clash between the
entrepreneurial, khaki culture of Nextel
and the buttoned-down formality of
bureaucratic Sprint.

Novell and WordPerfect

WordPerfectwas the nations best-selling

word processing software. The merger
was followed by layoffs at both
companies and a steep drop in share
value. With the focus on internal discord,
WordPerfect lost its market leadership.

AOL/Time Warner

A failed $350 billion merger with AOL.

Culture clash was widely blamed for the
failure

ANTILOGS
Disney & Pixar
Exxon & Mobil
Sirius & XM radio

CONCLUSION
Like a large number of cross-border M&As,
the
merger
between
the
two
car
manufacturers
Daimler-Benz
and
the
Chrysler failed due to cultural discrepancies
that could not be bridged.
The merger of Daimler-Benz and the Chrysler
Corporation was not foredoomed to failure
right from the beginning. At the time of
merger, the outlook was very positive and it
made perfect sense to join two successfully
operating businesses of the same sector in
order to make use of the one companys
strengths
to
complement
the
other
companys weaknesses.
From a strategic point of view, this merger
did make sense (DUTTA, 2001), but the
problems that doomed the merger to failure
were the opposing and contrary corporate
cultures and organizational models, that
presented insurmountable obstacles.
If both parties had put all cards on the table
from day one on, if they had combined their
strengths to pursue a shared goal, if they
had paid more attention to the cultural

THANK YOU

REFERENCES

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