Failures in Mergers and Acquisitions: the Daimler Chrysler case

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1. Introduction 
 
Starting from the 90's, cross-border mergers and acquisitions (M&A) have 
dramatically increased their frequency and they started to have an impressive 
impact on the global economy. When we talk about cross-border M&A we refer to 
these deals that take place between two companies from different countries. 
When we talk about mergers and acquisitions we basically refer to the 
consolidation of two organizations into a single one (merger) or the purchase of 
one organization from another when the acquirer maintains control (acquisition).  
Some research studies suggests that with the right strategy and the right 
approach to post-merger integration, cross-border acquisitions can create 
enormous value for all the players involved (Hopkins 2008) and that's the reason 
why they have become more and more popular. However, cross-border M&A are 
affected by a high rate of failure: differences in culture may create many 
difficulties for members of the merged organization to see things in the same way 
and to cooperate for the same goal. 
One of the most active industry in this kind of deals is surely the automotive 
industry. 
There are several drivers that can push an auto company to pursue strategic 
transactions like M&A deals. These include: broadening geographic footprint, 
increasing market share, diversifying the customer base, bolstering technology 
capabilities; that's why M&A activity is so important, specially in the automotive 
industry, where the high concentration is the peculiar characteristic (PwC report, 
2010).  
Proven that, we decided to analyze and discuss the biggest and most 
controversial cross-border merger happened in that industry: the merger between 
Daimler-Benz (Germany) and Chrysler Corporation (US) in 1998, which had a 
pervasive influence in the auto market equilibrium. Despite all the good premises,
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it ended with a failure; in fact after 9 years of disappointing performance, in 2007 
the two companies definitively split off. 
At the time of the deal it seemed like a good idea and it may have been, in fact, a 
good idea. Unfortunately things went bad, the integration strategy was wrong and 
the failure can mostly be attributed to what is called the “clash of culture”. 
Operations and management were not successfully integrated as “equals” 
because of the entirely different ways in which the Germans and Americans 
operated.  
In this work we will delve into all these subjects and many more, giving data, 
motivations and explanations and the structure is set in a way by which we will get 
to the point step by step. In fact, the work is divided in two sections, one purely 
theoretical and one referred to the DaimlerChrysler case. The aim is to give to the 
reader all the instruments to understand the subjects and, only after that, connect 
everything to the case. 
This is the structure of the work: the first section, that is focused on theory tools, 
includes the chapters from 2 to 7. The second section, based on the 
DaimlerChrysler case, includes the chapters from 8 to 16. 
In Chapter 2 we will talk about what mergers and acquisitions are, and how they 
are valuated. In Chapter 3 and 4 we will present all the players that can be 
involved in a deal and the most common motivations why a deal is done. Then in 
Chapter 5 and 6 we introduce a very important point: “failures in M&A”. We will 
give reasons, results of researches and we will discuss many theories by which 
“failures data” could be incorrect or misunderstood. In Chapter 7 we then move on 
a crucial subject for the comprehension of the DaimlerChrysler case: 
organizational culture and post-merger integration.  
Second section opens with an historical overview on M&A activity (Chapter 8) and 
then with an analysis on the automotive industry, with all the characteristics and 
some hypothesis on the future (Chapter 9). Finally, Chapter 10 is focused on the
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presentation of the DaimlerChrysler case: companies profiles, players and the 
timeline of the deal. 
In Chapter 11 we will give the reasons why the deal was done and then in 
Chapter 12 we will discuss all the financial issues. The cornerstones of the work 
are discussed in Chapters 13, 14 and 15: disappointing stock performance, 
cultural clash and the issues concerning the “merger of equals” are the main 
topics, discussed with a thorough and exhaustive analysis. Chapter 16 is about 
the internal/external communication and the relations with the media and it 
concludes the work.
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2. Forms of acquisition 
 
