Dimler & Chrysler

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r @THE DAIMLERCHRYSLER MERGER:
SHORT-TERM GAINS, LONG-RUN
WEALTH DESTRUCTION?
Matej Blaˇko, Jeffry M. Netter and Joseph F. Sinkey, Jr.
s
ABSTRACT
Differences in corporate culture, compensation policies, ownership structure, and the legal environment pose significant challenges to all mergers but especially international business combinations. On 6 May 1998 in London, Daimler-Benz of Germany signed a merger agreement with Chrysler Corporation of the United States. This chapter focuses on value creation and destruction, and the challenges of an international transaction. Given the favorable market response to the merger, we review the potential sources of value creation as well as outline the steps undertaken to consummate the deal. However, important post-merger events, such as the Standard & Poor’s decision not to include DaimlerChrysler in the S&P500 index and the clash of corporate cultures and compensation schemes, have tarnished the initial luster of the positive market response and present challenging obstacles to the long-term success of the transaction. As of this writing, the evidence suggests that wealth was destroyed rather than created.

Issues in International Corporate Control and Governance, Volume 15, pages 299–329. Copyright © 2000 by Elsevier Science Inc.
All rights of reproduction in any form reserved.
ISBN: 0-7623-0699-8

299

300

ˇ
MATEJ BLASKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

1. INTRODUCTION
The two companies are a perfect fit of two leaders in their respective markets. Both companies have dedicated and skilled workforces and successful products, but in different markets and different parts of the world. By combining and utilizing each other’s strengths, we will have a pre-eminent strategic position in the global marketplace for the benefit of our customers. We will be able to exploit new markets, and we will improve return and value for our shareholders. This is a historic merger that will change the face of the automotive industry.

This is much more than a merger; today we are creating the world’s leading automotive company for the 21st century. We are combining the two most innovative car companies in the world.
Jürgen Schrempp
Chairman of the Daimler-Benz Management Board.

On May 7, 1998, Daimler-Benz of Germany announced plans to merge with Chrysler Corporation in the largest international merger in history. Jürgen Schrempp of Daimler-Benz and Robert Eaton of Chrysler had signed the combination agreement the day before in London. The combined entity is called DaimlerChrysler AG and is incorporated under the jurisdiction of the Federal Republic of Germany. The company’s stock (DCX) trades on all of the world’s major stock exchanges, including New York, Frankfurt, London and Tokyo, as well as on the other exchanges in the USA, Germany, Austria, Canada, France, and Switzerland. In many respects, the DaimlerChrysler merger is shaping the future of the auto industry and has triggered consolidation in an industry plagued by overcapacity. Table 1 presents an Table 1.

Largest carmakers

Industry Overview (1998).

Earnings

Revenue

Car Sales

Cash

General Motors

$2.8 billion

$140 billion

7.5 million

$16.6 billion

Ford Motor*
DaimlerChrysler
Volkswagen
Toyota Motor Co.
Honda Motor Co.

$6.7 billion
$6.5 billion
$1.3 billion
$4.0 billion
$2.4 billion

$118 billion
$147 billion
$75 billion
$106 billion
$54 billion

6.8 million
4.0 million
4.6 million
4.5 million
2.3 million

$23.0 billion
$25.0 billion
$12.4 billion
$23.0 billion
$3.0 billion

Rumored merger
partners
Isuzu, Suzuki,
Daewoo
Honda, BMW
Nissan, Fiat
BMW, Fiat
Daihatsu, Hino
BMW

* In the spring of 1999, Ford Motor acquired Sweden’s Volvo car division for $6.5 billion. Volvo sold 400,000 cars in 1997. DaimlerChrysler called off merger talks with Nissan. Subsequently, Renault of France acquired a stake in Nissan. On March 27, 2000,...
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