Case of DaimlerChrysler merger

Introduction
The case is about merger and demerger of the two automotive companies which have dedicated and skilled workforces and successful products, but in different markets and in different regions of the world, i.e. Daimler Benz of Germany and other company is Chrysler Corporation of US which take place merger in 1998 and demerged in year of 2007. This study analyses the potential sources of value creation and destruction, and evidence on how this process has affected the valuation of the Daimler Chrysler merger. We also discuss some of the important issues that must be taken into account in cross-border mergers and acquisitions. Differences in corporate culture, compensation policies, ownership structure, and the legal environment may pose significant challenges to international business combinations.

This is the historic merger that will change the face of the automotive industry.

Context
In a Modigliani-Miller framework, if mergers do create value, they do so by changing tax liabilities, changing contracting costs, or changing investment incentives. If the size, timing, and riskiness of the combined future cash flows of the merged firms exceed the cash flows of the separate firms (“synergy”), the merger will be a positive net present-value project. They include:- Tax motivation Mispricing inspiration Market power high price hypothesis motivation Earning diversification stimulation

In the case of Daimler Chrysler merger, several potential reasons exist for the merger. Daimler derives 63% of sales from Europe, while Chrysler depends almost exclusively on North America for 93% of its sales. “Both companies have product ranges with world-class brands that complement each other perfectly. They wanted to continue to maintain their brands and their distinct identities.” Moreover, both companies are trying to expand geographically in their respective markets and immediate growth opportunities would exist by using each other’s facilities, capacities and infrastructure.

Challenging Issues
A number of issues had been attributed to this 9 year merger failed and those reasons were as follow:
• Conflict in Corporate Culture
The success of this cross-border merger depends on the management’s ability to create a single corporate culture and strategy. Although the combination of Daimler-Benz and Chrysler was designed as a merger of equals. The links between the companies of different countries may collapse on serious corporate culture, control, and strategy differences.
• Disparities in Wages
There were wide disparities in wages between the US and the German workers. It was felt the US workers were being a larger amount when compared to the amount the Germans were getting much lesser. This issue continued to cause severe strain in the interactions between the US and German employees, but incidentally before the issue became very serious, the merger itself was doomed.
• Different Business Model
There was an apparent clash of business models and ethics for the stakeholders. Mixing and integrating these two models unfortunately did not pay off and was not handled well.
• Adverse Media Reporting
The media, which had initially applauded the merger, started damming the merger and everyone from lay journalists to authors had a field day in bashing the merger. This created a very bad publicity and may have hastened the failure of the merger.
• Technology issue
Chrysler had certain technologies that could have helped the German company. Both the companies had developed prototypes of hybrid vehicles that could run on alternative fuels such as electricity, bio diesel, fuel cells, and hydrogen based fuel cells and so on. But common projects were never taken up to develop these vehicles. Unfortunately deep distrust and 'we are better' attitude acted as sound barriers for knowledge sharing. The benefits in engineering knowledge remained isolated in their respective companies.
• Cost Cutting Measures
With reducing sales and increasing overheads, there was an urgent need to control costs. The management decided to cut about 13,000 jobs and close a number of plants and factories as an immediate solution to control costs. This has created a lot if unrest in the workforce and the labour unions.
• Market Segments Issues Chrysler had an upper hand in the gas-guzzling card such as the SUVs and the minivan. While these vehicles were well-liked in the early 1990s, the market demand for these cars fell in the early 2000’s. At the same time, there was demand for fuel efficient, compact cars, Chrysler did not have any such cars and good model to meet this demand. Consequently, Chrysler lost about 1.5 billion USD in 2006. Accordingly, there have been rising demand.

Our analysis/ Conclusion Using the DaimlerChrysler merger as a case study, we analyzed that this paper has focused on value creation and destruction, and various challenges of an international transaction. Although the initial market reaction to the merger was favorable for both firms, the returns since then have been negative and well below market indices. We analyze both the initial value creation and the subsequent destruction of value. The former traces to product lines that meshed well,
Daimler’s movement into the American market and Chrysler’s movement into the European market, and complementary engineering and marketing skills. In contrast, the latter reflects among other things, Standard & Poor’s decision not to include DaimlerChrysler in the S&P 500 index and the clash of corporate cultures and compensation schemes. On balance, we provide evidence that the initial positive market returns have dissipated.