DaimlerChrysler Post Mortem
March 14th, 2007It is interesting to me that Daimler has now decided that it is open to considering suitors for its Chrysler unit. It’s not so much interesting to me that an acquirer would sell an underperforming target. This happens all the time. Again, most acquisitions fail, so why shouldn’t we expect a parent firm to dispose of an underperforming subunit? Rather, what’s most interesting to me about DaimlerChrysler is that the deal performed as poorly as it did.
If you would have told me on May 8th, 1998 (one day after the merger announcement) that this would be the end result, I certainly would have granted you that it could have been a possibility. However, I would have pegged that possibility at lower than 50%, much lower than 50% …maybe somewhere in the 10-20% range. I thought the combined DaimlerChrysler might have underperformed the individual units had each been left to its own devices – probably a 50% chance of this happening. I even thought that they had a 30-40% chance to make this thing work (creating true synergies and a whole more valuable than the sum of its parts). But I never envisioned total failure.
This deal had a lot going for it. The equity markets liked it. Shares of both companies increased dramatically in the months following the announcement. Moreover, there were some real complementarities between Daimler and Chrysler. Chrysler complemented Daimler on the product side by adding a line of small vehicles, minivans, and SUV’s to Daimler’s traditional up-market saloons. Daimler complemented Chrysler’s geographic reach and vice versa. Daimler had a strong footprint in Europe and Chrysler’s strength lie in the U.S. In addition, Chrysler had a very efficient production organization based on a platform-team structure, while Daimler had high production costs, in part because of its manufacturing base in Germany and its associated labor costs, but also in part because of its single platform per model approach. In that sense then, Chrysler could help Daimler lower its costs to more effectively compete with Japanese marks that had lower production costs like Lexus and Infiniti.
We certainly can’t blame this deal’s failure on Daimler overpaying (the premium Chrysler shareholders received was modest – 26% by most calculations). We can’t even blame this deal’s failure on the absence of synergies necessary to make the deal pay off. What scuttled this deal at the end of the day was the failure to realize those synergies. As a result, this merger stands as an example of one of the poorest integrations in the history of deal making.
I will not go over all the failures of execution here because I believe they have been fairly well covered in the popular press. However, I will acknowledge several issues that made this deal unbelievably complex from an integration perspective. First, this was a large deal. Large deals of this sort are always difficult to integrate due to their inherent complexities and sheer scale. But add on top of that the fact that it was a cross-border deal, and now we’re not only talking about corporate culture that needs to be integrated, but the need to achieve that in a context complicated by national culture. Stories of conflict between Americans at Chrysler and their German counterparts abound. There was also one unique issue of corporate culture in this deal – the marrying up marrying down problem. In this merger, Daimler (as the high status partner) viewed Chrysler not as an equal, but inferior in both quality and image. As a result, Daimler was resistant to any ideas and/or process improvements suggested by its American subunit. For example, Daimler could have saved a substantial amount of money had it moved to a platform-based system and shared platforms with Chrysler. Fearing brand dilution, Daimler decided against it. In addition, Daimler decided that it could not share a significant amount of parts with Chrysler for fear of diluting its brand in the eyes of the consumer. For these reasons (and others related) the merger never achieved the cost savings that might have been realized. Instead, the merger simply added layers of administrative and operating costs from which the deal never recovered. For instance, at the outset, Daimler’s top brass realized that they were underpaid compared to their American counterparts, in part due to the differences in business practices between the U.S. and Germany. Top managers at Chrysler earned in the neighborhood of $160 million per year whereas their counterparts at Daimler earned $16 million per year. Therefore, it was decided that Daimler managers should be “marked-to-market” to earn an amount in line with Chrysler’s management. This added $150 million to costs right off the bat. Not only that, but managing both entities required an extensive amount of travel between the U.S. and Germany. German executives made many trips to the U.S. (not Auburn Hills but New York City) to meet with their counterparts from Chrysler. After incurring large hotel bills in New York, Daimler executives decided to open an office there and acquire some corporate apartments. Again, this added to DaimlerChrysler’s overall costs.
In addition to an increase in costs, the combined entity lost a significant amount of managerial talent in the form of defections to other car makers. Talented managers and engineers (from both the Daimler and Chrysler sides) walked away because they were overwhelmed and/or marginalized. Daimler managers left because they were overwhelmed trying to integrate the two companies while at the same time they were expected to accomplish their day-to-day tasks. This is a classic case of managerial attention diverted away from the activities that they are supposed to be doing – running the business! Many talented Chrysler employees raced for the exits as it became increasingly clear that the deal was not truly a merger of equals but an acquisition of Chrysler by Daimler. As a result, their ideas were not implemented and they felt disenfranchised.
We can analyze this deal six ways to Sunday. Was this deal a merger or an acquisition? Might the integration efforts had gone better had it been billed as an acquisition instead of a merger with Daimler clearly taking the lead from the start? Would the U.S. government have even allowed Chrysler to have been purchased had it been billed as an outright acquisition? We can ask many questions about why the deal failed. We can also generate a bevy of alternatives to have made the merger work. But it’s easy to play Monday morning quarterback once you know the final score. Nevertheless, there are some cautionary tales in here. Was this deal a failure of due diligence? Probably not. In all fairness to Daimler, it’s true that Chrysler’s product line consisted of gas guzzling SUV’s and an ageing Minivan portfolio. Moreover, the sharp increase in gasoline prices from 2003-2006 could scarcely have been predicted. But Daimler knew what it was getting in Chrysler. And even so, real synergies existed. Was this then failure to realize ex ante the costs imposed by culture – both corporate and national? This is part of the story, as explained above. Was this the failure to execute and implement an effective integration plan? Absolutely!
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