INTRO
On May 7, 1998, Daimler-Benz announced plans to merge with Chrysler in a 38 billion $ deal, the largest industrial merger in history.
In this episode, we'll explore the key factors and the critical moments that shaped the negotiations between Daimler-Benz and Chrysler.
56% of global M&As fail.
A similar failure rate would result in 22 million plane crashes every year.
Research shows that an effective management of the negotiation process paves the way for a successful and durable M&A that creates value for all stakeholders.
M&A Global Negotiations puts you in the shoes of CEOs and founders by revealing the stories and strategies behind major M&A negotiations.
CHAPTER 1 – the perspective of Daimler-Benz
In early 1997, Daimler-Benz CEO Jürgen Schrempp made significant organizational changes. He set a rule that each business unit within Daimler had to achieve a 12% return on capital or face being sold.
This was unusual for German companies at the time.
As a result, the number of business units was cut down from 35 to 23, with significant exits including the sale of the loss-making electrical engineering arm, and the closure of aircraft maker, Fokker.
Schrempp then restructured the remaining operations into five key divisions: Mercedes-Benz cars, commercial vehicles, aerospace, services, and other specialized areas like rail systems and automotive electronics.
This was the first time that a Daimler CEO took direct control of the Mercedes-Benz car unit.
Daimler-Benz also had production and market challenges. It took between 60 and 80 labor hours to build a Mercedes-Benz car, 3 times more than the 20 hours Lexus required.
Despite a wide-reaching global sales network and over two-thirds of its sales happening outside Germany, Daimler-Benz had less than a 1% market share in the U.S.
Clearly, the company aimed to improve its operations and expand its market presence, especially in the U.S., the world's biggest car market.
CHAPTER 2 – Daimler-Benz CEO – Jurgen Schremp
Jurgen Schrempp was born on September 15, 1944, in Freiburg. His father was captured by the Soviet army in the same year he was born and held as a prisoner of war until 1949.
Schrempp wasn't a keen student. At 15, he left school to work as an apprentice mechanic at a local Mercedes-Benz dealership.
By 20, he was married to Renate, and in 1964, he started engineering school, supporting himself and his wife by working as a mechanic and playing trumpet at events.
Schrempp was a lively person and joined Daimler at 23, working long hours on truck warranty issues and repairs.
He desired international experience and moved with his family to South Africa in 1974, quickly advancing to chief salesman for Mercedes-Benz.
He was known for his long drives to visit plants and dealers and his strong stand against apartheid.
His efforts caught attention, and in 1982, he was chosen to lead a new truck division in Cleveland, Ohio.
Returning to South Africa in 1984 as CEO, he supported Nelson Mandela and continued opposing apartheid.
In 1989, back in Stuttgart, he took charge of the Daimler-Benz aerospace division, making tough decisions like cutting unprofitable operations.
By 1995, he became the CEO of Daimler Chrysler.
Schrempp had a commanding presence and was a charismatic leader known for his energy and ability to persuade the Board in favor of his plans.
He enjoyed adventurous activities like mountain climbing and chess matches against Gary Kasparov. His lifestyle was robust, filled with demanding workouts, socializing late into the night, and a love for music.
He aimed for a more centralized control at Daimler-Benz, calling its headquarters "Bullshit Castle" due to its slow bureaucratic processes.
He halved the number of top managers, reshuffled the governing Board, and sold off several divisions, earning him the nickname "Neutron Jürgen."
His key move was bringing Mercedes-Benz, Daimler-Benz's most profitable division, under his direct control, changing the former autonomous setup.
CHAPTER 3 – The Interests of Daimler-Chrysler
After closely studying the auto industry, Schrempp saw Chrysler as the ideal match for Mercedes-Benz. Daimler's interests in merging with Chrysler were twofold: strategic and operational.
The company's strategic goal was to grow its presence globally, focusing on the U.S. market.
The merger offered an immediate, well-established network of Chrysler dealerships in the U.S., an advantage that could have taken years to build from scratch.
Daimler also aimed to broaden its product range, adding Chrysler's diverse lineup of SUVs and minivans to its own luxury cars, reaching a wider group of customers.
The company was also eyeing the certain industry consolidation and wanted to secure a strong partner early on.
