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FAILURE OF MERGERS AND ACQUISITIONS:

THE CASE OF DAIMLER CHRYSLER

Presented by: Gina Bryan

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Contents

Overview of Mergers & Acquisitions Reasons for Failure of M&As Case Study: Daimler Chrysler Merger Failure Origins of the Merger Reason for and Goals of the Merger Why the Merger Failed

Culture clash Organizational Differences

Recommendations Conclusion References

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Overview of Mergers & Acquisitions

Economic pressures developed within the framework of a global marketplace have led to unprecedented numbers of mergers and acquisitions over the past decade.

The number of mergers and acquisitions involving US companies alone in 2004 reached 376 with an aggregate total paid of US$22.64 billion. In comparison, in 2003, the total amount paid was US$12.92 billion.

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Overview cont’d

However, statistics show that the failure rate of most mergers and acquisitions lies somewhere between 40-80%. The facts highlight a worryingly poor success rate for international mergers and acquisitions.

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Overview cont’d

Mergers and acquisitions rarely fail because one or both parties did a poor job of due diligence. The technical or "hard" issues are almost always addressed with a good deal of intensity . Financial performance, debt, market share, reputation, and physical plant are some of the hard issues that usually receive much scrutiny before a merger or acquisition is consummated. Obviously, the financial management staff play a key role in these matters.

Unfortunately, the less technical or "soft" issues rarely receive the same level of attention before the merger or acquisition decision is made. Yet, these are the very issues that cause the majority of mergers and acquisitions to fail. The primary soft issues that prevent most mergers and acquisitions from being implemented successfully are: Governance of the new organization; Leadership for the new organization; and Culture assimilation.

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Reasons for Failure of M&As

Many business commentators are now acknowledging that failure does not have its roots simply in financial, monetary and legal issues but in lack of intercultural synergy. Research suggests that up to 65% of failed mergers and acquisitions are due to 'people issues', i.e. intercultural differences causing communication breakdowns that result in poor productivity.

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Reasons for Failure of M&As Mergers and acquisitions fail for a variety of

reasons: First of all, a deal can fail because it was not

a good idea to begin with. Some executives get caught up in the ego-boosting idea of growth for its own sake. The business culture and profit motive may discourage internal managers and external agents from pointing out potential pitfalls, and the deal can carry through without any serious challenge.

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Reasons for Failure of M&As Second is the failure to manage the

"human" or "cultural" integration. Businesses are more than financial reports- they include people- people with uncertainties, self-interests, personal desires, needs, etc. A great number of acquisitions proceed with minimal effort to integrate the people aspects of the businesses. When this happens, its no wonder they fail.

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Reasons for Failure of M&As

Both sides in the partnership set out to show that intercultural hurdles would and could be overcome in their global merger.  The evidence suggests however, that DaimlerChrysler underestimated the influence of culture, and due to culture clash, struggled to become a unified global organization, and ultimately failed.

A recent example of such intercultural failure has been that of DaimlerChrysler.

Daimler Chrysler Merger Failure

Case Study:

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Origins of the Merger In 1926 the merger of two German automobile

manufactures Benz & Co. and Daimler Motor company formed Stuttgart-based, German company Daimler-Benz. Its Mercedes cars were arguably the best example of German quality and engineering.

In 1998, Daimler-Benz and U.S. based Chrysler Corporation, two leading global car manufacturers, agreed to combine their businesses in what was perceived to be a “merger of equals”. Jurgen Schrempp, CEO of Daimler-Benz and Robert Eaton, chairman and CEO of Chrysler Corporation met to discuss the possible merger.

The merged entity ranked third in the world in terms of revenues, market capitalization and earnings, and fifth in the number of unit sold.

Reason for and Goals of the Merger

Daimler-Benz luxury vehicles had captured less than 1% of the American markets.

Chrysler's primary reason for teaming with Daimler-Benz is to extend its international reach

Expected huge savings by combining purchasing and other operations

Reduce total research and development costs

Why the Merger Failed

To the principals involved in the deal, there was no clash of cultures. “There was a remarkable meeting of the minds at the senior management level”.

Cultural sensitivity workshops were provided for employees.

However the larger rifts in business practice and management sentiment remain unchanged

Culture Clash

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Why the Merger Failed

Analyst felt that though strategically, the merger made good business sense, the contrasting cultures and management styles hindered the realization of synergies. Daimler-Benz attempted to run Chrysler USA operations

in the same way as it would run its German operations. Daimler-Benz was Characterized by methodical

decision-making, while the US based Chrysler encouraged creativity.

Chrysler represented American adaptability and valued efficiency and equal empowerment, while Daimler-Benz valued a more traditional respect for hierarchy and centralized decision-making.

