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THE DAIMLERCHRYSLER MERGER: SHORT-TERM GAINS, LONG-RUN WEALTH DESTRUCTION? Matej Blaˇ sko, Jeffry M. Netter and Joseph F. Sinkey, Jr. ABSTRACT Differences in corporate culture, compensation policies, ownership structure, and the legal environment pose significant challenges to all mergers but especially international business combinations. On 6 May 1998 in London, Daimler-Benz of Germany signed a merger agreement with Chrysler Corporation of the United States. This chapter focuses on value creation and destruction, and the challenges of an international transaction. Given the favorable market response to the merger, we review the potential sources of value creation as well as outline the steps undertaken to consummate the deal. However, important post-merger events, such as the Standard & Poor’s decision not to include DaimlerChrysler in the S&P500 index and the clash of corporate cultures and compensation schemes, have tarnished the initial luster of the positive market response and present challenging obstacles to the long-term success of the transaction. As of this writing, the evidence suggests that wealth was destroyed rather than created. Issues in International Corporate Control and Governance, Volume 15, pages 299–329. Copyright © 2000 by Elsevier Science Inc. All rights of reproduction in any form reserved. ISBN: 0-7623-0699-8 299

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THE DAIMLERCHRYSLER MERGER:SHORT-TERM GAINS, LONG-RUNWEALTH DESTRUCTION?

Matej Blasko, Jeffry M. Netter and Joseph F. Sinkey, Jr.

ABSTRACT

Differences in corporate culture, compensation policies, ownershipstructure, and the legal environment pose significant challenges to allmergers but especially international business combinations. On 6 May1998 in London, Daimler-Benz of Germany signed a merger agreementwith Chrysler Corporation of the United States. This chapter focuses onvalue creation and destruction, and the challenges of an internationaltransaction. Given the favorable market response to the merger, we reviewthe potential sources of value creation as well as outline the stepsundertaken to consummate the deal. However, important post-mergerevents, such as the Standard & Poor’s decision not to includeDaimlerChrysler in the S&P500 index and the clash of corporate culturesand compensation schemes, have tarnished the initial luster of the positivemarket response and present challenging obstacles to the long-termsuccess of the transaction. As of this writing, the evidence suggests thatwealth was destroyed rather than created.

Issues in International Corporate Control and Governance, Volume 15, pages 299–329.Copyright © 2000 by Elsevier Science Inc.All rights of reproduction in any form reserved.ISBN: 0-7623-0699-8

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1. INTRODUCTIONThe two companies are a perfect fit of two leaders in their respective markets. Bothcompanies have dedicated and skilled workforces and successful products, but in differentmarkets 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 ofour customers. We will be able to exploit new markets, and we will improve return andvalue for our shareholders. This is a historic merger that will change the face of theautomotive industry.

This is much more than a merger; today we are creating the world’s leading automotivecompany for the 21st century. We are combining the two most innovative car companies inthe world.

Jürgen SchremppChairman of the Daimler-Benz Management Board.

On May 7, 1998, Daimler-Benz of Germany announced plans to merge withChrysler Corporation in the largest international merger in history. JürgenSchrempp of Daimler-Benz and Robert Eaton of Chrysler had signed thecombination agreement the day before in London. The combined entity iscalled DaimlerChrysler AG and is incorporated under the jurisdiction of theFederal Republic of Germany. The company’s stock (DCX) trades on all of theworld’s major stock exchanges, including New York, Frankfurt, London andTokyo, as well as on the other exchanges in the USA, Germany, Austria,Canada, France, and Switzerland. In many respects, the DaimlerChryslermerger is shaping the future of the auto industry and has triggeredconsolidation in an industry plagued by overcapacity. Table 1 presents an

Table 1. Industry Overview (1998).

Largest carmakers Earnings Revenue Car Sales CashRumored merger

partners

General Motors $2.8 billion $140 billion 7.5 million $16.6 billion Isuzu, Suzuki,Daewoo

Ford Motor* $6.7 billion $118 billion 6.8 million $23.0 billion Honda, BMWDaimlerChrysler $6.5 billion $147 billion 4.0 million $25.0 billion Nissan, FiatVolkswagen $1.3 billion $75 billion 4.6 million $12.4 billion BMW, FiatToyota Motor Co. $4.0 billion $106 billion 4.5 million $23.0 billion Daihatsu, HinoHonda Motor Co. $2.4 billion $54 billion 2.3 million $3.0 billion BMW

* In the spring of 1999, Ford Motor acquired Sweden’s Volvo car division for $6.5 billion. Volvosold 400,000 cars in 1997. DaimlerChrysler called off merger talks with Nissan. Subsequently,Renault of France acquired a stake in Nissan. On March 27, 2000, DaimlerChrysler announcedthat it will acquire 34% of Mitsubishi Motors.Source: Naughton (1999) in Business Week, January 25, 1999. Original Business Week sources:Company reports, Merrill Lynch & Co., Salomon Smith Barney, J.P.Morgan, Wasserstein Perella

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overview of the auto industry, including rumors about mergers that are likely tofollow the largest international merger ever.