On the operational front, Daimler was looking for economies of scale.
The merged entity could lower per-unit costs through increased production volume and better negotiating power with suppliers.
While Mercedes-Benz was developing a new platform for each new car, its competitors used shared platforms to cut costs.
Furthermore, Daimler was a leader in engineering and quality, and Chrysler was known for its innovative product development and distinct design.
CHAPTER 4 – The Perspective of Chrysler
In 1997, Chrysler was very healthy, with a 23% market share in the U.S., thanks to in-demand products like light trucks, SUVs, and vans.
Compared to its main U.S. competitors, Ford and GM, Chrysler was able to develop these products in half the time and at half the cost.
Their marketing was also effective in understanding what the market wanted.
However, Chrysler had its weaknesses.
Most of its sales in the U.S. were from trucks, vans, and SUVs, making up two-thirds of the total, while cars were just one-third.
On top of that, nine out of ten of their products were sold only in the U.S., with very little presence in Europe.
Bob Eaton, the CEO and Chairman of Chrysler at the time, believed the auto industry would undergo three significant changes.
He saw issues like excess production capacity, the high cost of developing new products, and environmental challenges leading to industry consolidation.
With this in mind, as early as 1997, Eaton started looking for partners to help Chrysler grow globally, diversify its products, and share the cost of new product development.
CHAPTER 5 – Chrysler CEO – Bob Eaton
Robert James Eaton was born in February 1940 in Buena Vista, Colorado, and later moved to Arkansas City, Kansas.
As a kid, he spent his summers on his grandfather's farm, helping fieldworkers and hunting quails.
When Forbes asked him about his take on the best education for business success, Eaton said growing up in a small, Midwestern town was vital, with Arkansas City being a good example.
His engineering interest showed early when he turned a washing machine into a go-cart. It was clear he wanted to be an engineer, especially in the automotive field.
He attended the University of Kansas, where he met his future wife and earned a B.S. in Mechanical Engineering.
After college, he joined General Motors, which was the world's biggest company back then.
Even though he wasn't very charming, his bosses appreciated his hard work and determination.
He became the Vice President of advanced engineering and, in 1988, the President of G.M. Europe.
When Chrysler's CEO, Lee Iacocca, had to retire, the company picked Eaton as the successor, which caused some stir as Bob Lutz, the then Chrysler president, was the expected choice.
However, the Board wanted to start fresh, and Eaton's quiet manner, technical skills, and global experience made him the top pick.
Eaton stepped into a challenging situation, replacing a legendary figure like Iacocca.
The Board and executives hardly knew him, and he was unfamiliar with the people, the products, and the company's operations and processes.
CHAPTER 6 – The Interests of Chrysler
Chrysler saw the merger with Daimler as a promising avenue for several key objectives.
On the strategic front, Chrysler was eyeing international expansion, especially in Europe, a market where it had a minor presence.
Daimler's well-established European network offered an immediate solution to this.
Furthermore, Chrysler's product line was highly concentrated in trucks, vans, and SUVs.
Partnering with Daimler would allow them to diversify into luxury and higher-end segments, a space where Daimler excelled.
Operationally, Chrysler was focused on improving efficiency and reducing product development costs. The merger presented an opportunity for sharing technologies and innovations, leading to potentially faster and cheaper product development cycles.
Additionally, the merger would combine both companies' research and development capabilities, accelerating innovation, especially in areas like fuel efficiency and alternative fuels.
In summary, Chrysler aimed to become a more versatile and globally competitive player through its union with Daimler.
CHAPTER 7 – Timeline of the negotiations
In the early months of 1997, a significant move set into motion. Jurgen Schrempp, CEO of Daimler-Benz, initiated 'Project Blitz' in collaboration with Goldman Sachs. This project aimed to deeply analyze the feasibility of acquiring Chrysler. The initial study was illuminating—it showed that the undervaluation of Chrysler's stock compared to Daimler's allowed for a beneficial acquisition, even with a premium of up to 45% on Chrysler's existing stock price.
By April 1997, Schrempp wasn't satisfied with just one opinion. He enlisted Transatlantic Consulting and Lehman Brothers to provide additional viewpoints. Their findings resonated with those of Goldman Sachs, confirming that a 45 to 60% price premium over Chrysler's then-stock price still served Daimler well. Each report emphasized the need for a friendly merger rather than a hostile takeover.
