Analysis of Failed Merger of Daimler Benz and Chrysler

Introduction

If two companies merge, they would have to consider the cultural and language differences between the two countries in which the two companies are situated. There will be differences between the accounting practices followed and the company who has higher stake would be given priority. Else the merger will be an utter failure as had happened in the case of Daimler and Chrysler.

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Background of Daimler-Benz

Daimler Benz AG was founded in 1926 and was one of the premier German manufacturers of automobiles, motor vehicles and engines. In 1886 Daimler Benz made their first car. There was an agreement between Benz and Daimler Motoren Gesellschaft which on May 1, 1924. Both companies, Daimler and Benz started to manufacture separate automobiles and internal combustion engines till 28 June 1926, and then they were joined each other and then they changed their name to Daimler Benz AG.

Daimler and Karl Benz made a mutual agreement that all the automobiles produced in their factories will have the name Mercedes- Benz which was one of the important models of Daimler. They changed the name Daimler because it was sold out by Daimler Motoren Gesellschaft (DMG) to other automobile companies and that will create confusion and other legal problems in terms of intellectual property right, etc.

Being an automobile manufacturing company, they have made a series of aircrafts, tanks and submarine engines during the Second World War. Now this brand name has become one of the premier automobile manufacturers in the world. (Daimler Benz).

In May1998 Daimler Benz announced the merging of Daimler Benz with The Chrysler an American Car Manufacturer and formed Daimler Chrysler AG.

Background of Chrysler

Walter P Chrysler joined Maxwell motor company in 1920. The Maxwell Corporation changed their name to Chrysler, in 1925. Since 1925, Chrysler, an American automobile manufacturer, that has manufactured automobiles. Chrysler acquired Dodge Brothers motor car Co in 1928 Chrysler.

After United States entered Second World War in 1941, Chrysler made tanks, army trucks, engines for B-29 bomber airplanes, anti-aircraft guns, and other equipments for Allied forces. The federal government agreed to guarantee $ 1.5 billion as loan as Chrysler faced bankruptcy in 1980. (DaimlerChrysler AG). Chrysler expanded into Europe, In the 1960s, by attaining a of stake in the British Rootes Group in 1964, Simca of France and Barreiros of Spain, and form Chrysler Europe. (The History of Chrysler).

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Chrysler announced the salling of Chrysler Defense which was a profit making defense subsidiary to General Dynamics for US$348.5 million in February 1982. The sale finished in March 1982 for US$336.1 million.

The improvements in efficiency and quality of the vehicle played a lot in rescuing the company. They entered back into Europe by locating a car production unit in Austria in the year 1990s and manufactured of certain Jeep models in1993. The popularity of Jeep increased, and the innovative models for the public such as the Dodge Ram pickup, Dodge Viper, sports car, and Plymouth Prowler hot rod, and new “cab forward” front-wheel drive LH sedans made the company to become the major player. (The History of Chrysler).

The Chrysler and its subsidiaries became the part of Daimler to form Daimler Chrysler. Then they changed it to Daimler AG. Daimler declared that their stake in Chrysler had a book value of zero dollars after write offs and charges On October 23, 2008. During the middle of 2008, Chrysler declared that the company was having cash flow problems. The company stated that they will shutdown their operations permanently due to the crisis.

Merger between Daimler Benz and Chrysler

In 1998 Daimler- Benz which was one of the Germany’s biggest car producer merged with Chrysler, to become the world’s fifth biggest automotive company after General Motors, Toyota, Ford, VW Group. The company bought Chrysler group for US $ 36 billion. The merger offered potential advantages for Daimler Benz. Daimler Benz had the opportunity to enter in to the Asian and American markets where there is a huge rise in the automobile industry. Thus they have the opportunity to enter in to the European Market.

Being the smallest car manufacturer in America also Chrysler was the one of the most efficient car producers. Through this they became competent, and they are able to save cost, and are able to expand their market share through diversification of complementary products. Making new cars with the combination of Daimler- Benz high technology and Chrysler’s speedy product development also accelerated the merger. Being success in their home market also they were struggling outside their home country. Having a higher sales in international market also there were comparatively low sales in American Market.

For selling Chrysler, DaimlerChrysler approached other automobile makers in the beginning of year 2007. But Volkswagen, Renault-Nissan, and Hyundai said that they weren’t interested in buying the Chrysler. They sold Chrysler to Cerberus Capital Management on 3rd August 2007. The agreement stated that Cerberus will buy 80.1% stake in the new company called Chrysler Holding LLC. They renamed their group and were given their name Daimler AG.

Market shares of US automakers

Company Market Share year
General Motors 23.4 % 2007 Ford
Toyota 15.9 % 2007 Ford
Ford 15.6 % 2007 Ford
Chrysler 12.6 % 2007 Ford
Honda 9.4 % 2007 Ford
Nissan 6.5 % 2007 Ford
All Others 16.6 % 2007 Ford
100.00

It is seen from the above that the major chunk has been with GM, followed by more or less equal partners – Toyota and Ford. Chrysler stands in the fourth position with around 13% market share. (Automobiles and Trucks Overview).

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HHI Index

HHI Index is used to measure market concentration for antitrust enforcement.

It is calculated as the sum of the squares of percentage market share by each firm.

HHI Index= 17.82 (Square of market share of Chrysler) + 60.12 (market share of Daimler) = 316.84 + 3612.01= 3928.85.

Thus it is seen that percentage market share of Daimler is higher than that of Chrysler and therefore, market concentration of Daimler could be reasoned out to be higher. In this alliance, the German automaker has always maintained the upper hand that may have contributed to the final fiasco.