This chapter provides an overview of the important elements of theDaimlerChrysler merger and relates them to the empirical evidence onmergers.1 Specifically, this study analyzes potential sources of value creationand destruction, and evidence on how this process has affected the valuation ofthe DaimlerChrysler merger. We also discuss some of the important issues thatmust be taken into account in cross-border mergers and acquisitions.Differences in corporate culture, compensation policies, ownership structure,and the legal environment may pose significant challenges to internationalbusiness combinations.

Our findings reveal an initial favorable market response for both companiesto the merger. However, important post-merger events, such as Standard &Poor’s decision not to include DaimlerChrysler in the S&P500 index and theclash of corporate cultures and compensation schemes, have tarnished theinitial luster of the positive market response and present challenging obstaclesto the long-term success of the transaction. On balance, as of this writing, theevidence suggests that wealth was destroyed rather than created.

2. MOTIVATIONS FOR MERGERS

According to Myers (1976), “Mergers are tricky; the benefits and costs ofproposed deals are not always obvious.” In a Modigliani-Miller framework, ifmergers do create value, they do so by changing tax liabilities, changingcontracting costs, or changing investment incentives. If the size, timing, andriskiness of the combined future cash flows of the merged firms exceed the cashflows of the separate firms (“synergy”), the merger will be a positive net-present-value project. Grinblatt and Titman (1998) and others identify thepotential sources of gains from mergers. They include:

(1) Operating synergies center around cost reductions or synergies related toeconomies of scale or scope, lower distribution or marketing costs, orelimination of duplicate assets.

(2) Tax motivations include changes that occur in mergers that reduce taxliabilities. These can include effects from stepping up the basis of theacquired firms’ assets, amortization of goodwill, tax gains from leverage,and acquiring tax losses.

(3) Mispricing motivations can occur if bidding firms have information abouttarget firms that permit them to identify undervalued firms.

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(4) Market-power hypothesis motivations are based on the idea that theacquiring firms can gain monopoly power in a merger, perhaps by buyingcompetitors or foreclosing suppliers.

(5) Disciplinary takeovers can create value if acquiring firms recognizemanagerial shortcomings in target firms and introduce more efficientmanagers.

(6) The earnings-diversification motivation suggests that acquiring firms focuson diversifying earnings in an attempt to generate higher levels of cash flowfor the same level of total risk. This approach substitutes reductions inbusiness risk (earnings fluctuations) for greater financial risk (leverage).Grinblatt and Titman (1998, p. 680) note that diversification can alsoreduce the probability of bankruptcy for a given amount of debt and avoidinformation problems that arise in using an external capital markets.

For various reasons, mergers also can destroy value. The major theoreticalfoundation for such destruction centers on the agency-cost idea that theinterests of managers and shareholders may not be aligned. Thus, managersmay pursue mergers because of motivations other than the ones in the bestinterest of shareholders. Examples of motivations for mergers that may destroyvalue include mergers resulting from managers’ “hubris” (Roll, 1996),managerial compensation tied to the size of the firm, and managers’ desire tomake acquisitions in areas where their human capital makes them morevaluable to their own firms.

3. EMPIRICAL EVIDENCE

The empirical evidence on mergers and acquisitions while large is notconclusive. Event-study evidence on large samples tends to show that, onaverage, around a merger announcement target shareholders benefit sig-nificantly from acquisitions while bidder shareholders are unaffected or loseslightly.2 The net announcement effects of takeovers (for both target andbidder) are positive, although the variance of these announcement returns islarge. Various researchers have looked for the source of the gains from mergersand evidence exists that mergers can create value by reducing taxes, increasingproductivity, improving incentives, or creating synergies.

Another approach has been to examine the long-run performance of firmsafter the merger using stock or accounting data. The results from the long-runperformance literature are mixed, in part because of the difficulty of estimatinglong-run performance. For example, Loughran and Vijh (1997) examinebenefits to long-term shareholders from corporate acquisitions. They find arelationship between the post-acquisition returns and the method of payment.

