Novel Insights Into the Foundering Daimler-Chrysler Merger

Published: June 05, 2002 in Knowledge@Emory

"Seventy percent of international mergers go wrong: That’s the prevailing wisdom, and Jurgen Schrempp, CEO of Daimler, even admitted as much just before the merger with Chrysler. He vowed, ’We’ll be among the 30% that succeed,’" recounted Peter Schneider at a recent luncheon at Emory University’s Goizueta Business School.

Schneider, this year’s Halle Institute Distinguished Fellow at Emory University, has become an unusual expert on the largest "merger of equals" ever between an American and German firm. Born in Luebeck, Germany, Schneider is primarily a novelist, but has been contributing cross-cultural German-American essays to The New York Times for 15 years. So when the paper approached him about writing an in-depth analysis of the Daimler-Chrysler merger, he couldn’t resist.

As he researched the article, Schneider says he discovered a fascinating story that also offers some cautionary guideposts for any company thinking about expanding into an EU marketplace.

Schneider began by noting the cultural irony of two auto companies -- both heavily involved on opposite sides during World War II -- suddenly joining forces: Chrysler’s Jeep was originally designed for U.S. military service, while Daimler’s Mercedes vehicles served many functions for the Nazis, including Hitler’s personal transport. While the circumstances are greatly different today, it’s the cultural differences that may determine the merger’s success or failure more than anything else. Conscious of this new territory, the German managers trod lightly at the outset. "The Germans feared they’d be seen as invaders, as arrogant and ruthless -- so in essence, they did nothing with Chrysler for two years. When they did step in, very fast, it was too late, and they were still portrayed as ruthless," Schneider says.

By "too late," Schneider refers to Chrysler’s disturbing post-merger loss of market share, as well as management problems that saw the defection "of all the Americans involved in the merger, including CEO Eaton." They departed, Schneider points out, "either with large sums of money or having been driven out. I think this is a major mistake on Daimler’s part." He believes the continuity of Chrysler leadership during such a sensitive time is crucial, and "the absence of American management to represent Chrysler to the American buying public was -- and is -- a bad move."

In his New York Times article, Schneider wrote, "After a low of $37.75 in December 2000, the price of DaimlerChrysler stock stagnated around $50 a share, meaning that the company was worth less than Daimler alone had been pre-merger." (Currently, the price is hovering in the high $40s; its 52-week low was $25.60.)

This begs the questions, what gave birth to this merger and did the two parties know what they were getting into? Schneider firmly believes that for Chrysler, the impetus to merge was one of survival. "The most vital cause of mergers seems to be sheer panic, that is, if we aren’t among, say, the two or three biggest auto makers, we’ll be out of business in 10 years." For Daimler the rules of German law may have undermined its expectations. As Schneider points out, under German law there are two kinds of mergers: "One kind allows you to look at all the books [of the other company] in great detail; the other kind has to take place in four weeks -- but it has huge tax advantages, which in DaimlerChrysler’s case amounted to savings of $1.3 billion every year."

Unfortunately for Daimler, choosing the "fast track" merger route meant they really didn’t know what they had bought. For instance, Schneider says, "The Germans found out Chrysler only planned ahead for four months on many issues, whereas the Germans planned ahead for almost 10 years on virtually everything. That’s true for German business people in general, so any U.S. firm thinking of expanding into Germany should be aware of that long-range planning tendency. It’s good on the one hand, but on the other, it means less willingness to be flexible."

Indeed, the role and power of the two men at the top of Chrysler and Daimler proved one of the most fascinating aspects of the story. "It’s unbelievable how much individuals count in these huge mergers -- the initial proposal for the merger evidently happened in less than 20 minutes!" Schneider recounts. Citing one of his research sources, Schneider says that Robert Eaton of Chrysler and Jurgen Schrempp of Daimler met in Eaton’s office without any real agenda -- it was supposedly just an exchange of ideas. But within the first few minutes, Schrempp quickly brought up merging the two companies, and Eaton agreed to think it over -- he asked for only a week -- before giving Schrempp his answer.

