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[ARCHIVES] DaimlerChrysler Post-Merger Integration: Case Study

DaimlerChrysler Post-Merger Integration: Case Study via Harvard Business School

by Richard Meyer, Michael G. Rukstad, Peter J. Coughlan, Stephan A. Jansen

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DaimlerBenz AG of Stuttgart, Germany, and the Chrysler Corporation of Auburn Hills, Michigan, surprised the business world at a press conference in London on May 7, 1998, when they announced their “merger of equals made in heaven.” This major cross-border transaction, with an equity value of $36 billion, was the largest merger of its kind to date. The combined entity would have revenues of $132 billion, annual sales of 4 million vehicles, and 421,000 employees, making it the fifth-largest automobile manufacturer in the world in vehicle sales and the third largest in revenues. This merger was expected to reshape the entire automotive industry, as competitors would seek to reposition themselves in response to DaimlerChrysler. At the press conference analysts listened carefully for the strategic rationale behind the merger and searched for clues indicating how the partners intended to implement the proposed integration. Robert Eaton and Jürgen E. Schrempp, co-chairmen of DaimlerChrysler AG, announced their expectation that this deal would be “not only the best strategic merger or the best prepared merger, but also the best executed merger.”

Strict secrecy had been preserved throughout the negotiation process, with discussions limited to a small group of managers and to the most essential issues. The pre-merger phase, including partner screening, due diligence, valuation, and negotiations, had been executed rapidly and professionally over a four-month period. With the close of the press conference, the challenges of executing the post-merger integration (PMI) would have to be addressed in earnest.

A Brief History of Chrysler Corporation

Walter P. Chrysler, formerly president of Buick, founded Chrysler in 1924 to manufacture an upscale car that would compete with Cadillac, Lincoln, and Packard. By the 1950s, Chrysler had grown rapidly during a late consolidation phase of the U.S. automobile industry by acquiring several other unaffiliated manufacturers of well-known U.S. marques (Plymouth and Dodge) and had become the distant third of the American “Big Three” automakers. For a relatively brief period Chrysler owned Simca, a French carmaker, and finally, in 1987, it acquired American Motors, itself a merger of “orphan” marques (Hudson, Studebaker, Packard, and Willey’s Jeep). By 1997, Chrysler cars were sold under the brands Chrysler, Dodge, Plymouth, and Jeep. The Chrysler marque was the only upscale brand remaining. (See Exhibit 1 for Chrysler activities, brands, and sales in 1997.)

Chrysler’s history was often likened to a roller coaster: successful years were followed by years with serious financial crises, such as those in 1956, 1965, 1979, and 1993. During the particularly severe 1978–1980 crisis, Chrysler was forced to sell its principal European activity, Simca, to Peugeot/Citroen and became again a purely North American manufacturer. However, Chrysler’s recoveries were as spectacular as its crises. Under the leadership of the legendary Lee Iacocca, and aided in 1979 by $1.5 billion in federal loan guarantees (which Chrysler repaid in 1983, seven years ahead of schedule), Chrysler made a remarkable recovery in the 1980s. In 1993, Iacocca’s successor, Robert Eaton, previously head of European Operations for General Motors, took the reins of Chrysler. Eaton continued Iacocca’s focus of strengthening Chrysler’s core activities and increasing its productivity. To these two objectives, Eaton added a third goal of his own: reducing Chrysler’s dependence on the North American market.

Chrysler became the least diversified of all major carmakers by the 1980s, after divestiture of its defense division and Gulfstream Aerospace. Then in the early 1990s, with the sale of its financial participations in Mitsubishi Motors, Maserati, and Lamborghini, Chrysler began to focus exclusively on the manufacture and sale of automobiles and light trucks. Even within the car business itself, Chrysler became much less vertically integrated than its competitors. In early 1998, for example, Chrysler produced only 25% (by value) of the components it used, outsourcing the remainder. The comparable figure at Ford was 50%, while at General Motors (GM) it was 70%.

By the mid-1990s, Chrysler was recognized as the most productive and profitable carmaker in the United States. During this period, Chrysler (and, to a lesser degree, Ford) rapidly gained U.S. market share, largely at the expense of GM. Fortune magazine quipped: “If a vehicle is in demand and generates high profit margins, you can bet Chrysler’s making it.”2 Chrysler reduced the development time of its new cars from 60 months in 1988 to 24 months in 1996.

Using “target costing,” Chrysler realized high productivity through cost efficiencies (for example, in 1997 the R&D cost per Chrysler car was estimated to be $550 compared with $2,000 for that of a Mercedes). Also, through its “supplier cost reduction effort” (SCORE), the company narrowed its supplier base from 2,500 to 1,140 suppliers.3 In 1991, Chrysler dissolved most of its functional groups and reassigned their members to four “platform teams” (small cars, large cars, minivans, and Jeep/small trucks), autonomous groups containing all the professionals required to design and produce a new car. These platforms could then be shared across brands and models. Unlike other carmakers, which were focusing almost entirely on cost cutting during this period, Chrysler was surpassing its competitors in profits by also focusing on new-model introductions.

Even though Chrysler achieved its financial goals by focusing on core activities and increasing productivity, it did not achieve its third goal of establishing significantly greater geographic scope. Sales outside North America rose from 50,000 units in 1990 to 237,060 in 19974 but this still amounted to less than 8% of Chrysler’s total unit sales. Its internationalization strategy concentrated on Latin America and involved little European activity. Only the Voyager minivan, assembled in Graz, Austria, was produced in the European market, and only imported Jeep products plus the Voyager were sold there. Chrysler’s overall market share in Europe was 0.7% in 1997, barely sufficient to justify the rather meager sales network on that continent. In Latin America, Chrysler’s 1997 market share was 1%, and in Asia it had even smaller market shares. (See Exhibit 1 for the geographic distribution of sales.) The internationalization of its major component suppliers was also slow in developing. However, in April 1998, just one month before the announcement of the DaimlerChrysler merger, Chrysler initiated a $500 million joint engine plant in Brazil with Bayerische Motoren Werke (BMW), Mercedes’s principal German competitor.

DaimlerChrysler

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