Daimler chrysler merger

DaimlerChrysler Merger:
The Quest to Create “One Company”

Tom Stallkamp, Chrysler president and executive in charge of accelerating integration ofthe
recently merged Daimler and Chrysler companies, was feeling great frustration. Why
couldn’t he move the integration process along more rapidly? He could see clearly
theamazingpotential for payoffs, but it just wasn’t happening. He wasn’t used to
beingunable to move theorganization, and he hated the feeling of being able to visualize great
things without being able tomobilize people to action. What else could he do? Maybe it
was time to let the two culturesduke it out, and allow the stronger one to win. That would be
one kind of integration, though notquite what he had been working for.

Background

At 4:00pm on November 12, 1998 as the final bell rang on the New York
StockExchange, U.S. automaker Chrysler Corporation and German automaker Daimler-
Benz ceased toexist. They emerged the next day as a new global conglomerate named
DaimlerChrysler AG.With combined revenues of $130 billion and a market
capitalization of $92 billion, DaimlerChrysler became the fifth largest automaker in the
world in number of vehicles sold andthird largest in sales. The $40 billion stock deal was the
largest ever in the industrial world. Uponc om pl et ion of t he t ransact ion Daiml er
s tockholders owned 57 percent of t he new DaimlerChrysler and Chrysler
stockholders the remaining 43 percent. After ten months of discussions and negotiations
between the two companies, the merger was billed as a marriage ofequals. It signaled new
levels of consolidation within the automotive industry and was heraldedas the beginning of a
new era where only truly global players would survive. At the May 7, 1998London press
conference officially announcing the merger, Daimler -Benz Chairman JürgenSchrempp
declared,

“This is much more than a merger. Today we are creating the world’s leadingautomotive
company for the 21st Century – DaimlerChrysler AG. We are combining to merge the
two most innovative car companies in the world. We arecommitted to making
DaimlerChrysler the most innovative competitor this industry has ever seen, one that will
set the pace in the automotive world in thenext Millennium. We are doing this merger because
we share a common passionfor making great cars and trucks…..by combining and
utilizing each other’sstrengths, we will have the pre -eminent strategic position in
the globalmarketplace, for the benefit of our customers. We will be able to exploit new
markets, and thereby improve return and value to our shareholders.”

Chrysler CEO Bob Eaton added,

1 | DaimlerChrysler Merger

“We are leading a new trend that we believe will change the future and the face of this
industry. As a result of being among the first, we had the ability to chooseour favorite
partners.”

Schrempp was convinced the two auto companies could form a powerful partnership. He
recalled the first meeting with Eaton,

“I just presented the case and I was out again. The meeting lasted about 17minutes. I
don’t want to create the impression that he was surprised. When themeeting was over, I
said, “If you think I’m naïve, this is nonsense I’m talking justtell me.” He smiled and said,
“Just give me a chance. We have done someevaluation as well and I will phone you in
the next two weeks.” I think he phonedme in a week or so.”

This was not the first discussion Daimler-Benz had with a U.S. auto manufacturer norwas it the
first time Chrysler had thought of combining with another major automobile company.In
1997 Chrysler and Daimler-Benz had studied the possibility of a joint venture to
mergeinternational operations but the deal never came to fruition. Chrysler had
studied variouscombinations and recognized the need for global presence. The company
was financially healthybut industry overcapacity and huge prospective investment outlays
created a risky environmentfor global expansion on their own. Only a small number of
automakers, like Toyota, Volkswagen,Ford and GM had the capability to go global without
major acquisitions. Eaton had gone so far asto poll investment bankers on their ideas and
spoke with executives from BMW on this topic. In1998 Ford pitched a merger plan of its own
to Daimler-Benz, unaware of the already ongoingtalks between the German automaker and
Chrysler. Ford Chairman Alex Trotman acknowledgedthe talks but then suggested the
talks had not become very serious. But the Ford Chairman reportedly briefed both his
board of directors and the Ford family, which controlled 40 percent ofthe automaker’s voting
stock. It was the family’s unwillingness to give up control that apparentlyended the
discussions, a key reason why merger talks between Ford and Fiat a few years prioralso
collapsed.

Schrempp and Eaton believed the potential benefits from joint product
design,development of new technology to meet emissions and fuel economy requirements,
efficientmanufacturing, combined purchasing, other economies of scale and brand
expansion anddiversification would position the combined entity as a powerful global
player. In discussing thepossibility of a business combination between Daimler-Benz and
Chrysler, they considered itessential that their respective companies play a leading role in
the process of expected industryconsolidation and in choosing a partner with optimal
strategic fit. In this respect, both the timingof the proposed business combination and the
selection of the parties were considered highlyappropriate in order to secure and strengthen
their respective market positions. Furthermore, sincethe companies had virtually no product
overlap there was little threat to immediate rationalizationof product offerings.

Before DaimlerChrysler could hope to unseat GM or Ford, however, it had to create a
single company, keeping the best of both former companies in the areas of innovation,
costsavings, supplier relationships, quality and brands. The integration of the two


companies was nosmall challenge. It required a blending of corporate and national cultures
and operations. FormerChrysler President Robert Lutz commented,

“I do think that managing the cultural issues will indeed be the toughest part of making this
marriage work. And the challenge, as always, will be getting thecultures to really meldbelowthe
level of senior-most management.

The task of integrating the two car companies fell to Chrysler President Tom
Stallkamp.Stallkamp had become Chrysler president effective January 1, 1998 just days
before Schremppvisited Eaton to plant the seeds for the historic merger. Despite the
powerful company the mergercreated on paper, Stallkamp knew the track record for such
large mergers, particularly crossborder ones, was not good. A global report by KPMG at
the time indicated 83 percent of mergerswere unsuccessful in producing any business
benefit with regard to shareholder value. Daimler-Benz had conducted its own study of
previous mergers and found that 70 percent had failed.Theworld auto industry had already
experienced culture clashes that ended various mergers and jointventures. Autolatina, the
Ford Motor Co.-Volkswagen AG venture in Brazil and Argentinacollapsed in 1995, the
victim of continued arguments over product plans between executives of the two
automakers. A proposed merger of Renault S.A. and Volvo AB also fell ap art in 1995due
to extreme resistance and cultural friction within each company. Merging two large
successful companies, incorporated in different countries, with geographically
dispersedoperations, and with different business cultures and compensation structures
created challengesthat were quite different from absorbing a smaller acquired company into
an existing structure.

