The Road Ahead Is an Uncharted One
The strategy underlying the historic $40-billion acquisition of Chrysler Corp. by Germany’s Daimler-Benz on Thursday calls for a carefully scripted approach that will result in no plant closures, keeps product lines separate and projects only modest cost savings.
In announcing the merger in London, the two firms emphasized the deal’s long-term strategic benefits in technology, marketing and production for the combined corporation, which will be known as DaimlerChrysler.
By sheer force of its size--$130 billion in revenue and 421,000 workers--it will be a formidable global competitor whose product lineup will range from Plymouth subcompacts and Dodge pickup trucks to Mercedes-Benz luxury sedans.
Still, it is far from certain that this blockbuster transatlantic merger, the largest industrial combination ever, will be a success. Will the sum be greater than the individual parts? Will culture clashes subvert the union? Have they read the tea leaves about the auto industry’s direction right?
It could take years for these questions to be fully answered. But initial reactions to the deal are largely positive if somewhat cautious because so many details about the takeover are still unknown.
“It looks good on paper,” said Maryann Keller, analyst with Furman Selz in New York. “But the proof is in the pudding. The history of mergers in the auto business is there are as many failures as successes.”
At a news conference Thursday morning in London, Daimler and Chrysler executives left no doubt that they believe the linkup is in the best interests of the companies, shareholders, employees and customers.
“If we are good now, believe me, we are going to be better,” Chrysler Chairman Robert Eaton said.
The deal brings together Daimler’s Mercedes-Benz luxury car line, known for its high quality and precise German engineering, and Chrysler’s broad line of mass appeal cars, minivans, pickups and sport- utility vehicles. Mercedes is strongest in Europe and Chrysler in North America.
“The companies have virtually no overlap,” said David Healy of Burnham Securities. “It’s a complementary fit in geography and product.”
Under the agreement, Daimler holders will get one share of the new company’s stock for each of their shares, and Chrysler holders will get 0.547 share. DaimlerChrysler will be 57% owned by Daimler-Benz shareholders and 43% by Chrysler’s.
On Thursday, Chrysler shares surged $4.69 to close at $53.50, and Daimler shares eased $2.19 to close at $106.38. Both trade on the New York Stock Exchange. Chrysler stock has rocketed 32% so far this week. The value of the merger will depend on stock prices at the time the transaction closes.
Daimler Chairman Juergen Schrempp, 53, will be co-chief executive of the new company with Eaton, 58, for three years. Eaton will then step down, and Schrempp will become sole chief executive.
DaimlerChrysler will be incorporated in Germany, although it will maintain joint headquarters in Stuttgart and Auburn Hills, Mich. The new firm’s management and supervisory boards will be equally divided between Chrysler and Daimler. Board meetings will alternate between sites.
The executives said the merger should result in cost savings of $1.4 billion in 1999, rising to $3 billion annually in three to five years. These modest savings--initially just 1% of revenue--would largely come from joint parts purchases, sharing engines and other components and reduced distribution costs.
The companies should also benefit from reduced research and development costs in advanced technologies needed to meet future safety, emissions and fuel economy regulations. For instance, they could merge their electric car and fuel-cell programs.
DaimlerChrysler plans no plant closing or layoffs and predicted growth opportunities created from the merger are likely to create more jobs. The promise prompted the United Auto Workers union to give tentative backing to the deal.
Chrysler and Mercedes products will continue to be sold and marketed separately. The dealerships in Europe and North America will not carry both brands.
“We don’t expect to commingle our brands in dealerships,” Eaton said.
Chrysler, two decades ago a financial basket case that was saved from bankruptcy by taxpayers, is now the lowest-cost U.S. producer and reaps more profit per vehicle than its domestic rivals.
It is likely to benefit from Mercedes engineering expertise and quality control rigor. Mercedes should be helped by Chrysler manufacturing prowess and design panache.
The acquisition, if approved by shareholders and regulators later this year, will form the world’s fifth-largest auto company and could spark another round of industry consolidations spurred by a worldwide glut of vehicles.
“This is an historic agreement that will change the face of the auto industry,” Schrempp said.
He noted that there were as many as 42 major auto makers two decades ago, and now there are fewer than 20. Some forecasters predict that will fall to fewer than 12 within a decade.
