Daimlerchrysler Is a Merger-of-Equals or Merger of Convenience

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Though the Daimler-Chrysler deal was referred to be a “merger of equals”, but the deal never remained as a merger of equals. In early 1999, Schrempp admitted in a discussion with the Financial Times that the DaimlerChrysler merger deal was never meant to be a “merger of equals” and arrogated that Daimler had bought Chrysler.

Thus, the DaimlerChrysler transaction was under no circumstances intended to be a “merger of equals” and this has been evidenced from the following facts.

Structure of transaction

In fact, Daimler was bigger than Chrysler as Daimler’s revenue in 1998 before the merger was estimated at $69 billion and Chrysler’s revenue was estimated at only $61 billion through Chrysler was considered to be a major player in the automobile segment. Some critics suspected that it was not a merger of equals even at the start and they cautioned that Daimler was acquiring Chrysler, a doubt that later happenings corroborate.

Joint name: Eaton, then CEO of Chrysler insisted and stood firm that Chrysler’s name should appear in the new name for the company after the merger whereas Schrempp, CEO of Daimler preferred the new name as Daimler –Benz. Recognizing that a” rose by another name would not smell as sweet” to Eaton, Schrempp finally agreed to the name “Daimler Chrysler”. Thus, the joint name appeared to be coherent with the merger-of-equals but in reality, it was temporary tactics designed by Schrempp to please Chrysler executives.

Country of incorporation for the new company after the merger: Germany was the country where the headquarters of Daimler-Benz is situated and it had been selected for the new company‘s headquarters also.

This is mainly in tune with many legal obstacles on Daimler: Benz may face if a new headquarter was in the U.S.A and the choice of Germany corroborates that deal had not mirrored a true merger of equals.

Structure of Board of Directors of DaimlerChrysler

As a merger deal, it was agreed that about fifty percent of Board positions will be held by Chrysler in the new company. However, due to the existing provision of German law, Chrysler had been given one-third percentages in the supervisory board as German law stipulates that employee unions should hold about 49% of the strength of the board of directors. This again seemed to be in favor of Daimler-Benz and hence there was no real merger of equals.

Critics were of the opinion that immediately after the amalgamation, Chrysler would under no circumstance remain as a separate body and this prediction turned to be reality later. Immediately after the so-called merger of equals, Chrysler was brought down to a sheer manufacturing entity of Daimler. The presence of Daimler’s top executives penetrated almost all significant management activities or decisions at Chrysler. These developments also proved that the deal was a fake “merger of equals”.

Further, in just twelve months after the merger, the Chrysler management team was fired, retired, or otherwise ousted from the Board of Daimler Chrysler. As of 2002, only just two members from Chrysler side remained on the merged company’s board and no new members were inducted from Chrysler side.. In contrast to the merger of equals ideology, the acquired company namely Daimler prevailed in the long term and experiments of a merger of equals did not long last more than a year. Finally, the authority and power went to the company that paid for the acquisition.

Further, Daimler Chrysler immediately after the merger had some key figures on its board. This included CEO from companies like Xerox, AT&T, Deutsche Bank, Owens Illinois, and Bertelsmann. One of the directors namely Robert Allen was the erstwhile CEO of another major company that had committed the worst merger blunders earlier. One another director namely Joseph Califano, the erstwhile secretary of Health and head of the National center on Addiction and Substance abuse at Columbia University was appointed to the Board of DaimlerChrysler. Being an erstwhile civil servant, he might not definitely have exposure to overseeing the management of an international automobile company. He probably did not apply his expertise to hold back Daimler from doing poor deals after the merger.

Further, having little knowledge of the automobile industry, he lacked the talent to challenge a hard-charging, ego-driven CEO. This is one of the issues that Daimler shared with many other boards. Thus, DaimlerChrysler Board was decorated with some popular names who actually did not bring any dedicated capabilities to their board assignment.

The outside directors from various industries as mentioned above along with the representatives from Chrysler were actually have no power or decision-making authority and simply acted as a watchdog in the Board meetings of Daimler Chrysler did prove that the deal was just a merger of equals on the paper only.

Compensation Paid to Executives

One another major consequence at DaimlerChrysler was the variances in pay scales between two companies prior to the merger. Germans were dismayed at vast pay inequalities and were not likely to consent for any sharp revision of salaries for the top management. On the other hand, American top executives have compensated attractively. Eaton pocketed a total compensation of $16 million in 1997 whereas Schrempp was paid a meager compensation of about $ 2.5 million per annum.