There are different ways for conveying or transferring the ownership from the 
target to the acquiring firm, and the mechanism chosen is called the form of 
acquisition. It affects the negotiation process and each form has a number of 
advantages and disadvantages from buyer and seller point of view. 
Purchase of assets: 
In an asset purchase, a buyer acquires all rights a seller has on an asset for cash, 
stock or some combination. It may be the most practical way to complete the 
transaction when the acquirer is interested only in a product line or division of a 
parent firm with multiple product lines or divisions that are not organized as 
separated legal subsidiaries. The seller retains ownership of a share of stock of 
the business. The buyer must either create a new entity or use another existing 
business unit as the acquisition vehicle for the transaction. Only assets and 
liabilities specifically identified in the agreement of purchase and sale are 
transferred to the buyer (DePamphilis 2011).  
Asset purchases are generally more complicated than mergers or stock 
purchases because ownership of the assets and liabilities must actually be 
transferred and this may involve additional fees. 
Purchase of stock: 
Stock purchases often are viewed as the purchase of all of a target firm's 
outstanding stock. In effect, the buyer replaces the seller as owner; the business 
continues to operate without interruption, and the seller has no ongoing interest in, 
or obligation with respect to, the assets, liabilities, or operations of the business 
(DePamphilis 2011). 
Mergers:
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Economists have grouped mergers based on whether they take place at the same 
level of economic activity, hence taking into account the element of relatedness 
(Gonzalez 2000).  
 Horizontal Mergers : they involve two firms that operate and compete in the 
same kind of business activity. They may have the benefit of economies of 
scale. 
 Vertical Mergers: they occur between firms in different stages of production 
operation. The efficiency of them is primarily on the costliness of market 
exchange and contracting. 
 Conglomerate Mergers: they involve firms engaged in unrelated types of 
business activity. 
When a merger is used to complete the transaction, the legal structure may take 
many forms. In a merger, two or more firms combine, and all but one legally 
cease to exist. The combined organization continues under the original name of 
the surviving firm. Typically, shareholders of the target firm exchange their shares 
for those of the acquiring firm after a shareholder vote approving the merger 
(DePamphilis 2011). 
Statutory Consolidations 
A statutory Consolidation is the one involving two or more companies that want to 
join forming a new company. Although it might be considered like a merger, there 
are instead differences. In fact, as DePamphilis pointed out, in a Statutory 
Consolidation all legal entities that are consolidated are dissolved as the new 
company is formed, usually with a new name, whereas in a merger either the 
acquirer or target survives. The 1999 combination of Daimler-Benz and Chrysler 
to form DaimlerChrysler is an example of a consolidation. 
The new corporate entity created usually assumes ownership of the assets and 
liabilities of the merged or consolidated organizations. Stockholders in merged 
companies typically exchange their shares for shares in the new company.
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Mergers of Equals: 
A merger of equals is a merger framework usually applied whenever the 
participants are comparable in size, competitive position, profitability and market 
capitalization (DePamphilis 2011). Sometimes it could be unclear whether one 
party is ceding control to the other and which party provides the greatest synergy. 
Normally the CEO position of the new firms is equally shared between the former 
CEOs of the merged firms. 
Tender offers: 
Tender offers refer as an offer to purchase some or all of shareholders' shares in 
a corporation. The price offered is usually at a premium to the market price. When 
a firm extends an offer to its own shareholders to buy back stock, it is defined as 
self-tender offer. Tender offers may be friendly or unfriendly. As explained by 
DePamphilis, a hostile tender offer is a takeover tactic in which the acquirer 
bypasses the target's board and management and goes directly to the target's 
shareholders with an offer to purchase their shares. 
 
2.1 Forms of payment 
As we previously described, the purchase price in a merger can consist in cash, 
stock, or debt, giving the acquiring company more space and options in how to 
pay for the purchase of the target's stock. 
If the seller receives acquirer shares in exchange for their shares, the merger is a 
stock-for-stock or stock-swap. If the shareholders of the selling firm receive cash 
or some form of nonvoting investment for their shares, the merger is referred to as 
a cash-out statutory merger (DePamphilis 2011). Merger generally are not 
suitable for hostile transaction because they require the approval of the target's 
board.