Some analysts cautioned, however, that it is unlikely that a rash of defensive mergers will occur in the wake of the Daimler-Chrysler deal. They note that there are few good buying opportunities, though the strongest auto makers, including General Motors, Ford and Volkswagen, are prowling the globe for possible opportunities and bargains.
Although the deal was touted as a merger of equals, Daimler is the controlling partner and is essentially taking over Chrysler, one of the Big Three U.S. auto makers whose roots go back to the 1920s.
Analysts and company officials said the biggest obstacle to making the merger successful is meshing the strikingly different corporate cultures of the two companies. The auto industry, an important engine of both the German and U.S. economies, often gives vent to protectionist and anti-foreign sentiments.
Much of Chrysler’s success in the 1990s is attributed to its free-wheeling culture that has encouraged creativity and risk-taking. Mercedes, however, is more measured and conservative.
“The attempted combination of such disparate cultures is really unprecedented,” Healy said.
Meshing the firms will be the responsibility of a panel headed by Chrysler President Thomas Stallkamp. It will oversee the gradual marriage of the marketing, engineering and manufacturing staffs.
There are countless examples of failed joint ventures and mergers in the auto business. Cultural differences caused a breakup of car making projects between South Korea’s Daewoo and GM in the early 1990s. The proposed merger of Sweden’s Volvo and France’s Renault was killed over cultural disagreements.
David Lapin, president of Strategic Business Ethics, a Los Angeles-based mergers consultant, said most failed mergers are caused by management’s failure to integrate disparate cultures. The focus should be on encouraging diversity of views, not seeking uniformity, he said.
DaimlerChrysler would rank behind only General Motors, Ford, Toyota and Volkswagen. It would have production of about 3.6 million cars, lagging Volkswagen at about 4.3 million units.
The merged company will maintain Daimler’s nonautomotive operations, which include aerospace, railroad, telecommunications and financial services operations.
Daimler is Germany’s largest industrial company and the world’s 14th-largest auto maker.
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How DaimlerChrysler Stacks Up
A combined Chrysler and Daimler-Benz would rank fifth in worldwide market share and third in U.S. and California shares. The combined company would have a strong-selling product in each of five major product categories, but only one product--the Dodge Caravan--that is a sales leader in its category. Top-selling models in the U.S. for each company and units sold from January to April:
THEIR PRODUCTS
Chrysler
Mid-size car: Dodge Stratus (8,929 units)
Sports car (luxury): Dodge Viper (157)
Minivan: Dodge Caravan (28,007)
Sport-utility vehicles: Jeep Grand Cherokee (20,035)
Luxury: LHS (493)
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Mercedes-Benz
Mid-size car: None
Sports car (luxury): SLK (1,081)
Minivan: None
Sport-utility vehicles: ML320 (3,995)
Luxury: C class (3,402)
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Bestseller overall
Mid-size car: Honda Accord (34,541)
Sports car (luxury): Chevrolet Corvette (2,785)
Minivan: Dodge Caravan (28,007)
Sport-utility vehicles: Ford Explorer (31,182)
Luxury: Lincoln Town Car (7,583)
Market Share
California (first three months of 1998)
General Motors: 25.0%
Ford: 20.6%
Chrysler/Daimler-Benz: 14.2%
Toyota: 13.7%
Honda: 11.1%
Other: 15.4%
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United States (for 1997)
General Motors: 31.1%
Ford: 23.9%
Chrysler/Daimler-Benz: 16.3%
Toyota: 9.3%
Honda: 6.3%
Other: 13.1%
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Worldwide (for 1997)
General Motors: 16.2%
Ford: 12.9%
Toyota: 9.0%
Volkswagen: 7.9%
Chrysler/Daimler-Benz: 7.4%
Fiat: 5.3%
Nissan: 5.2%
Other: 36.1%
Sources: Autodata Corp., Automotive News, J.D. Power and Associates
Photos: Associated Press, Los Angeles Times, company handouts
Researched by JENNIFER OLDHAM / Los Angeles Times
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More Coverage
* The historic alliance of Chrysler and Daimler-Benz has other car makers around the world wondering if they will be--or should be--next. A1
* Billionaire investor Kirk Kerkorian and his Tracinda Corp., a major shareholder in Chrysler, stand to come out way ahead in this deal. D5
* Britain’s Vickers said it has agreed to sell its Rolls-Royce unit to Volkswagen, terminating an earlier deal with BMW. D5
