Chrysler to Merge With Daimler-Benz in $40-Billion Deal


In a deal that could reshape the global auto industry, Chrysler Corp. and German luxury car maker Daimler-Benz are expected to announce today that they have agreed to merge in deal valued at nearly $40 billion.

The alliance--the largest industrial combination in history--creates the world’s fifth-largest auto manufacturer and could precipitate a wave of similar megamergers among other auto makers.

The merger involves a swapping of stock with a majority of shares being held by Daimler stockholders, though management control of the new organization at the outset would be shared equally, analysts said.


The combined company will be called Daimler Chrysler. It will be incorporated in Germany, but will have joint headquarters in Auburn Hills, Mich., and Stuttgart, home bases for the two companies.

Other details were sketchy late Wednesday. Top Chrysler and Daimler executives were understood to be headed to London to announce the agreement early today, a site apparently chosen as neutral turf.

The merger must be approved by shareholders and regulators in Washington and Europe.

The union would wed two storied companies whose roots stretch back more than a century, but whose image and corporate cultures are vastly different.

Stuttgart-based Daimler, the world’s 14th-largest auto maker, is renowned for luxury sedans that boast technological sophistication and snob appeal. Its top-of-the-line S600 sedan sells for $130,000.

By contrast, Chrysler, the auto industry’s sixth-largest player, has demonstrated a deft ability to outmaneuver larger rivals and ranks as the world leader in profit per vehicle. Its low-cost Dodge Neon subcompact sells for $12,000.

Whether two companies with such different product lines, heritage, cultures and national interests can be seamlessly brought together remains open to question. But a massive glut of autos worldwide has made the industry ripe for consolidation, as manufacturers scramble to cut production costs and hold market share while expanding around the globe.


Consolidation in the auto industry has been percolating for some years. Auto factories, many in foreign markets like Korea, have the capacity to build 20 million more vehicles a year than consumers will buy.

This potential oversupply is forcing auto makers to hold costs down. To remain competitive they are looking for partnerships with other manufacturers, expanding into new markets and cutting production costs.

Auto experts see a Chrysler-Daimler merger as just the beginning of a new wave of big acquisitions. Most vulnerable are the smaller European operators, such as Renault, or weaker Japanese companies, such as Nissan.

“This merger could have a destabilizing effect on the industry,” said James Mateyka, vice president of auto consulting for A.T. Kearny. “I expect other mergers of this type around the world.”

Daimler employs 300,000 workers and last year posted profits of $4.47 billion on revenues of nearly $70 billion. Chrysler has more than 112,000 workers. It earned $2.8 billion in 1997 on revenues of $61 billion.

While it is unclear how the combined company will be structured, Chrysler and Mercedes are likely to survive as distinct entities. Current models are likely to continue being sold at independent dealers for each company.


Future products, however, could be derived off common platforms--the chassis that forms a car’s foundation--and share major components. Mercedes, for instance, might develop a luxury pickup truck based on a Chrysler platform at a much lower cost than it could otherwise.

“There are tremendous synergies in this deal,” said Seth Glickenhaus, whose New York money management firm Glickenhaus & Co. is a major Chrysler shareholder.

Chrysler gains a toehold in Europe, access to Daimler’s vast technology base and get an image boost from Mercedes’ high-line halo. Daimler should benefit from Chrysler’s strong U.S. presence, design flair and manufacturing prowess that has made it the world leader in profit-per-vehicle.

A merger should not cause major layoffs or factory closings because their products are so different. As a result, this merger may not help reduce excess worldwide manufacturing capacity, some analysts note. The United Auto Workers union in Detroit responded cautiously to the news, saying it would monitor developments carefully.

The sheer size of the undertaking will make the merger complicated and take years to complete. The different cultures--Mercedes more conservative and stolid, Chrysler more freewheeling and dynamic--are expected to be problematic to integrate.

Chrysler has risen from two near-death experiences in the 1970s and 1980s to become the low-cost U.S. manufacturer best known for its minivans and Jeep sport utility vehicles.


When Chrysler bought American Motors Corp. from Renault in the 1980s, many of Chrysler’s old-line executives resented ideas presented by AMC’s French managers. A merger of Volvo and Renault collapse in 1994 because of culture differences and nationalistic jealousies.

“One company doesn’t easily and naturally dominate this merger,” said Csaba Csere, editor of Car & Driver. “There is a lot of room for internal conflict and cultural clashes.”

While the deal is likely to be presented as a merger of equals, Daimler will have the upper hand because of the way the merger is structured. It is expected that Daimler Chairman Juergen Schrempp and Chrysler Chairman Robert Eaton would serve as co-chief executives.

Both Schrempp and Eaton are globe-trotting executives known as tough-minded pragmatists. Unlike his predecessor, Lee Iacocca, Eaton emphasizes team play and might be willing to accept the No. 2 position heading Chrysler and Mercedes with Schrempp overseeing overall Daimler operations.

Wall Street responded positively to the announcement. Chrysler shares surged $7.38 to close at $48.81 on the New York Stock Exchange, while Daimler’s shares--traded as American depositary receipts--rose $6.50, closing at $108.56. Shares of other auto makers also rose on merger expectations.

While the timing of the merger was a surprise, Chrysler has been considered a strong merger candidate for several years. One reason is its need to expand beyond North America to mitigate swings in the U.S. economy and to enter growth markets abroad.


In 1995, when billionaire Kirk Kerkorian made an unsuccessful hostile takeover play for Chrysler, he complained that the company’s stock was woefully undervalued, in part, because it lacked a global strategy. Kerkorian still owns 13.7% of Chrysler’s stock.

By teaming up with Daimler, Chrysler will gain greater access to the European market where Mercedes has more than 1,000 dealers. Chrysler has only 1% of the European market, compared to 12% each for GM and Ford.

The merger may also help Chrysler overcome the problem that has dogged it in recent years--quality. The company gets high grades for design, production and profitability, but still lags its domestic and Japanese rivals on quality ratings.

Like Chrysler, Daimler has remade itself in recent years. After diversifying in the 1980s, the company lost its way. Japanese auto makers attacked Mercedes with high quality but lower-priced luxury models.

Daimler, which is 24% owned by Deutsche Bank, responded by restructuring operations. It began a painful divestiture program to refocus on its core business, though it continues to have operations in transportation, aerospace and financial services.

The company made its German plants more efficient and moved some manufacturing abroad. It also decided to extend its product line, offering its M-Class sport utility vehicle and A-Class subcompact sedan in Europe.


Some auto experts worried that such moves down market could damage Mercedes’ luxury cache. By tying into Chrysler, Mercedes might be able to offer mass-market products without besmirching its snobbish appeal.

Mercedes has been on a roll in the United States with sales up 40% last year. The company sold 1.1 million vehicles worldwide in 1997.

Formed in a merger in 1926, Daimler-Benz’ roots stretch back 112 years to Carl Benz, builder of the world’s first auto, and Gottlieb Daimler, inventor of the internal combustion engine.

* WHERE TO NEXT? Southland dealers would anticipate few changes. Analysts see more auto mergers. D1, D7