The attention the merger garnered from the media, industry experts and Wall Street
created an environment of speculation. Everyone h ad an opinion about the merger and
itschances for success.Autoline Detroit, a weekly industry news show hosted a special one-
hourpanel discussion on the merger. Csaba Csere, editor of Car and Driver magazine observed,”
Ifthey really want to integrate they need to figure out how their two different systems can
[blend].Each side has a very proud history and each side thinks they know
something/have uniqueknowledge about how to do things.” Paul Ballew, chief economist
at J.D. Power asserted, “The greatest challenge of any major merger is the culture. It
probably will or should be the numberone topic on their agenda for the next 3-5 years.”

Stallkamp thought that,

“The way you can make the merger work is to get people excited about finding
something new, rather than going back to defending their own turf. It’s human
nature to fall back on what’s familiar. We have to take away the fear of the
unknown by making it fun and exciting.”

Both companies had a history of strong turnarounds and recent mark et success (see
Exhibit 1for company histories), but all eyes were on DaimlerChrysler, as the price of failure
forthe largest industrial merger in history would be immense .


Potential Benefits of the Merger

For Chrysler and Daimler-Benz there were high hopes about a number of gains to be
achieved through their merger. Daimler-Benz was stronger in Europe; Chrysler, in
NorthAmerica. Daimler-Benz had a global distribution network. Daimler -Benz’s
reputation forengineering complemented Chrysler’s reputation for creative styling and
product development.Chrysler’s experience in dealing with US investors would help
Daimler-Benz become apacesetter in bringing modern concepts of corporate governance
and shareholder value to theGerman economy. Chrysler’s freewheeling methods of vehicle
development would kick-start themore bureaucratic Mercedes-Benz. The combination
with Chrysler helped reduce the riskassociated with Daimler-Benz’s dependence on the
premium segment of the automobile marketby introducing brand diversity. Daimler-
Benz’s financial clout and technical prowess wouldbolster Chrysler in the auto wars.
Moreover, the combined company had greater financial strengthwith which to enter new
markets. Exhibit 2summarizes the potential advantages of the merger toboth.

Of particular importance was the need to improve Daimler’s development time and
reduce development costs and the need to improve Chrysler’s quality and engineering.
Daimler-Benz typically spent 5 percent on R&D, compared to Chrysler’s 3 percen t. As an
engineeringcompany Daimler-Benz had high development costs. Mercedes-Benz’s
cost structure wasconsidered too high to make a reasonable return on cars below $20,000.
Mercedes R&D cost wasover $2000 per vehicle compared to Chrysler’s $590 and it could
take as long as 60 days to builda vehicle in Germany (seeExhibit 3for key performance
comparison for the 1997 calendar year).

In addition the two companies had promised to deliver synergies totaling $1.4 billion in 1999 and
more than $3 billion by 2001. Commenting on the areas for integration and savings
Stallkampexplained,

“Some things will be integrated right away, like global purchasing. Sales and marketing
will be among the first, though the brands will remain separate. Youwon’t sell Chrysler
products at Mercedes dealerships or Mercedes products through Chrysler. The
integration will occur behind the scenes. The next area isengineering. This was the area I
was most concerned about. But our technicalpeople have come in and said let’s find new
ways of doing things. The last areawill be manufacturing, and that’s driven by product.
We need more commonproduct. We’ll never share the same platforms (between Chrysler
and Mercedes),never the same vehicles, but maybe common components, like side -
impactprotection devices. This could save enormous amounts of money.”

Exhibit 4indicates the areas where synergies were expected. Achieving these
synergiesrequired a focused effort to quickly integrate the necessary functions. Stallkamp
knew they had todeliver on the promised synergies but the big savings would come from the
combination of backoffice functions and the streamlining of systems and processes. He
envisioned separate marketingand sales to ensure brand integrity. On the operational side he
saw numerous opportunities forsignificant savings. A more strategically focused R&D
process would help drive technologytransition, the sharing of design expertise from


Chrysler would keep DaimlerChrysler at theforefront of innovation, a single
manufacturing organization with separate plants would providefor the transfer of key
manufacturing process technologies and systems. DaimlerChrysler couldleverage its unit
volume to achieve additional savings and streamline its systems. Bringing this vision to
reality however was a formidable challenge. Chrysler and Daimler-Benz had
verydifferent ways of operating. Getting both sides to see the benefit of operating in a new
way wascritical to the success of integration.

The Two Companies before the Merger
Recent Change and Structure at Chrysler

Reengineering expert Michael Hammer called Chrysler, “overwhelmingly the most 7
innovative auto company in the world.”Chrysler garnered this praise following company-
widerestructuring. Beginning in 1991, Chrysler’s management had bulldozed its traditional
functionalorganizational structure. It created platform teams for the whole organization,
assigning allfunctional employees to one of five teams, large car, small car, minivan,
truck or Jeep (seeExhibit 5for platform team structure). Corporate staff was all but eliminated.
The executive vicepresidents were co-located on one floor and were forced to work
through issues together.Chrysler established a matrix management structure for these
senior managers. Many of thetraditional vice presidents were replaced with people who
not only had functional expertise butwho were able to work together. Each vice
president under the new structure had two jobs,creating mutual dependence among
them. In order for Tom Stallkamp, then vice president ofProcurement and Supply and
general manager of Minivan Operations, to obtain good designs forhis minivans from Tom
Gale, head of design, he needed to provide supply chain support to Gale. Likewise for Gale
to receive quality parts from procurement and supply he needed to providegood designs for
the platforms. This teamwork ethic applied to the highest levels within Chrysler.

