Daimler Acquires Chrysler—Anatomy of a Cross-Border Transaction The combination of Chrysler and…

Daimler Acquires Chrysler—Anatomy of a Cross-Border
Transaction

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 The combination of Chrysler and Daimler created the third
largest auto manufacturer in the world, with more than 428,000 employees
worldwide. Conceptually, the strategic fit seemed obvious. German engineering
in the automotive industry was highly regarded and could be used to help
Chrysler upgrade both its product quality and production process. In contrast,
Chrysler had a much better track record than Daimler in getting products to
market rapidly. Daimler’s distribution network in Europe would give Chrysler
products better access to European markets; Chrysler could provide parts and
service support for Mercedes-Benz in the United States. With greater financial
strength, the combined companies would be better able to make inroads into
Asian and South American markets. Daimler’s product markets were viewed as
mature, and Chrysler was under pressure from escalating R&D costs and
retooling demands in the wake of rapidly changing technology. Both companies
watched with concern the growing excess capacity of the worldwide automotive
manufacturing industry. Both companies shared the same sense of urgency about
their vulnerability to companies such as Toyota and Volkswagen. With this
motivation, the transaction was completed in April 1998 in less than three
months for $36 billion. Enjoying a robust auto market, starry-eyed executives
were touting how the two firms were going to save billions by using common
parts in future cars and trucks and by sharing research and technology. In a
press conference to announce the merger, Jurgen Schrempp, CEO of
DaimlerChrysler, described the merger as highly complementary in terms of
product offerings and the geographic location of many of the firms’
manufacturing operations. It also was described to the press as a merger of
equals (Tierney, 2000). On the surface, it all looked so easy.

The limitations of cultural differences became apparent
during efforts to integrate the two companies. Daimler had been run as a
conglomerate, in contrast to Chrysler’s highly centralized operations. Daimler
managers were accustomed to lengthy reports and meetings to review the reports.
Under Schrempp’s direction, many top management positions in Chrysler went to
Germans. Only a few former Chrysler executives reported directly to Schrempp.
Made rich by exercising their stock options following the merger, the potential
for a loss of American managers within Chrysler was high. Chrysler managers
were accustomed to a higher degree of independence than their German
counterparts. Mercedes dealers in the United States balked at the thought of
Chrysler’s trucks still sporting the old Mopar logo delivering parts to their
dealerships. All the trucks had to be repainted. Charged with the task of
finding cost savings, the integration team identified a list of hundreds of
opportunities, offering billions of dollars in savings. For example, Mercedes
dropped its plans to develop a battery-powered car in favor of Chrysler’s
electric minivan. The finance and purchasing departments were combined
worldwide. This would enable the combined company to take advantage of savings
on bulk purchases of commodity products such as steel, aluminum, and glass. In
addition, inventories could be managed more efficiently, because surplus
components purchased in one area could be shipped to other facilities in need
of such parts. Long-term supply contracts and the dispersal of much of the
purchasing operations to the plant level meant that it could take as long as 5
years to fully integrate the purchasing department. The time required to
integrate the manufacturing operations could be significantly longer, because
both Daimler and Chrysler had designed their operations differently and were subject
to different union work rules. Changing manufacturing processes required
renegotiating union agreements as the multiyear contracts expired. All of that
had to take place without causing product quality to suffer. To facilitate this
process, Mercedes issued very specific guidelines for each car brand pertaining
to R&D, purchasing, manufacturing, and marketing.

Although certainly not all of DaimlerChrysler’s woes can be
blamed on the merger, it clearly accentuated problems associated with the
cyclical economic slowdown during 2001 and the stiffened competition from
Japanese automakers. The firm’s top management reacted, perhaps somewhat
belatedly to the downturn, by slashing production and eliminating unsuccessful
models. Moreover, the firm pared its product development budget from $48
billion to $36 billion and eliminated more than 26,000 jobs, or 20% of the
firm’s workforce, by early 2002. Six plants in Detroit, Mexico, Argentina, and
Brazil were closed by the end of 2002. The firm also cut sharply the number of
Chrysler car dealerships. Despite the aggressive cost cutting, Chrysler
reported a $2 billion operating loss in 2003 and a $400 million loss in 2004.
Although Schrempp had promised a swift integration and a world-spanning company
that would dominate the industry, 5 years later new products have failed to
pull Chrysler out of a tailspin. Moreover, DaimlerChrysler’s domination has not
extended beyond the luxury car market, a market it dominated before the
acquisition. The market capitalization of DaimlerChrysler, at $38 billion at
the end of 2004, was well below the German auto maker’s $47 billion market cap
before the transaction. With the benefit of hindsight, it is possible to note a
number of missteps DaimlerChrysler made that are likely to haunt the firm for
years to come. They include paying too much for some parts, not updating some
vehicle models sooner, failing to offer more high-margin vehicles that could
help ease current financial strains, not developing enough interesting vehicles
for future production, and failing to be completely honest with Chrysler
employees. Although Daimler managed to take costs out, it also managed to
alienate the workforce.

Case Study Discussion Questions

1. Identify ways in which the merger combined companies with
complementary skills and resources.

2. What were the major cultural differences between Daimler
and Chrysler?

3. What were the principal risks to the merger?

4. Why might it take so long to integrate manufacturing
operations and certain functions such as purchasing?

5. How might Daimler have better managed the postmerger
integration period?

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