Eaton obviously said yes, but he insisted the combined company must be a "merger of equals." DaimlerChrysler would have two CEOs for three years -- himself and Schrempp, and its board would consist of executives from both companies. The lesson here for any prospective merger partners is not to disregard financial reality: Daimler put in 57% of the merger’s stock value to Chrysler’s 43%, which doesn’t add up to a "merger of equals," and it has certainly not turned out to be one. Today a German, Dieter Zetsche, heads the "Chrysler Group," and he reports to Schrempp in Stuttgart.

In fact, it’s obvious now that Schrempp never truly bought into the "merger of equals" concept. In an infamous interview he gave to the Financial Times in the fall of 2000, Schrempp said, "We had to go a roundabout way, but it had to be done for psychological reasons. If I had gone and said Chrysler would be a division, everybody on their side would have said, ’There is no way we’ll do a deal.’ But it’s precisely what I wanted to do." As Schneider reported in his New York Times article, "This fabulously undiplomatic confession earned Schrempp and his company outrage in the American press and an $8 billion lawsuit from Kirk Kerkorian (an investor)."

While Chrysler’s former CEO might not have known Schrempp’s intentions, insight into the German culture may have prevented some missteps. As Schneider explains, a major factor in any U.S.-European merger is labor. "Unions are much stronger in Germany than in the U.S., which meant that Daimler brought the concept of co-determination to the merger. Under German law, large companies are governed by a Supervisory Board, which always contain a union member, and that member has to agree to a merger -- that’s also true in many other parts of Europe.

"You know, when the DaimlerChrysler merger happened, management announced from the outset that 25,000 American workers would lose their jobs -- but this was done in such a cautious way, and according to German laws, which are much more generous than those in the U.S., that the unions decided not to go against it. There were pension funds that were established, transition money -- this [power of German labor unions] was one striking difference I found. Another was that the managers from Stuttgart found out their counterparts at Chrysler -- a smaller company than Daimler -- earned not twice or three times as much as them, but ten times as much."

However, the German executives were realistic enough to know that they "had to work within the environment ... in the American environment, you can’t say you want the best man for the job and pay according to the German standard -- so Chrysler CEO Dieter Zetsche is getting paid more than his boss Schrempp!"

Interestingly, the merger resulted in virtually no layoffs for German employees. "That’s because it’s much more difficult to fire somebody in Gemany," Schneider explains. "In the U.S., I’d like to see more power given to workers, but in Germany, I’m right on the other side -- there should be more flexibility, more profit motive. In Germany if, say, the metalworkers’ union wins a new contract at one company, it’s binding on every single company in that industry, which is catastrophic. But in these days of reunification [with the former East Germany], that will change, because companies there are doing so badly that even their union leaders are rejecting that across-the-board approach."

For U.S. companies thinking of expanding into Germany, Schneider offers this advice: "First and foremost, understand our consumer culture. In the auto industry, for instance, safety and reliability are much more important in Germany. One U.S. industry I think would have a good chance of success in Germany would be computer technology – Americans really seem to have the edge. In other cases, such as pharmaceuticals and wine, German companies see themselves as equal to Americans, so we would be competitors in those arenas.

"In general, I believe it would be easier for a U.S. firm to expand into Germany than other EU countries, because we are the most Americanized society in Europe. Since we lost the war, we have been very influenced by the U.S. Most Germans know we owe America many of the things we like: our democracy, our free market economy, so there’s a special relationship that really doesn’t exist with Italy and France, for instance."

Schneider points out another major benefit of American firms expanding into Germany. "I would estimate that over 90% of German executives at big companies know English rather well. They’re also very reliable, and as I said, they bring long-term strategic planning skills to the table."

Returning to the DaimlerChrysler merger, Schneider is not optimistic about the outcome. "I think it looks quite critical right now, especially since Daimler is not doing so well with their own products. It may be that five years from now, they’ll try to sell Chrysler. But now, nobody would buy Chrysler, plus as long as Schrempp is in charge, it won’t happen -- because it would mean the end of his career."


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