CEO Bob Eaton was considered to be one of the more modest chief executives in the
world, amild mannered and even- tempered man who believed in the power of teams. Eaton and
formerChrysler President Bob Lutz, a dynamic and outspoken man, had formed a balanced
partnershipin running the company. When Tom Stallkamp replaced Lutz as Chrysler
president, it wasbelieved his self-effacing manner and ability to generate consensus
would enable Chrysler tocontinue on its successful path.

With the introduction of the platform teams, management focused on determining the
“what” -- the specific goals, objectives, constraints, and resources -- but the team
woulddetermine the “how.” Teams were empowered to find the best way to deliver
the results,providing periodic progress reports to senior management. Chrysler soon
began to reap thebenefits of its platform team concept and new structure; Chrysler
became one of the mostprofitable automakers in the world. Chrysler’s brushes with
bankruptcy in 1979 and 1990 alongwith its radical restructuring had forged a culture
dedicated toteamwork,speedy productdevelopment, lean operations, cost
leadershipandflashy design.


Eaton commented, “We’re trying to build a culture that is focused on
continuousimprovement, setting tougher objectives and never being satisfied with where
we’re at.”
Upon taking the position as Chrysler president, Stallkamp commented,

“At Chrysler we’re all different personalities. What we’re trying to do is run thecompany as
a team like we’ve been doing. The speed in improving quality, improving the company
and the way we operate the business. Timing is veryimportant to us. We’re very
flexible. We’re lean. The speed energizes thepeople within Chrysler.”

Chrysler’s management wanted to ensure that speed and adaptability to change
remainedpart of the company’s culture. Former Chrysler President Bob Lutz commented,
“One of ourgreatest challenges is to prevent our people from thinking everything is OK because
Chrysler isno longer on the ropes.”With respect to the use of platform teams, Chrysler’s Vice
Presidentfor Marketing “Bud” Liebler stated, “At this point there is no way we’d be able to even
think ofmanaging without them. Nor would we want to.”Eaton summed up his thoughts,

“Perhaps the most important attribute of any company today is to anticipate change,
and to move quickly to capitalize on it. It’s all about speed and flexibility. It’s about
converting ideas into profits, and doing it faster than ourcompetitors. It’s about speed to
market. Above all, we believe it’s about passion -the passion for designing, developing and
building the world’s greatest cars andtrucks…Everyone is truly passionate about what we’re
trying to do.”

Recent Change and Structure at Daimler-Benz

When Schrempp took over as chairman in May 1995, Daimler was in serious
financialtrouble. Many of its 35 business units were making little or no profit. Its
traditional slowbureaucratic structure and amalgamation of disparate businesses created an
unwieldy organizationfocused on its past successes. Significant levels of streamlining and
restructuring were needed.Schrempp created a new Board of Management with many new
members who would undertakethe fundamental changes to the inherited structure.

The Board was determined to see the processthrough and to keep the momentum going.
They attached great importance at the outset toorganizing the change process so that
there was a clear division of responsibilities with predefined tasks and priorities and, to
keep friction to a minimum, as few interfaces as possible.The Board quickly carried out a
streamlining of Daimler’s business portfolio trimming itto 23 strategic business units
(seeExhibit 6for Daimler-Benz structure). The goal was to achievea strong market position in
first or second place in the world market in each business. As part ofthe restructuring of the
auto business, Mercedes-Benz was merged with the Daimler-Benz group.Helmut Werner,
the head of Mercedes-Benz and the man credited with its success, was a vocalopponent of
the move. He resigned soon after the decision was made.

Profitability became a key measure for the company– once restructured, business
unitswere required to earn a 12% return on capital employed in order to remain part of the


company’sportfolio. In 1995, to improve financial transparency, Daimler -Benz began
reporting resultsexternally based on US GAAP. In addition Schrempp and his new Board
began preaching thenecessity for a strategy focused on “shareholder value.” This approach had
not yet been expresslyformulated or followed in Germany. The issues surrounding quarterly
reporting and focusing onstock price triggered lively debate. One trade union
representative expressed the opinion that“the obsession with increasing shareholder value
rides roughshod over the interests of employees,the environment and society.”

The Board also undertook an aggressive cost cutting program, which included layoffs
ofthousands of workers, something unprecedented in Germany. A restructuring of the
headquartersgroup was initiated to reduce the bureaucracy and improve planning and
decision-making.Although significant reductions were made Daimler-Benz still
maintained a strong centralizedcorporate staff. At a January 1997 announcement of
the new group structure Schremppannounced, “The new structure will make us fit for
the next century. But we still need a cultureshock.”The new structure gave business unit
managers more autonomy in running theirbusinesses and increased accountability for
profits. Each business unit maintained its own staff.By 1997 the restructure had borne its
first fruit. For financial year 1997 Daimler-Benz reportedan operating profit of DM 4.3
billion, a 79 percent increase over 1996.

“Our strategy of orienting the group around units that are profitable and offer good
prospects for future growth has now borne its first fruit. We must also point out
however, that Daimler Benz has still only completed the first stage inits effort to reach
world best practice.”

The significant changes at Daimler-Benz left many managers dazed by its rapid pace.Many of
the people working for the century-old company were unable to keep pace or keep trackof
the changes going on around them. Schrempp, a driven and charismatic individual, earned
areputation as a “Rambo,” partly due to the speed with which he demanded change and
partlybecause of his direct and sometimes severe nature. Schrempp responded, “If Rambo
is someonewho acts quickly and decisively, the image is an appropriate one.”

By the end of 1997 the new structure was fully in place. Schrempp reported,

“We had once again lashed the new organization down at a time when many inthe
company thought that we were still in the change state. This meant that wehad already
moved on to refreezing at a time when many thought that we werestill in the unfreezing and
moving stage.”