Type of merger

As the merger is between the companies that are in the similar industry it is known as horizontal merger which helps in the increase of product line. Through this merger the companies have large economies of scale. They can minimize the expenses through merger. This changes the structure of the company and removes other competitors and able to get a dominant place in the industry.

Monopoly is increased and this will increase the barrier and no other company can enter in to this field of production. Companies that are smaller cannot survive due to huge competition. (Horizontal Mergers).

Anti-trust laws

It is seen that mergers on the kind registered between DB and Chrysler had far reaching impacts and implications on the vendors, clients, markets in both the Americas, Europe, Asia and even Latin America. (Inter National Law).

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The differences in corporate profiles were different. While Chrysler was registered in the US Stock Exchange, Daimler is a strongly entrenched German company. Differences in language, culture, business approaches, and technological differences prove robust barriers in creating wider voids which could not be filled by this merger.

Further even vexing questions that need to be addressed were in terms of workforce salaries, executive compensation, stock options and a host of other variables that needed to be sorted out amicably. Apparently, these issues could not be overcome.

Instead, Daimler found itself faced with rising pension and retiree health costs in the U.S. while its Mercedes brand stumbled with quality problems. The main problem is that Chrysler does not have a strong brand image outside North America, whereas most of its US competitors like GM and Ford rake up overseas profits. The merger between Daimler and Chrysler was not one between equals but between a superior auto brand Daimler and a subordinate one, Chrysler.

Government barriers

The biggest question that would have possibly arisen in the failed Benz/Chrysler deal would be regarding US competition laws. Both being large organizations, it is seen that both American and German lawmakers feared that it would affect competition and could be seen in oligopolistic merger, even if, in real terms, it were not so.

Thus the Government feared that when “German industrial giant Daimler-Benz, the maker of Mercedes-Benz luxury cars, has agreed to acquire Chrysler for more than $38 billion in stock in a deal that weds two companies whose image and corporate cultures are vastly different, “there could be problems posed to other automakers and may be unfair trade practices which aims at reducing competition and amassing markets. (Vertical Integration & Corporate Mergers Resources).

The Stock value of Daimler before the merger was little over €60 before the merger, but after the announcement of merger it climbed to around €70. (Ongoing Positive Development of Daimler’s Share Price).

It is evident that Chrysler experienced stagnation and fall in stock market prices, from $50/ share to around $40, post merger. Thus, the merger has not boosted the share value of the minor party. (Novel Insight into the Foundering Daimler Chrysler Merger).

It is seen that the major stakeholder in this merger has been Dailmer Benz, and Chrysler has only been a minor one.

Regarding Chrysler, it is seen that, more than a merger between similar companies, it was essentially an acquisition of Chrysler by Daimler Benz. Thus, it is seen more as an acquisition of the former by the latter. This is seen from the fact that even an American president of the Chrysler Group, Jim Holden, was replaced by a German appointee, Dieter Zetsche. (Keegam).

Even at the lower hierarchies, it is seen that most American officers were replaced by German ones, and the major partner of the merger seemed to impose their will on the minor one.

In 1998 Daimler-Benz and the Chrysler Group merged and they named this as DaimlerChrysler. DaimlerChrysler emerged as fifth biggest automotive company the world. The main reason for the failure was due to loss-making Chrysler division. Before merger Chrysler was profitable but due to slow down in economy of US they faced financial problems. Chrysler performance was different after the merger.

Due to this they closed their six factories in America and they send off 26000 workers and reduced 15% of their production. The culture and management styles were too different this also affected their performance.

The main cause of the failure is that the two companies are from different countries – one a US based company and the other a German based company. Differences in culture between firms led to consistent decreased performance for both employees after the merger. There is a vast cultural difference prevailing in these two countries. There is a vast difference between the languages that are spoken in these countries, English in US German in Germany. If there is a manager who is working in a company who is from the other country there will be certainly a conflict between the managers and the workers of the company.

The culture was more formal and in Chrysler it was more relaxed. There was a huge difference between the managerial styles also. The management style in Chrysler was more freewheeling and that of Daimler was structured. (Ojha).

The two units’ traditions are entirely different. There was a huge difference between the pay scales and travel expenses. The principles of accounting that are used in the two countries are totally different.

For reducing the future cost of the vehicle Chrysler plan to use Daimler’s parts or components in the same model. They didn’t give any technical support but only provided some steering and suspension components, a transmission and a diesel engine and few packages. Due to high competition Chrysler’ sales fell down which prompted Daimler to dispatch from Asia. (How Daimler, Chrysler Merger Failed).

Conclusion

If two companies want to merge they have to study thoroughly about the culture prevailing in the countries where the companies are situated. They also need to study about the language differences. Accounting practices followed are different in different countries. The vision and mission of the merging companies have to match. If not, merger will fail and will result in huge losses.

Works Cited

Daimler Benz. 2007. Web.

Daimler Chrysler AG. Msn.Encarta. 2008. Web.

Horizontal Mergers. Economy Watch. 2009. Web.

How Daimler, Chrysler Merger Failed. Amazines. 2009. Web.

Inter National Law. University of the PACIFIC McGeorge Scholl of Law. 2009. Web.

Keegam, Matthew C. Daimler Chrysler: Merger or Acquisition. 2008. Web.

Novel Insight into the Foundering Daimler Chrysler Merger. Knowledge Emory. 2002. Web.

Ongoing Positive Development of Daimler’s Share Price. DAIMLER. 2008. Web.

Ojha, Niyati. Failure Mergers. JurisOnline.in. 2009. Web.

The History of Chrysler: Expansion into Europe. Cars Directory.Net. 2009. Web.

Vertical Integration & Corporate Mergers Resources: Daimler-Benz will acquire Chrysler. 2009. Web.

Automobiles and Trucks Overview. 2008. Plunkett Research, Ltd. Web.

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