Fast forward to January 12, 1998—a day of crucial meetings. Schrempp met Robert Eaton, Chrysler's CEO, at the International Auto Show in Detroit. The conversation lasted just 17 minutes, but it was enough to set the gears in motion. Schrempp said, "Bob, let me get straight to the point. I have assessed your company, and I have assessed my company. Many people on both of our sides held talks in 1995 and 1996. I have come to the conclusion that if we get together, we will really fit perfectly well. Product, geographically, everything fits. Okay?".
Eaton replied, "We have done studies, too. I have been thinking the same thing myself. It makes sense".
Eaton committed to considering the proposal seriously and promised to respond within two weeks.
The same day, Schrempp also held exploratory talks with Ford's CEO, Alex Trotman. However, Ford's size and the controlling Ford family made it clear that a merger was unfeasible.
By February 5, Eaton brought the Chrysler board up to speed. They were interested and authorized the continuation of talks with Daimler.
On February 17th and 18th, Eaton and Chrysler CFO Gary Valade, advised by Credit Suisse First Boston, met in Geneva with Schrempp and Daimler CFO Eckhard Cordes, advised by Goldman Sachs. Eaton laid out three non-negotiable conditions: maximizing Chrysler shareholder's value, minimizing taxes for those shareholders, and insisting on a merger of equals.
Schrempp, in return, emphasized the need for a tax-free transaction and a German-based entity.
Schrempp knew that his supervisory Board would never accept a new merged entity as an American corporation. He was ready to compromise on the structure of the management and the premium over Chrysler's then-stock price, but the newly merged entity had to be a German "Aktiengesellschaft."
Schrempp was glad that Chrysler prioritized an advantageous tax condition over the location of the newly merged corporation. That favored establishing the combined entity as a German A.G.
March 2 provided another turning point. According to Eaton's lawyers, Germany provided the most advantageous and accessible tax situation for the new combined entity. In return, Eaton demanded that the new entity be named ChryslerDaimlerBenz. "You know, if it's going to be a German AG, then we'll have to make the name ChryslerDaimler-Benz", Eaton said. "That implies a merger of equals. Chrysler should go first".
"That will be difficult, but I understand why you want that", Schrempp replied. "I will talk to my supervisory and management boards and try to sell them on it".
They moved on, agreeing in principle that the new company would operate dual headquarters in Stuttgart and Auburn Hills, that both sides would be equally represented on the management board, and that Chrysler shareholders would receive a premium on their stock (still to be decided in the following meetings).
For two days Schrempp and Eaton debated a fair price for Chrysler. Schrempp argued for a premium of 20% over the current stock price. "Look if I was acquiring you I could understand giving that kind of premium, but this isn't an acquisition. It is a merger."
Still, Eaton was determined to accept nothing less than a 28% premium.
After weeks of careful preparation every fact and figure analyzed to death, the deal came down to the two CEOs punching out the numbers alone in a cheap calculator.
By April 9, the final financial aspects were hammered out. Following intense negotiations, Schrempp agreed to a 28% premium on Chrysler's stock.
On May 4, one day before the Chrysler board was called to approve the merger, Eaton called Schrempp.
“Jurgen,” Eaton said. “The name”.
“Daimler-BenzChrysler,” Schrempp said.
"No, that's not it," Eaton countered. "We have to call it ChryslerDaimler-Benz".
“How about DaimlerChrysler,” Schrempp said. "I'll drop the Benz part".
"No, that's not possible," Eaton said.
"You know," Schrempp replied, "we will solve this in the end".
The following day the Chrysler directors gathered at 8 am. Just before the Board convened, Eaton called Schrempp in Germany. He told Schrempp that the Board was about to meet, and they had to vote on a name. Eaton said the name would be ChryslerDaimler-Benz.
"No," Schrempp said bluntly, "I cannot do that. It is Daimler-Chrysler. We dropped Benz. If that compromise is not acceptable to you, we have a problem".
The Board wants Chrysler in front," Eaton countered.
"You tell your board that Daimler has to be the first name," Schrempp said.
"Jurgen, that is not possible," Eaton said.