Daimler-Benz had forged a culture focused on(brand) image, quality, engineering,
profitability, andbusiness unit autonomy.

Reflecting on the significant changes made at Daimler-Benz, Dieter Zetsche, head of
sales and marketing, concluded,“In many people’s minds Daimler-Benz is this
traditional,conservative company of managers wearing dark suits and moving ahead very


slowly. I have tosay that there are very few companies in the automotive industry that have
made as many rapid,daring and basic changes as Daimler-Benz.”

Initial Structure of Management and Integration Process

As a public limited company DaimlerChrysler like Daimler-Benz was required under
German law to have a Board of Management and a Supervisory Board. Based on the German
Co-Determination Law the Supervisory Board was comprised of ten shareholders’
representativesand ten employees’ representatives. Five members from the Supervisory
Board of Daimler-Benzand five members of the Chrysler Board of Directors comprised the
new Supervisory Board. Inorder to assist the integration of the two companies, Hilmar
Kopper, then chairman of theSupervisory Board of Daimler-Benz, was named
chairman of the Supervisory Board of DaimlerChrysler for at least two years.

The Board of Management consisted of 18 members, eight from Daimler -Benz, eight
from Chrysler and two responsible for the Aerospace and Services divisions. Jürgen
Schremppand Bob Eaton were to be co-chairmen and co-chief executive officers for
a period ofapproximately three years. Eaton announced at the outset of the merger that
he would retirewithin three years, causing considerable consternation at Chrysler, where
he was seen as havingmade himself a lame duck with considerable loss of
power.DaimlerChrysler President TomStallkamp was put in charge of the integration
effort (seeExhibit 7for profiles of Schrempp,Eaton and Stallkamp). Chrysler also had
employment continuation agreements in place with eachof its executive officers to cover a
period of two years following the merger.

The Board of Management formed a committee, called the “Chairman’s IntegrationCouncil,”
the stated main task of which was to promote the integration of the two companies
(seeExhibit 8 for Integration Organization). It was anticipated that the Council would be in
place fortwo years. The companies prepared for integration through 29 Issue Resolving
Teams; laterapproximately 70 working groups were brought together to make
recommendations. Finaldecisions were left to the Board of Management. An overall
coordination team, called the PostMerger Integration Team (PMI) was also introduced and
headed by managers from both Daimler-Benz and Chrysler. The PMI reported to the
chairmen’s Integration Council and was responsiblefor ensuring integration occurred in
all areas. Integration teams fell into two categories,automotive, and non -automotive
areas and corporate functions. Each team was co-led byDaimler-Benz and Chrysler
managers.

Automotive Integration Teams:

 Product Creation
 Purchasing
 Marketing and Sales


 Production Planning
 Global Strategy-Integration

Non-automotive and Corporate Functions Teams:

 Corporate Development
 Technology and Research
 Information Technology
 Finance and Controlling
 Human Resource and Corporate Structure
 Corporate Communication
 Non-automotive Divisions

Commenting on the integration structure Stallkamp noted, “We had our own
teaminternally that was getting ready for this, and they had their own team doing the
same thingindependently. We have now married those two teams together.”

The Quest to Create “One Company”

After the May 1998 public merger announcement Daimler and Chrysler
executivesinitiated efforts to address the challenges of integrating the two companies. Since
only a handful
of managers were taken into confidence during the negotiation phase the task of bringing
themanagement levels together needed to begin immediately. Commenting on the unique
blendingof the two organizations, Chris Benko, managing director of Autofacts, a
division ofPricewaterhouseCoopers stated, “They have the best combination of creativity and
charisma plusbureaucracy and precision management.”

Stallkamp commented, “All 420,000 employees need to know we’ve left Chrysler behind
and we’ve left Daimler-Benz behind,” he said. “We will all be working for a new company.”

Because of the intense scrutiny the merger was under, analysts and the media sought
outbenchmarks in other major US-German mergers and acquisitions, of which there were
very few.In the May 24,1998Autoline Detroitspecial, Dean Langford, President of OSRAM
Sylvania, theresult of a 1993 acquisition of GTE’s Sylvania by Siemens subsidiary OSRAM,
gave insight intothe challenge of integrating German and American companies.

“Americans are more free form in their discussions, a little less rigid. TheGermans
tend to be very rigid, more methodological in their meetings and thought processes.
Americans have a tendency to sometimes go off on tangents.With the Germans you don’t have
to worry about it. When they say they’re goingto do something and this is the agenda they
stick to it.”

Charles Jerabek Executive Vice President and General Manager of OSR AM Sylvania


added,

“For the most part Germans don’t understand the informalities of Americanbusiness,
everything from casual dress days to drinking coffee throughout a meeting. In that
context they don’t take the ideas presented as seriously as theywould if they were being
presented in their own culture. On the other side Americans often misinterpret the
Germans’ need for rules and order as maybedisinterest in doing something. What we’ve
worked hard to overcome and whatDaimler and Chrysler will have to work hard to
overcome is the separation ofNot Invented Here (NIH) syndrome. Both sides of the ocean
tend to think thatwhat they’ve come up with and developed is the best way to do
something.”

Some close observers believe that the merger was a “marriage of
opposites…Daimlerembraced formality and hierarchy, from its intricately structured
decision-making processes to itssuit-and-tie dress code and starchy respect for titles and
proper names. Chrysler shucked barriersand promoted cross-functional teams that favored
open collars, free-form discussions, and casualrepartee…Virtually all the German executives
spoke English. None of the Americans, with thenotable exception of Lutz, [retired Vice
Chairman, forced out by Eaton], spoke German.”

DaimlerChrysler’s early integration efforts were focused on trying to identify the best
process for the new company. “It’s not our intent to say “one side wins and the other loses,” said
Stallkamp.

“Take the different ways we conduct meetings. Our approach is more informal,with more give
and take. Theirs tends to be more formal, with a lot more workdone in advance.”

