1.4 The structure of the case study
1.4.6 Lessons learnt
Chapter 7 is the final chapter of the case study and considers lessons learnt. As Yin (1984) points out, case study research is pained to demarcate the boundaries between empirically investigating current phenomena and defining their overall context. Although short, the final
chapter will suggest that this case study offers a number of lessons to be learnt, independent of the specificities of the current case (Eisenhardt 1987).
The study will conclude with drawing attention to the important limits of this research. Large cross border takeover are very public events and the subject of daily public scrutiny. Success stories result in allowing the public to peak behind the scenes. Failures, such as DaimlerChrysler AG set off the exact opposite reaction, silence and deception. The final version of the DaimlerChrysler AG takeover failure can only be written with access to all the records and minutes of the history of the company between 1998 and 2007. Two phrases survived the initial press conference from May 1998; “merger of equals” and “marriage made in heaven”. It has already been pointed out that the “merger of equals” lie did not survive the press conference inside the company and began to deteriorate outside the company with the Standard & Poors 500 decision not to list the new DCX stock from October 1st, 1998 (Blaško, Netter and Sinkey 2000). As a result this case study will refer consistently to the DaimlerChrysler AG takeover failure. The marriage metaphor will serve as a barometer of the degree of stakeholder acceptance of the takeover and the following headline from the New York Times made it clear how quickly the perfect match started to fall apart:
Scenes from a Marriage
The DaimlerChrysler takeover is similar, in many ways, to the wedding of Prince Charles and Lady Diana. An elite, old-line company, Daimler-Benz, had asked for the hand of a beautiful, populist bride, the Chrysler Corporation, and its petition had been accepted. It was a dream match—a “wedding made in heaven,” as Daimler’s C.E.O., Jürgen Schrempp, called it in May 1998. The wedding party—among it, Wall Street and its analysts and even major stockholders like the billionaire Kirk Kerkorian—was enthusiastic. The new company’s shares rose to a dream high of $108.62 a few months after its stock was first traded on Nov. 17, 1998. By this spring, the dream couple had undergone a remarkable transformation. The American bride had apparently vanished;
or, to be more precise, she had turned into a German with a bald spot and a mustache.
To American ears, the name of the Chrysler division’s new German C.E.O., Dieter Zetsche, sounded more like “Mrs. Thatcher” than like “Princess Di.” Daimler still looked terrific, but Chrysler was all gloom and doom. “We have to face facts,” said Jürgen Schrempp, by then the chairman of DaimlerChrysler AG. “The U.S. situation has taken a serious turn for the worse.” (New York Times August 12th, 2001).
2 THE GOALS AND RATIONALE FOR THE TAKEOVER
1997 was the hitherto most successful year in the history of Daimler-Benz. Having reduced the number of business units by 13 to 23, operating profit rose by 79% to DM 4.3 billion.
Setting a goal of return on capital employed at 12% the performance of the business units almost doubled from 5.8% to 10.2% (Daimler-Benz AG Annual Report 1997).
Schrempp confirmed his commitment to raising shareholder value by deciding on an extraordinary payout to shareholders of DM 10.3 billion. In addition, the company’s stock option plan was extended to all 1,400 senior executives. In a preview of upcoming events Schrempp emphasized the role of globalization as one of the three core elements of his strategy:
Daimler-Benz is firmly rooted in Germany with a proud tradition of engineering quality and innovation. But today, we serve customers in more than 200 countries around the world. More than two thirds of our revenues come from outside Germany and more than one third of our stock is held internationally. And the key to further growth is to tap new markets for our products. So we have to be where the markets are. For example, we have said that we aim to increase our group revenues in Asia from 8% in 1997 to between 20 and 25% in 10 years’ time. (Daimler-Benz AG Annual Report 1997 4) The proposed goals for the passenger car division pointed out the importance of emerging markets and a continued radical expansion of production capacity. Sales had risen strongly from 645,000 to 715,000 from 1996 to 1997, but the goal of 1 million units demonstrates the extent to which Schrempp valued high volumes in order to survive the current wave of takeover threats in the automobile industry (Blaško, Netter and Sinkey 2000).
The newly industrializing countries in Asia, Latin America, and Eastern Europe will probably exhibit the most rapid growth in terms of volume in the coming years. In the industrialized nations, the growth in passenger car demand will primarily be supported by vehicles such as minivans, off-road vehicles, roadsters, and convertibles. The aim of the Passenger Car division is to continue to expand the Company’s position in the market for luxury cars worldwide and to open up new markets and market segments.
We intend to further improve our earnings by the year 2000 and increase our sales volume to more than one million vehicles. Our new products such as the A-Class, the M-Class, and the Smart will be instrumental in this effort. The new S-Class will
reinforce our leading position in the high-end market segment (Daimler-Benz AG Annual Report 1997 12).