"Then," Schrempp said, "we have to cancel the whole deal. It is a showstopper for me".
A few hours later the Chrysler board approved the merger. The new entity name was Daimler-Chrysler
CHAPTER 8 – Reactions to the Merger announcement
The proposed merger between Daimler-Benz and Chrysler captured the attention of analysts, investors, and competitors alike.
Many saw this alliance as a potential game-changer that could boost the global presence of both companies while pressuring smaller rivals.
Analysts praised the merger, calling it a 'dream team', a marriage in heaven, pairing two highly successful automakers with minimal product and geographic overlap.
Stock markets responded positively, witnessing a surge in Daimler's shares in Frankfurt and substantial gains in Chrysler's stock price in the U.S. market.
While the announcement was surprising to some, it appeared to be well-timed for both companies.
Daimler had gained valuable experience in the U.S. market, particularly with its successful M-Class SUV, highlighting the need for a broader product range.
Meanwhile, Chrysler's U.S. market share had been declining because of tough competition, and European passenger car sales faced challenges.
The merger offered potential benefits for both parties, with Daimler poised for transformation and Chrysler securing a strong European ally. It was set to become the largest industrial merger ever, with a combined market capitalization of 92 billion $.
Furthermore, Industry experts suggested that this move by two successful players may have served as a signal for further consolidations in the automotive sector, aiming to increase scale and reduce costs.
Notably, concerns have been raised about the potential influence of financial incentives on the merger decision by Chrysler managers. Chrysler's top executives stood to collectively receive shares valued at over 1 billion $, with Bob Eaton expected to receive more than 100 million $ in DaimlerChrysler stock.
CHAPTER 9 – The outcome of the merger
Nine years later, the merger collapsed. The early signs of post-merger disintegration appeared as soon as it became clear that the so-called 'merger of equals' was, in reality, Daimler taking over Chrysler.
Analysts pointed out several issues that led to the downfall of the merger.
First, there were cultural differences: German executives wanted to move to the U.S., but their American counterparts were unwilling to relocate to Germany. The two companies also differed in their organizational structures.
Chrysler was a lean and flat organization, while Daimler-Benz was hierarchical and bureaucratic. Furthermore, Daimler management compensation was significantly lower than their Chrysler counterparts.
Kirk Kerkorian, once Chrysler's largest shareholder, sued DaimlerChrysler. He claimed that the merger was falsely presented as an equal partnership. His lawsuit was sparked by a 2000 interview in The Financial Times where Mr. Schrempp admitted to using the term 'merger of equals' just for psychological reasons,
Schrempp described himself as a chess player keeping his next moves secret. ''If I had gone out and said, 'Look. Eventually, Chrysler will be a division of the DaimlerChrysler Group,' everybody would have said, 'No way will we do a deal like that,'' he told the newspaper.
One major issue was Daimler's pride in Mercedes. Mercedes-Benz European dealers regarded Chrysler products as inferior and refused to sell Dodge and Jeep cars. Salary and expense discrepancies further deepened the divide. Senior Chrysler managers became rich at the time of the merger, as share options suddenly became hugely valuable.
American executives earned much more than their German counterparts, who, on the other hand, were criticized for their lavish travel expenses, which included first-class flights and five-star hotels over weekends.
Despite initial optimism, the merger didn't yield the expected benefits. Mercedes didn't trust Chrysler's manufacturing processes. Several key Chrysler executives, including Bob Eaton, left the company early on, leaving it ill-prepared for the challenges ahead.
The deal fell apart mainly because the two companies were never truly integrated. They operated more as separate entities under a common name than a single, unified organization.
By 2001, the combined company's value had crashed, and Chrysler's U.S. market share had dropped from 23 to 14% due to the company's failure to adapt to market demands for smaller, fuel-efficient cars as the U.S. economy sank.
In May 2007 Chrysler was sold to a private equity group for a fraction of its original value, proving the merger to be a significant failure.
OUTRO
I hope to see you next month when we'll explore another M&A negotiation.
If you enjoyed this episode and would like to help support the podcast, please share it with others and visit our website, Neglob.com.
The Global M&A negotiations podcast is hosted by me, Yadvinder Singh Rana.
Original music by Henrik Juul Jensen.