The differences in business culture were widespread, as basic as figuring out
howDaimler and Chrysler could share product information when the Germans take
measurements incentimeters and the Americans use inches, to as complex as ensuring
market competitivecompensation systems on both sides of the Atlantic. In an effort to
improve the likelihood ofintegration success, Chrysler invited employees to take voluntary
culture training. “The nationalcultures are less of an issue than business culture, and it’s
more important to get cultural trainingthan language training,” noted Stallkamp.

When asked about his approach to the integration Stallkamp responded,

“More and more of my time, if you include the cultural side, is spent on integrating
the two companies. My job is to integrate them as much as possible,so we can get the synergies
we signed up for, to get one company out of two. Thebiggest challenge is the need for
face-to-face communications, rather thanvideophones. You need to meet people in
person, rather than long distance, sothat means we have to travel more. You have to
socialize with each other, youhave to meet after business meetings. Otherwise, the comfort
factor would keeppushing people back into their own (traditional cliques).”

The pace of integration was also a concern to the DaimlerChrysler management. “To be


fair we move faster and they’re much more analytical,” said Stallkamp. “That is one of the
issues.How fast do we go on this? This is a big deal, and we don’t want to screw it up by
crashing somepremature integration.”

Schrempp added his thoughts,

“We have said to ourselves, let’s rather make 80 percent correct decisions now and not
wait for the 100 percent decision which might not eventually happen. Because the whole
organization expects change. So if you do something now,they will say, yes it’s
necessary. If you do not act for 12 -18 months theorganization will again get into a
sort of stable situation. And then when youwant t o m ove and chan ge som et hi ng
t he y s a y wh y di dn’t t he y do i t immediately?”

The Reality of Integration

The Chairman’s Integration Council (CIC), ostensibly created to promote the integration of
the two companies, was in effect an attempt to get around the cumbersome governance
structure and run the company using a small group of leaders with a long-term strategic
focus.The formation of the CIC, however, met with immediate and equal dissatisfaction
from non-CICmembers on both sides. These senior officers felt they were once again
being left out of theimportant decisions for the company. Stallkamp saw it as a “slap
in the face to non-CICmembers, and doomed to fail.” The CIC met with such
retaliation that it was ultimatelydisbanded. Decisions reverted to the 18-member
management board. Schrempp, however,maintained a small cadre of loyal advisors,
which the Chrysler managers nicknamed his “kitchencabinet.” This small group served as
Schrempp’s primary information network and soundingboard for his plans. Topics to be
presented before the management board were often previewedby this group. This soon
included merger integration updates by the PMI team.

Stallkamp had intended to use the PMI team as the catalyst for process redesign. Initiallythe PMI
would identify “low hanging fruit” that could be used to achieve early synergies. Since
the PMI consisted of working level managers from each business unit, not senior
officers,Stallkamp believed the PMI could identify processes that, if redesigned, could provide
significantimprovements and/or savings long term. The framework for process redesign was to
be similar toGE’s Workout sessions; current systems would be detailed and compared and
then new systemsdeveloped containing the best aspects of the current ones. Stallkamp
and other Chryslermanagers felt the PMI could be used to track synergies, measure
the morale and culturemomentum, and identify new opportunities. Instead of inventing a
new best system, however,both sides spent significant time trying to convince the other that
their system was superior. ThePMI soon became bogged down in the financial accounting
of the synergies that had been sopublicly touted and its reports to the management board soon
were sanitized to discussions of thefinancials. The “soft” issues and new processes were not
considered important by many of theGerman managers. Instead they were focused on
achieving their portion of the financial synergytarget that had been allocated to them.


The different philosophies of organizational structure became a contentious issue earlyon.
Chrysler had matrix management and platform teams and operated in essence as a single
strategic business unit. Daimler-Benz had a more traditional structure with direct lines
ofauthority and business unit autonomy for each of its 23 business units. The matrix concept
of onemanager having two jobs, for example the head of Mercedes-Benz also heading
DaimlerChryslerEngineering, did not make sense to the Daimler-Benz managers. Even
Schrempp himself asked,“Who do you shoot when it doesn’t work?” Daimler-Benz
managers were rewarded basedprimarily on the profit and loss results of their unit.
Chrysler managers were rewarded based onthe success of their team and Chrysler. The
differences in compensation, particularly betweenEaton and Schremmp -- one paid at the high
American CEO rate with ample stock options, andthe other at much lower German salary --
were often highlighted in the press. Further, Chryslerexecutives had rich termination
contracts, (“golden parachutes”), a practice not used in Germany.

In addition, Stallkamp’s title became an issue. In a German AG company there is no
president; allboard members are considered equal. Even the CEO is not the boss, at
least not legally.Stallkamp’s title of president of DaimlerChrysler caused a disturbance
among many of theGerman managers, who questioned, “Why is he called president?”

At the outset neither side was willing to give up its structure; many managers on bothsides
wanted to be left alone to run their business units. Despite these major
differencesStallkamp believed there were opportunities to demonstrate the benefits of
finding the “newway”, stating, “All we needed was a couple key processes to show the
workforce that it could beone company.”

Stallkamp’s efforts to integrate the operational systems of the company soon hit anothermajor
roadblock. Daimler-Benz managers, particularly those from Mercedes -Benz,
wereextremely sensitive to the issues of brand image. Schrempp explained,

“We had to keep brand identity and we see how we do it here. And beforeclosing we were able
to come up with a great policy paper on how we wanted todo that, in every detail,
describing every brand, describing back offices, infrastructures, identities, etc.”

The policy paper became known as the “brand bible.” The Germans pushed for theseparation of
brands to extend to the back office activities. To the Americans, this
seemedunnecessarily conservative. Stallkamp recalled,

“We had one discussion that lasted for three days. It was that we couldn’t haveour (Chrysler)
Mopar truck, from our after market parts division, arrive at a Mercedes dealer, even with
parts not identified as Chysler-connected. We had aprotracted discussion on whether we
could even use white trucks and unbrandedtrucks! We wasted a lot of intellectual capital and
time on that issue.”