There arose personal conflict when an American manager transferred to Daimler-Benz HQ in Stuttgart Germany who had to report to an executive in Germany who was just garnering fifty percent of the American manager’s pay. Chrysler could have reduced the pay of its American executive but only at the jeopardy of losing its experienced executives.

Further, the merger agreement required that the top five Chrysler executives were to be paid huge lump-sum payments so as to reimburse them for their holdings in Chrysler which definitely happened to be a golden parachute to them. Further, the merger agreement also ensured the employment continuation agreement for the top 30 executives of Chrysler which called for the payment of $ 96 million over the period of twenty-four months. Further, the merger agreement also put a freeze on any changes in the executive compensation of Chrysler’s top employees.

Two years after the merger, the epilogue to the merger-of-equal scheme happened. A minority investor in Chrysler namely Kirk Kerkorian brought legal action against DaimlerChrysler A.G holding that the merged company had unleashed fraud by claiming the deal as a merger-of-equals.

Kerkorian brought to the notice of the court that the share price tumbled down to the low of $40 in November 2000 from its height of $108 in January 1999 immediately after his filing the suit in the court. In his affidavit, he alleged that key executives of Chrysler have already departed the company since the merger. Kerkorian pleaded that had he been aware of the truth that transaction was under no circumstances going to be “merger-of-equals,” he would never have voted for the merger. The Daimler –Benz CEO Schrempp was accused by Kerkorian that he misled the investors by calling it a merger of equals mainly to avoid paying a takeover premium as it had to pay a large sum for the third largest auto giant of U.S.A.

To circumvent the payment of takeover premium amount which may be in the tune of $ 5 to $ 10 billion, Schrempp dubiously named it as a merger of equals.

In normal parlance, investors should encourage that mergers of equality are fairy tales and if they ever occur, the investors may be worst affected because:

  • Infighting in the management may be at its worst form.
  • As nobody is in command, the company may drift.

However, business law experts were of the opinion that the prospects of the suit were dim as the soft promises about the fate of executives and the total concept of “merger-of-equals” were perhaps too fuzzy to instigate legal action. (Robert, Bruner& Perella.2004 :678).

In August 2003, DaimlerChrysler announced that it would defer $ 300 million to settle the class action claims out of court that Daimler-Benz had cheated investors by calling it “merger-of-equals.” Though Chrysler investors claimed compensation as high as $ 12 billion, however, DaimlerChrysler’s package tried to resolve the fraud claims. However, later, Kirk Kerkorian opted out of the accord and he finally lost his case.

The Daimler-Chrysler merger made many major errors in this so-called merger-of-equals, commencing with the public relations mismanagement subsequent to the decision to declare the deal as a merger –of –equals when it was in fact an acquisition. Daimler’s corporate culture was narrated as the time of the acquisition as arrogant and as self-absorbed since the vast popularity and reputation of its super brands and its past track record of its profitable growth, was obviously more in contour with a complete acquisition rather than a harmony –focused merger-of-equal partners.. (Gatignon et al 2004:139).

The creation of scale and the exchange, the business vision, joint purchase and production of spare parts, consumption of a long time to develop and when it did finally produced, it blemished the Mercedes goodwill for top quality which made the second-tier Chrysler products too costly. There was an overestimation by Daimler-Benz about the competitiveness of Chrysler on a stand-alone basis. Further, German managers took full operational control of Chrysler turned out to be the only way of a chaotic merger of equals.

In a merger of equals, the principal or the dominant company and its top executives will soon rise to the top and quickly take over the management of the merged company. In this merger of equals, Chrysler right from the start was in a secondary position with less powerful top executives. It seems that Daimler management sensed this weakness and was not so confident that Chrysler executives would be successfully running the combined company.

Arrogance and dominance of Schrempp, CEO of DaimlerChrysler

Experts were of the opinion that it was Schrempp’s management style that made the predicted principle of a “merger of equals” pointless. From the start itself, Schrempp gave more priorities to the apparent strategic gains, without giving adequate concessions to the issues that such a transatlantic merger would bring more gains to both the companies. Though, it is wrong to propose that he performed recklessly or had acted purely on the background of biased gut feelings about the probable benefits of such a giant merger but finally all these became true. There were varieties of evidence available to corroborate that both Schrempp and the management team of both companies did not exercise their homework properly.

