1

DO MERGERS CREATE VALUE IN AUTOMOBILE INDDUSTRY

2

THE JOURNEY SO FAR …

Mergers and acquisition (M&A)

The automobile industry

M&A in the automobile

industryDo mergers create value

?

Daimler Chrysler

3

WHAT IS VALUE ? …

Cumulative abnormal returns

Managers’ assessments

Divestment dataExpert informants’

assessments

Post-Merger performanc

e

Early measures ….

4

WHAT IS VALUE ? …(CONTD.)

Accounting based

measures

Stock market based

measures

Managers subjective assessmen

t

Post – Merger performance

Current measurement methods….

5

DO MERGERS CREATE VALUE ?...

What does the literature say

• Abnormal returns in the short runTarget

Firm

• Value restricted to few success stories

• Contrasting results• On an average – no value

created

Acquiring firm

6

SNAPSHOT OF THE AUTO INDUSTRY

Largest manufacturing industry

Capital intensive

High barriers to entry

Highly consolidated industry

7

TRENDS IN THE AUTO INDUSTRY

Consolidation

Overcapacity

Technology

Consumer demands

Lean and green production

8

COMPANY SELECTION Universe of mergers from 1996 – 2010. Ranking by transaction size No restructuring, no partial stakes, true merger and acquisitions Daimler Chrysler ‘ Merger of Equals’ Daimler Chrysler – 3 phases

9

THE CHRYSLER CORP. STORY

Originally known as Maxwell Motor Company Walter Chrysler pioneered the change Computer based Unibody design Hasty decisions followed to hit the company

financials Chrysler Corporation Loan Guarantee Act,

1979 for USD$ 1.5 billion Diversified business in 1988, acquisitions

reducing working capital to USD$ 1.7 billion

10

CHRYSLER PERFORMANCE PRE-MERGER…

1991 1992 1993 1994 1995 1996 19970

10000

20000

30000

40000

50000

60000

70000

25575

33548

40831

49363 49601

57587 56986

22922

28396

32382

38032

41304

45842 46743

854 902

46776767

44447099

5563

0

12005

1609318864 19657

2405725708

RevenuesCOGSOperating IncomeCurrent Liabilities

11

CHRYSLER PERFORMANCE PRE-MERGER…

1991 1992 1993 1994 1995 1996 1997

-6

-4

-2

0

2

4

6

-1.64

1.11

-3.81

5.06

2.68

4.83

4.15

Basic EPS

Basic EPS

12

DAIMLER

Founded in the year 1886 by Gottlieb Daimler and Carl Benz

Personal mobility in 200 countries and 35 operating units

Financial Dilemma of 1995 New Chairman and his ownership: Jurgen

Schrempp Restructure and Realignment Expansion Plans - Merger

13

RESULTS OF CHANGE IN STRUCTURE

1991 1992 1993 1994 1995 1996 1997 1998

-20000

0

20000

40000

60000

80000

100000

120000

140000

RevenueCOGSOperating IncomeCurrent Liabilities

14

`

1992 1993 1994 1995 1996 1997

-15

-10

-5

0

5

10

15

20

25

30

35

Basic EPS

Basic EPS

15

MOTIVATIONS FOR MERGERS Daimler’s Dilemma

- Entry into U.S domestic market Chrysler Puzzle

- European presence Daimler & Chrysler

- Match made in heaven

Synergy Equation

Daimler AG (2)

Chrysler Corporation

(2)

Daimler Chrysler AG

( 5)

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THE MERGER OF ‘EQUALS’

Structure of the transaction • 1 Daimler = 1 Daimler Chrysler ( DCX)• 0.45 Chrysler Corporation = 1 Daimler Chrysler

( DCX)

Deal closed in 200 days• May 6, 1998, merger agreement is signed• 17th November the stock starts trading

First global share• 21 markets all over the world• DCX was no longer a part of S&P 500

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DAIMLER-CHRYSLER POST MERGER PERFORMANCE

Return on Equity

Profitability

• EPS• EBIT/share• Operating margins• R&D/ sales• R&D/EBIT• CFO/Share

Efficiency

• Total asset utilization

• Fixed asset utilization

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SHAREHOLDER VALUE - ROE

Still below pre-merger levels

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

Daimler Chrysler

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PROFITABILITY - EBIT/SHARE

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

Daimler Group Daimler division Chrysler / division

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PROFITABILITY - R&D/ SALES & R&D/EBIT

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Daimler Daimler division Chrysler Division

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-600.00%

-400.00%

-200.00%

0.00%

200.00%

400.00%

600.00%

Daimler Daimler division Chrysler Division

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CASH FLOW/SHARE

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 200612.00

13.00

14.00

15.00

16.00

17.00

18.00

19.00

20.00

Cash Flow Per Share - Daimler

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EFFICIENCY- FIXED ASSET TURNOVER

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20061.1x

2.1x

3.1x

4.1x

5.1x

6.1x

7.1x

8.1x

9.1x

Daimler Chrysler

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CULTURAL CLASH

Dominance of Daimler over Chrysler Power and conflict Difference in compensation policies, travel

expenses Conflicting goals among newly merged

departments Dividend payments germanised Structured Management V/S Permissive

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DAIMLER AG AFTER DEMERGER

Return on Assets %

Return on Equity %

Net Profit Margin %

EBIT Margin

(8.0%)

(3.0%)

2.0%

7.0%

12.0%

2008

2009

2010

2008 2009 2010

(3.0)

(2.0)

(1.0)

0

1.0

2.0

3.0

4.0

5.0

EPS

Dividends

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ETHICAL CONSIDERATIONS & LIMITATIONS

Due to time constraints we could consider only one unsuccessful merger for our research

We relied on S&P Capital IQ for financial data and were unable to check every line item with SEC filings

Our research data is secondary

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CONCLUSIONS

Mergers should be evaluated for their performance in the long run rather than in the short run.

Large automobile companies have legacy costs and hence mergers in these companies fail to create value in the long run.

Quantitative factors vs. Qualitative factors. International diversification and product

portfolio diversification might not work

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THANK YOU

Special thanks to our mentor Dr. Parvinder Arora and Dr. Veena Jadhav for providing guidance, mentorship and facilitation for this research.