Financial reporting and investor relations became another battleground. Over theprevious
several years, the finance staff at Chrysler had implemented several major


processredesigns, and established itself as a world-class benchmark. It had received formal
recognitionfor these achievements from the U.S. business community. Its brushes with
bankruptcy hadingrained a disciplined approach to cash manage ment. Daimler-Benz
had begun reportingaccording to US GAAP in 1995, but was still developing its approach,
particularly in the area ofcash management. Since all cash was pooled it was difficult to
trace the sources and uses of cashfor Daimler-Benz’ business units. This difficulty became a
sore point early in the merger.Chrysler executives couldn’t believe, for example, that the top
finance official at Daimler-Benzcould not produce – or seem to understand the need for – a
simple cash flow statement.

In addition Chrysler was adept at dealing with the investment community. It hadsignificant
experience dealing with analysts, Wall Street and institutional investors. Daimler -enz on
the other hand did not have a strong relationship with Wall Street and followed a
moretraditional approach to the investment community, reporting the required numbers and
avoidingsignificant attention. In addition to the internal 12 percent ROCE hurdle rate,
Daimler-Benzprimarily measured revenue and number of personnel empl oyed as
indicators of its size andsuccess.

Chrysler also maintained an external focus with emphasis on quarterly reports andcompetitor
analysis. Daimler-Benz was focused internally on achieving management
byobjectives and maintaining decentralized responsibilities. Heated debates over methods
for datacollection, data presentation and discussion with analysts marked some of the
earliest politicalbattles within the new company. The Daimler-Benz financial head
refused to report a poorquarter’s earnings separately to Wall Street analysts, insisting on
reporting only the combinedhalf-year results (which could be determined by subtracting
the previous quarter’s results fromthe total), despite dire warnings from Chrysler
executives. When brought in to the discussion,Schremmp declared that he wouldn’t
bother with trying to please young, immature MBAanalysts. The day after the public
announcement, DaimlerChrysler shares dropped 12 %.

The Daimler-Benz managers prevailed in many of the early arguments over positions
andfunctions, setting the tone for later debates and giving the impression that the “merger of
equals”was in fact a takeover. Stallkamp found himself personally embroiled in these
debates. BecauseChrysler had no corporate staff to complement the staff at Daimler-Benz,
Stallkamp selected anemployee to become part of his Operations Planning and Strategy Group.
He recalled,

“I was summoned to the management board in Germany because a membercomplained I was
creating “a strategic group” – and strategy belonged to EckhardCordes in Daimler-Benz’
Strategic Planning Group. I said I was just trying toidentify someone as a counterpart to
their guy and they said OK, but you can’tcall it strategy. That was one of the real turning
points in the political battle.”
Changing even the “minor” business norms proved difficult. The use of overhead chartswas a
tradition at Daimler-Benz. Presentations usually involved significant numbers of detailedand
complex “flimsies,” with many backup slides to address practically any question that might


be asked. Chrysler presentations, on the other hand, usually took the form of open and
pointeddiscussions with little advance preparation. Chrysler’s platform teams typically
gave updatesusing a single 12 point chart. Schrempp joked about the difference, “The one
side a little moreoff the hip, the other side a bit more analytical, possibly too analytical.
And you know thewisdom might be somewhere in the middle.”
Daimler-Benz employees also flew first-class in keeping with the company’s luxuryimage. At
Chrysler only top officers could fly first-class. Like many other seemingly trivialissues,
the travel policy became a focal point and took more than six months to resolve.
Issuesthat should have been handled easily by the teams, such as labor relations, public
relations ordifferences in emissions control policies, were bumped up to the company’s
management boardfor resolution. Even the size of the company business cards became
fodder for debate.

The difficulties in bringing the cultures together was perceived by many in the autoindustry and
Wall Street,

“There’s this view within this company that there’s Chrysler guys and there’sDaimler guys,
“said Rod Lache, an analyst with Deutsche Bank Securities in New York. “Although the
functions have been integrated, the cultures havenot.”

Stallkamp’s frustration with lack of progress on the integration began to take its toll.
Helamented,

“We’re missing a golden opportunity to shuck off the past. We’re into this “ourway” or “their
way” instead of saying what do we do right, what do they do right,and let’s take only the
good stuff. The analogy is you’re moving. You’re leavinghome and you don’t have enough
room in your new house --you have to throwaway something. (You) don’t drag all that
baggage with you to the new house.”

The Frustrations of Managing Up

Part of what made it difficult for Stallkamp to get full cooperation was that he had
verylittle contact with Schrempp: “Because of the geographic distance it was hard to
establish arelationship with him. His kitchen cabinet of loyal underlings, who he met
with daily overdrinks, was his information system. We all tried to minimize time away
from the office bylearning to do trips to Germany in one day, flying overnight, meeting all
day, then flying back toDetroit to sleep at home.”

A few months after the merger agreement but several months before it would be fullycompleted,
Schrempp had taken the very unusual step for a German manager of asking to
visitStallkamp at his home. Schremmp’s secretary called Stallkamp’s secretary to say
that “Mr.Schremmp would accept an invitation to Mr. Stallkamp’s house.” Bewildered,
Stallkamp’ssecretary asked him what to do. Stallkamp was also amazed, but went
through with theinvitation. They talked for two hours, during which Stallkamp became
uneasy.


“… Schrempp was reaching out...in a way that was a little uncomfortable. [He]was already
wondering when Eaton would leave DaimlerChrysler.”

“It was like, you and I are going to do this, don’t worry about Bob,” Stallkamprecounted later.
“It was clear that he didn’t want to be viewed as throwing Bobout…I thought he might be
trying to co-opt me to get Bob to leave and I told himI would never do that…But it was
also like Schrempp saying, you and me,buddy, we’ll make this thing work.”

Stallkamp added that he knew the visit to his home was an important gesture, but beingasked to
help get Eaton out was “not a really fun assignment and one I found
personallydistasteful.”