When Schrempp approached Chrysler CEO at the Detroit Auto Show in January 1998, he knew that Ford was interested in acquiring Daimler-Benz as part of their strategy of taking over luxury models. Jaguar, Daimler (Jaguar), Land Rover, Aston Martin and Volvo would all end up in Ford’s Premiere Automotive Group (Vlasic and Stertz 2000). Schrempp also knew that Daimler-Benz was the last independent luxury brand without family support to protect it against any hostile takeover attempt. Despite the success of 1997, Daimler-Benz was also a relatively inexpensive takeover object for the likes of Ford or GM. The possibilities of expansion in the luxury car segment were limited and the competition had caught up to Mercedes in terms of quality and innovation (Der Spiegel 18, 1996). In 1998 it was also unclear whether the new A-Class and M-Class would establish themselves as luxury brands in their respective market segments. The realization of Schrempp’s Welt AG required a partnership, an alliance, a merger or a takeover. The Chrysler Board was also conscious of continuing consolidation within the automobile industry. In addition, Chrysler executives realized their overdependence on the NAFTA region (93% of sales). Despite high growth rates since 1992, America’s third largest automobile manufacturer could not be expected to achieve more than 20% of the American market. In their record performance year Chrysler had managed to attain 16% of the US market in 1997 (Vlasic and Stertz 2000).
In 1995, both Chrysler executives and new Daimler-Benz CEO Jürgen Schrempp had rejected Mercedes CEO Helmut Werner’s efforts to bring the two companies together (Vlasic and Stertz 2000). This time it would Schrempp himself who would approach Chrysler CEO Robert Eaton. In 1995 hundreds of specialists had compared up to twelve options for cooperation for almost a year before ending talks. In 1997 fewer than 10 people negotiated the takeover in just a few months and the results were presented to the public on May 7th, 1998.
Figure 4: DaimlerChrysler AG Takeover Timeline 1998 Jan. 12th Jürgen Schrempp, CEO of Daimler-Benz, suggests “merger” to
Chrysler Chairman Robert Eaton while in Detroit for the 1998 North American International Auto Show.
Mid Feb. Initial discussions on a possible takeover between representatives and consultants.
March 2nd Eaton and Schrempp meet in Switzerland to discuss organizational structure for takeover
March-April Teams from both companies work out acquisition.
April –May Teams negotiate takeover agreement and related documents.
May 6th Takeover agreement signed in London.
May 7th “Merger of equals” announced.
May 14th Daimler-Benz supervisory board approves takeover.
June 18th Daimler-Benz management team visits Chrysler headquarters in Auburn Hills, Mich.
June 25th Chrysler management team visits Daimler-Benz headquarters in Stuttgart, Germany.
July 23rd European Commission approves takeover.
July 31st Federal Trade Commission approves takeover.
Aug. 6th Announcement that DaimlerChrysler shares will be traded as Global Registered Shares
Aug. 27th Management teams meet in USA to discuss post-takeover plans.
Sept. 18th Chrysler (97.5%) and Daimler-Benz (99.8%) shareholders approve.
Oct. 1st Announcement not to include DaimlerChrysler on S&P500 Index Nov. 9th 98% of Daimler-Benz stock exchanged for DaimlerChrysler AG shares.
Nov. 17th DaimlerChrysler stock (DCX) begins trading in Germany and USA
Source: Adapted by John Riach; DaimlerChrysler AG Figures Appendix 2.1
Whereas Chrysler CEO Eaton was left to struggle with the pronunciation of German names as he announced the Members of the Board, it was Schrempp who delivered his vision of the new company at the first press conference on May 7th, 1998:
The two companies are a perfect fit of two leaders in their respective markets. Both companies have dedicated and skilled workforces and successful products, but in different markets and different parts of the world. By combining and utilizing each other’s strengths, we will have a pre-eminent strategic position in the global
marketplace for the benefit of our customers. We will be able to exploit new markets, and we will improve return and value for our shareholders. This is a historic merger that will change the face of the automotive industry. This is much more than a merger; today we are creating the world’s leading automotive company for the 21st century. We are combining the two most innovative car companies in the world (DaimlerChrysler AG Video Appendix 1.1; also quoted in Blaško, Netter and Sinkey 2000).
At the same press conference Schrempp announced the three main goals of the takeover:
1. Increase shareholder value
2. Achieve operational synergy effects 3. Satisfy customers with high quality
It was the second goal, which appeared particularly contradictory during this first press conference and the subject of a number of questions from the press (DaimlerChrysler AG Video Appendix 1.1). On the one hand both Eaton and Schrempp emphasized the complementary nature of both companies. Daimler-Benz was stronger in high-end and luxury cars whereas Chrysler’s strength lay in the market for minivans, jeeps and sport-utility vehicles. With the possible exception of the Jeep Grand Cherokee and Mercedes’ new M-Class there was no overlapping. Secondly, Daimler-Benz was strong in Europe (63% of sales) while Chrysler sold over 90% of its vehicle in the NAFTA region (Blaško, Netter and Sinkey 2000). Daimler-Benz’s reputation for excellence in engineering was said to complement Chrysler’s strengths in speedy product development and product innovation. Although Daimler-Benz had introduced ten new models in the previous three years compared to 3 in the 10 year period prior to that, it was still far away from Chrysler’s 24 month development cycle time. For their part, Chrysler could profit from Mercedes’ tradition of quality. Although Chrysler had adopted Honda’s model of innovation and flexibility in the 1990s, the company continued to be plagued with quality issues (Boyer and Freyssenet 2000; Vlasic and Stertz 2000). As a result of their complementary relationship Schrempp stressed the importance of
completely unclear to industry insiders, where synergy effects could be realized. No plants were to be closed and both CEOs expected an increase in the number of employees. The promise of initial synergy benefits of $1.4 billion and annual benefits of $ 3 billion within 3 to 5 years seemed unrealistic without a major integration of shared technologies, purchasing power and the use of common parts, processes and platforms. Such a degree of integration would exactly thrEaton the brand demarcation that Mercedes executives adamant on retaining.