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Between Daimler-Benz & Chrysler

Organizational Differences

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Culture:

- Stiff

- Formal

- Straight-forward

- Traditional

- Mannerly

- Bureaucratic

- International

Daimler AG

Structure:

- High authorities - Strong hierachy- Little payment disparity

Products:

- High quality- High price- Luxurious - Smaller sized cars

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Products:

- Attractive

- Eye-catching

- Very competitive price

- Comfortable driving

- Moderate speedStructure:

- Top down management- Lean staff

Culture:

- Relaxed- Informal- Flexible- Risk Taking

- “Cowboy aura“- Free form discussion

Chrysler Corporation

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Why the Merger Failed cont’d

James Holden, Chrysler president from September 1999 to November 2000, described what he saw as the "marrying up, marrying down" phenomenon. "Mercedes [was] universally perceived as the fancy, special brand, while Chrysler, Dodge, Plymouth and Jeep [were] the poorer, blue collar relations“

This fueled an undercurrent of tension and the dislike and distrust ran deep.

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Why the Merger Failed cont’d

DaimlerChrysler’s CEO Jürgen Schrempp was reported to have said that he had always intended Chrysler Group to be a mere subsidiary of DaimlerChrysler. "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 a reality”.

Also, Jürgen Schrempp and Bob Eaton did not follow a coordinated course of action in determining Chrysler's fate. During 1998-2001, Chrysler was neither taken over nor granted equal status. It floated in a no man's land in between.

Dishonesty & Mismanagement

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Why the Merger Failed cont’d

As a result, Chrysler sat in apathy, waiting for Daimler's next move - a move which came too late -- when Schrempp installed a German management team on November 17, 2000. During that interval, Chrysler bled cash.

Owing to culture clash and a poorly integrated management structure, DaimlerChrysler was unable to accomplish what its forbears took for granted three years ago: profitable automotive production.

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Recommendations

This is a diagnosis of cultural relations between companies prior to a merger and a determination of the extent to which cultural clashes are likely to occur.

Do a Bicultural Audit:

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Recommendations

The cultures of the two organizations must be assessed to determine whether they are compatible. If they are not compatible, the two parties can identify before the merger or acquisition what needs to be done to fit the two cultures together and whether it is worth the effort.

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Recommendations

Soft issues such as governance, leadership, and culture must be given the same level of attention during the due diligence phase of the merger or acquisition as hard issues. Managers should focus on the following:

Governance of the new organization must be discussed openly and negotiated in the same way that financial issues are resolved. Before agreeing to the deal, decide which board of directors and which directors will survive the transaction.

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Recommendations

Leadership for the new organization must also be determined before the merger or acquisition is completed. Delaying this issue usually results in power struggles among executives and management staffs. Addressing the leadership questions before a merger or acquisition is difficult because it is almost impossible for the two parties negotiating the transaction to be objective on this issue. Self-interest usually prevails over logic or common sense. This is where the boards of the two parties have to step in and provide strong leadership. Also, it may be helpful to bring in an outside consultant to aid in this process.

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Recommendations

The norms, beliefs and values of the two organizations are key cultural issues that must be examined. For example, there was clearly a difference in the norms and values of both Daimler and Chrysler. Both entities had a difficult time merging because of these issues.

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Recommendations

These basic cultural issues must be addressed before the merger or acquisition is completed. Cultural conflicts are the most common reasons behind failed mergers and acquisitions.

Less technical or soft issues must be identified and addressed as management plans the merger or acquisition. Failure to do so guarantees that there will be problems when a merger or acquisition is implemented. By submerging the soft issues during the planning phase, an organization runs the greatest risk of all--not only being unsuccessful in implementing the merger or acquisition, but also weakening itself. This was clearly evident in the case of Daimler and Chrysler.

This is an area where outside assistance can be very helpful.

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Conclusion

There should have been no announcement of “merger of equals” as this was not true.

Beware of national differences which can effect the business culture.

Observing business cultures better and deciding on leadership decision rights, from the beginning.

Hiring outside help (consultants) to aid in the acquisition process.

If more attention had been paid to the “soft issues” then real intensions would have come to light during the discussion phase and the merger probably would not have happened at all.

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References

Finkelstein, S. (2002). The DaimlerChrysler Merger. Retrieved March. 22, 2010 from http://mba.tuck.dartmouth.edu/pdf/2002-1-0071.pdf

Strebel, P. (2002). Focus on Corporate Specifics Not National Cliché Cross-Border Lessons from the DaimlerChrysler Merger. Retrieved Mar. 22, 2010 from http://www01.imd.ch/news/research/perspectives/index.cfm?art=2325

Gordonhomeland.com, "Changing Organizational Culture: Unleashing Creative Energy", September 23-25, 2003)http://users.rcn.com/pgordon/homeland/change_culture.html

accessed March 23, 2010.