An empirical study of 100 domestic and 170 cross-border acquisitions disclosed that the top executives turnover rate of U.S companies that were acquired by non-U.S companies was dominantly higher than the rates of domestic acquisition. The foreign acquirer’s nationality was found to be a significant predictor of employee turnover in some acquisition types. (Krug and Hegarty 1997). Thus, Schrempp’s hegemony and arrogance proved to be the catastrophe to the ideology of ‘merger of equals’ in the DaimlerChrysler merger.

What issues should be addressed to make a cross-cultural merger a success?

Daimler-Benz and Chrysler aligned together as Daimler Chrysler in 1998. Very soon, the merger was pronounced as a failure as not proper attention was given to the differences that existed in cultures between the two companies. DaimlerChrysler merger would be more successful if the under-mentioned cross-cultural issues had been resolved by the DaimlerChrysler management immediately after the merger.

American and German management styles contrasted sharply. Even before the merger, it was forecasted that cultural conflict would be a chief impediment in the way of the integration between the two companies. Schrempp determined to permit both entities to sustain their present cultures so as to minimize the clash of cultures. If this has been implemented in both letter and spirit, the merger could have now proved to be successful. However, in reality, Germans wanted to edge over Americans. American top executives were resigned within 11 months after the merger despite the existence of the employment continuation agreement for the top 30 executives of Chrysler.

It is to be observed that DaimlerChrysler’s victory was based on incorporating two blatantly dissimilar business cultures. Actually, they failed to foster an atmosphere of educating from each other and as the result, the merger met with an unbelievable catastrophe.

The Germans comprehended the Americans as “unpredictable” while the Americans sensed the Germans were “obstinate and militaristic. They failed to understand each other. Further, they failed to shrink their cultural differences for the development of the company. Egoism, national pride, nativity feelings, and hegemonies acted as major impediments for the success of DaimlerChrysler

Cultural differences made Daimler Chrysler’s honeymoon stage of fine-tuning very arduous. Despite many confidence-building measures, Schrempp failed to win the hearts of Americans. Schrempp failed to peruse the American management style in American plants and forced the German style of management on Americans which brought cultural clashes and as a result merger became a failure. Schrempp failed to understand the concept of while in Rome, be like a Romanian.

Daimler had erred in judging its own talent to administer an integration process on such a massive scale, especially it failed not only in leveraging but also in generating early savings in overlapping activities or any other “immediate win” that might have assisted to foster an optimistic momentum. Even in the longer run, some of the most palpable sources of value, like IT systems and purchasing, have not been made on the probable, partially because of Daimler cognitive preconceptions from exterior sources, partially because of its cultural characteristics, perhaps hardened even more by the negative results and the exasperating reactions by the business counterparts and markets particularly in the United States. (Gatignon et al 2004;139)

Solutions to International Branding Issues

Both Chrysler and Daimler-Benz had built an international brand of their own. A brand can have a specific countrywide identity despite being manufactured in some other country. Especially, this is applicable to brands that have a well-established country of origin –intended or not, their brand positioning ever remains a nationality cue. Suppose, if Chrysler sets up a plant in India and manufactures and exports its cars from India to Saudi Arabia, the Saudi Arabian consumer is still convinced that it has emanated from Chrysler of the U.S.A. For instance, a Sony television manufactured in the US is evidently still “Japanese” to many American customers. Levi Jeans and Coca-Cola soft drinks are in general ‘American’ wherever they manufactured and sold, evoking either rejection or favor are based upon place and time. That is the power of the brand which has registered so deep in the minds of consumers.

Though the DaimlerChrysler merger was the right step in the direct direction due to cultural clashes and management policies, the merger was unsuccessful. Had the merger was successful, they would have built a new global brand namely “DaimlerChrysler”. Thus, Schrempp lost a very great opportunity in building a well-accepted international brand due to his hegemony and arrogance. (Barton et al 2006:472).


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BusinessEssay. "Daimlerchrysler Is a Merger-of-Equals or Merger of Convenience." December 16, 2022. https://business-essay.com/daimlerchrysler-is-a-merger-of-equals-or-merger-of-convenience/.