A few months later, after an offsite meeting to discuss post-merger integration, Schremppinvited
Stallkamp to lunch in his suite.

“Here’s what we’re going to do,” Schrempp said. “You stay close to me. Call mewhenever you
want. Don’t worry about going through Bob Eaton, and all that kind of stuff.”

Stallkamp felt intensely uncomfortable with the idea of circumventing Eaton. It seemeddisloyal,
almost unethical.

“I can’t do that,” he protested. “I won’t do that. I don’t think it’s the right thing to do.
Iwouldn’t feel right.”

“Don’t worry about it,” Schrempp asserted.

As the merger and integration efforts moved forward, however, Eaton was no helpbecause,
Stallkamp believed, he didn’t like confrontation and had abdicated. So Stallkamp was left
to raise what he believed were some critical issues that he saw being handled incorrectly.
Forexample, after a while, the management board meetings were moved to New York to
reducetravel back and forth to Germany. Fancy suites at expensive hotels were held for
board members,even when they did not stay overnight. Stallkamp was worried that the
wrong message aboutspending was being sent to the Chrysler managers who were used to
traveling coach and stayingat Holiday Inns. He “circulated a critical memo, which
Schrempp immediately took offense at.he costs, Schrempp scolded Stallkamp, were
inconsequential. As president of the Chrysler unitand head of integration, he should be
spending more time on making the merger work than sweating meaningless details of hotel
rooms and the price of wine.”Stallkamp backed off.

Another misunderstanding occurred when Stallkamp said to Schremmp, with admiration,that
Schremmp was not caught up in details and “operated at 50,000 feet.” To Schremmp this
was an insult, implying that he was not on top of things, and Stallkamp had to explain that he
hadmeant it as a compliment.

Soon after the merger was culminated, however, Stallkamp felt compelled to opposeSchrempp
on his plan for the potential acquisition of Nissan. Schrempp was excited about


thepossibility of extending the company’s reach into Asia, but Stallkamp and other
long-termChrysler executives were very concerned about whether the precarious new
DaimlerChryslercould handle the added integration burdens. Stallkamp wrote a three page
memo of opposition tothe board, declaring that Nissan was going to go bankrupt and that it
would be better off doing so,since the world didn’t need it. Schrempp was furious, but ended
up calling off the deal for Nissanwhen he realized how little support he had.

This led Schrempp to confront Stallkamp about “block voting” on the American side. Atfirst
Schremmp maintained that creating an analytical team to prepare strategic reports for the
American executives was an attempt to vote as a block, though he eventually concede d
that itmight be because the Americans had no staff while the Daimler executives did.
But thenSchrempp argued that the Nissan decision was block voting, to which
Stallkamp exclaimed,

“That’s bullshit…We all thought individually it was a stupid idea. There was no block
voting.”

It was in this climate that Stallkamp was trying to figure out what to do about integration.Under
the watchful eye of the auto industry and Wall Street, Schrempp and Eaton pushed for
results and faster integration. It just didn’t feel right to allow Chrysler to become one of 24
SBUswhen it was half of the total company size, and other Chrysler executives were incensed
about theidea. Stalkamp felt an obligation to protect their interests. But he was beginning to
wonder if heshould abandon the effort to create one company and let the power struggle
between the twosystems continue so that the stronger would take over the weak, reverting
to a “survival of thefittest” approach. He was beginning to think there might be no other
solution.


Exhibit 1
Chrysler Corporation and Daimler-Benz Company Histories
Chrysler Corporation
In 1908 Walter P. Chrysler bought his first automobile, a Locomobile Phaeton. Notsatisfied
with merely driving the car, he took the car apart and put it back together several timesto get
to know its technology. In 1912 Chrysler became production manager at Buick MotorCompany,
then a subsidiary of GM. From GM, Chrysler moved on to the Maxwell
MotorCompany. In 1924 the first vehicle to bear the Chrysler name was unveiled. On
June 6, 1925Walter Chrysler purchased the company he chaired, transferring all rights and
obligations fromthe Maxwell Motor Company to the new Chrysler Corporation. In 1928
Chrysler acquired DodgeBrothers, Inc. a company five times its size. In 1942 Chrysler
stopped civilian vehicle productionin favor of war production.

Throughout the post-war period Chrysler nearly succumbed to the effects of the cyclicalauto
industry. In 1979, with a huge inventory of low-mileage cars at a time of rising fuel
prices,Chrysler faced bankruptcy. Chrysler elected Lee Iacocca as Chairman to turn
around thecompany. In 1980, President Jimmy Carter signed the Chrysler Corporation Loan
Guarantee Act,providing Chrysler with $1.5 billion in federal loans. Chrysler faced
bankruptcy again in 1990 butthe Chrysler management team used the crisis to conduct a
major restructure of the business,returning Chrysler to profitability by 1992.

By 1997 Chrysler Corporation operated in two principal industry segments:
AutomotiveOperations and Financial Services. Automotive Operations included the
research, design,manufacture, assembly and sale of cars, trucks and related parts and
accessories. Substantially allof Chrysler’s automotive products were marketed through retail
dealerships, most of which wereprivately owned and financed. Financial Services included the
operations of Chrysler FinancialCorporation and its consolidated subsidiaries, which were
engaged principally in providingconsumer and dealer automotive financing for Chrysler’s
products. Chrysler focused heavily ontrucks in its product line. In 1997, trucks, including
minivans, accounted for about 65 percent ofChrysler’s vehicle sales in the U.S. and cars
made up the remaining 35 percent. Chrysler’s brandsincluded Jeep, one of the most
recognized car brands in the world, Chrysler, Dodge, and Plymouth. One of its most
successful products was the minivan, which Chrysler invented in 1983.

In 1997, minivans accounted for approximately one third of Chrysler’s truck sales.
Chrysler’slarger cars, such as the Stratus, were priced similar to Mercedes-Benz’ lower mid-
size car, the C-class. At the bottom end of the range Chrysler offered the Dodge/Plymouth
Neon. Its car productline included mass-market cars such as the Neon to niche vehicles such as
the Dodge Viper andthe Plymouth Prowler.

Daimler-Benz A.G.


Gottlieb Daimler and Karl Benz were two rival German carmakers who went intothbusiness at
the turn of the 20century. While both Daimler and Benz achieved individualsuccess in
the early 1900s, the challenge of rebuilding Germany after World War I, as well as
competing with the burgeoning Ford Motor Company, led the two companies to merge in
1926 toform Daimler-Benz. The company shifted to military production during World
War II, butDaimler began manufacturing cars again in 1947. By the 1980s, Daimler and its
Mercedes brandhad become synonymous with premier quality and craftsmanship. Daimler
began a program ofdiversification in the mid-1980s, intending to transform the
company into a self-described

“integrated technology group” with product lines ranging from transportation to aerospace
tomicroelectronics to white goods. A string of largely unprofitable acquisitions in the late
1980sleft Daimler unfocused and inefficient, culminating in a staggering DM 5.7 billion
loss for 1995the largest peacetime loss ever by a German company.

Under the direction of the new chief executive Jürgen Schrempp, Daimler began to
shedunprofitable business units, to return the company to its core business of making high
qualityautomobiles and to move towards a more “American-style” management designed
to enhanceshareholder value. Under Schrempp’s direction Daimler-Benz quickly returned
to profitability.By 1997, Daimler-Benz was the largest industrial group in Germany with
1997 revenues of DM124 billion. Daimler-Benz operated in four business segments--
Automotive (Passenger Cars andCommercial Vehicles), Aerospace, Services and Directly
Managed Businesses. Daimler-Benzwas primarily active in Europe, North and South
America and Japan and continued to expand inmarkets such as Eastern Europe and East and
Southeast Asia, which were also assuming strategicimportance as production locations. In
1997, approximately 33 percent of Daimler-Benz’revenues was derived from sales in
Germany, 25 percent from sales in other member states of theEuropean Union and 21
percent from sales in the United States and Canada. The Automotive segment contributed
approximately 71 percent of Daimler-Benz’ revenues in 1997.


Exhibit 7
Executive Profiles
Thomas T. Stallkamp, President DaimlerChrysler AG

Stallkamp’s tenure as president of Chrysler Corp. was unexpectedly short. Stallkamp
wasappointed Chrysler President in January 1998, just a few short months before the
surprisingpublic announcement of the merger with Daimler-Benz AG. Some observers
said the mergercouldn’t have happened without the 52-year-old executive. Prior to taking on
the president’s post,he’d overseen Chrysler’s global purchasing program. It was his job to
get the most for the morethan $60 billion the automaker was spending for parts and
components each year. But Stallkampdid more than just demand good prices. He actively
sought to make suppliers part of Chrysler’s“extended enterprise,” taking on many of the
design, engineering and development chorestraditionally handled in-house. The process
paid off by making Chrysler one of the world’sleanest and most efficient carmakers. He
was described as having an easy manner mixed with awry sense of humor.

“The reason he is so successful is because he has a small ego,” says one longtime friend.His
keen sense of humor, often self-effacing attitude and “my word is my bond” ethic won
himthe trust of Chrysler suppliers.

“Tom has an unusual ability to get people to march in the same direction”, said JackSights, an
executive with automotive glass supplier Guardian Industries in Auburn Hills.

“Tom is sort of custom-made for this role he is playing” said Robert Liberatore ChryslerVice
President of Washington Affairs. “He is an excellent listener, which is part of the skill
setyou need when you bring two gigantic entities together.”9

Jürgen E. Schrempp, Co-Chairman DaimlerChrysler AG

During his tenure as Chairman of Daimler-Benz, Schrempp proved to be a master ofboardroom
politics, with the ability to make decisions quickly and the willingness to take risks. He
called these decisions “digital” decisions: uncompromising yes/no determinations that
acomputer might make. He was respons ible for significant restructuring and
portfoliorationalization at Daimler-Benz, returning the company to profitability in just one
year. He brokeGerman business taboos through his tough labor negotiations, ordering huge
layoffs to try to turnthe company around. His aggressive American style management practices
and his focus onshareholder value were not popular in many German business circles.
Schrempp characterizedhis methods stating, “Nobody will ever spread a rumor about my
having been brought up at agirls’ boarding school.”33 A driven and charismatic individual
Schrempp believed that businessalways comes before personal or career considerations.
When he announced the end to his 35-year marriage in 1999 he explained it by saying he


wanted to concentrate on making the merger asuccess. In an interview with a Dutch
newspaper Schrempp stated, “This company needs memore than I need the company. Do
you think that’s arrogant? I can tell. Write it down.
Schrempp valued decisiveness over protracted consensus building. “He’s very much a
don’twaste my time guy,” commented Hypo bank auto analyst Thomas Aney. Schrempp
counted GEChairman Jack Welch among his business heroes.

Robert J. Eaton, Co-Chairman DaimlerChrysler AG

A no-nonsense engineer from Kansas, Eaton spent more than two decades climbing theladder at
GM before jumping to Chrysler in 1992. Prior to accepting the Chrysler
chairmanshipEaton was running GM’s vast European operations. Eaton was considered to
be one of the moremodest chief executives of the world, a mild mannered and even-
tempered man who believed inthe power of teams. His demure, less forceful manner
was a significant departure fromSchrempp’s style. One GM executive commented that
Eaton had a solid self-worth without beingon an ego trip, adding, “You always know he’s
the boss but he doesn’t always push to the centerstage.” He approached problems in a direct,
straightforward manner and sought the advice of hismanagement team.


Daimler chrysler merger

Recommandé

Recommandé

Contenu connexe

Tendances

Tendances (20)

Similaire à Daimler chrysler merger

Similaire à Daimler chrysler merger (8)

Dernier

Dernier (20)

Daimler chrysler merger