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The analysis suggests that firms completing cash-tender offers earn sig-nificantly positive excess returns, while the stock mergers appear to destroyvalue over the long term. It appears that the method of payment for a target mayprovide valuable clues about the manager’s confidence in the quality of aproposed merger. However, a growing literature has noted that seriousmethodological and theoretical difficulties exist in estimating long-runperformance. For example, Lyon, Barber and Tsai (1999) say the “analysis oflong-run returns is treacherous,” while Fama (1998) argues that bad-modelproblems are “unavoidable . . . and more serious in tests of long-run returns.”Thus, the question of the long-run performance of firms after mergers remainsunsolved.

Another approach to the study of the effects of mergers is the case approach.For example, Kaplan, Mitchell and Wruck (1997) examine two acquisitionsthat in the long run did not create value, in large part, they argue, because thebidder management did not understand the target’s business. Bruner (1999)analyzes the loss of value in the aborted deal of Volvo and Renault, while Lysand Vincent (1995) focus on value destruction in ATT’s acquisition of NCR.Bruner argues that his hypothesis of “path dependence” could complementhypotheses about value-destroying mergers that originate from managersthemselves. By path dependence, he means that researchers should recognizethat decisions managers have made in the past might constrain their choices inthe future. While Bruner suggests that researchers should look further back intime than the first announcement of a merger to build a deeper understandingof the origins of bad deals, path dependence should also affect good deals. Onbalance, past decisions can provide a solid foundation for good future deals orthey can become quagmires that doom future transactions. Nevertheless,Kaplan (1989, 1994) shows that the Campeau acquisition of Federated (eventhough it ended in bankruptcy) created value.

In summarizing the empirical evidence on mergers Grinblatt and Titman(1998, p. 702) state:

Based on an analysis of the empirical evidence we cannot say whether mergers, on average,create value. Certainly, some mergers have created value while others were either mistakesor bad decisions. Of course, many of the mistakes were due to unforeseen circumstancesand were unavoidable.

This case analyzes the Daimler-Chrysler merger in the light of the existingempirical evidence to identify potential areas of value creation and destruction.Our analysis reveals an initial positive market response followed by substantialdissipation of market value over the next two years. The verdict on the long-runsuccess of the deal, however, remains to be seen.

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4. COMPANY PROFILES AND THE REASONS FOR THEDAIMLERCHRYSLER MERGER

Jürgen Schrempp, Chairman of Daimler-Benz Management Board, has beenbehind the dramatic turnaround at Daimler transforming the firm into acompetitive global powerhouse.3 On January 12, 1998, Schrempp visitedRobert J. Eaton, Chairman and CEO of Chrysler Corporation, at anInternational Auto Show in Detroit to suggest discussion of a possible merger.Less than four months later, there was a signed merger agreement. Table 2presents a Chronology of the DaimlerChrysler merger and the most importantsteps taken before the merger closed in November 1998. The key steps in themerger process included initial discussions on the feasibility of the merger,discussions of governance and business-organization structures, signing amerger agreement, and closing the merger transactions after getting approvalsfrom the interested parties – Boards of Directors, shareholders, and regulatoryagencies.

Daimler-Benz AG, a stock corporation (Aktiengesellschaft), was the largestindustrial group in Germany with 1997 revenues of DM124 billion ($68.9billion). Although known primarily for its luxury Mercedes cars, Daimleroperated in four business segments: Automotive (Passenger and CommercialVehicles), Aerospace, Services, and Directly Managed Businesses. ChryslerCorporation, incorporated in Delaware, operated in two principal segments:Automotive operations and Financial services. Primary operations includedresearch, design, manufacturing, assembly, and product sales (including trucksand accessories), as well as financial services providing consumer financing forChrysler products.4

Several potential reasons exist for the merger. Daimler derives 63% of salesfrom Europe, while Chrysler depends almost exclusively on North America for93% of its sales. As Robert Eaton mentioned:5 “Both companies have productranges with world-class brands that complement each other perfectly. We willcontinue to maintain the current brands and their distinct identities.” Moreover,both companies are trying to expand geographically in their respective marketsand immediate growth opportunities will exist by using each other’s facilities,capacities and infrastructure. Auto industry experts (see Table 3) alsowelcomed the merger, although analysts from firms that were not involved inthe merger (Goldman Sachs and CSFB advised Daimler-Benz and Chrysler)were more cautious in their forecasts and recommendations of long-termperformance. The DaimlerChrysler merger prospectus (1998a, p. 47), states:

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During the course of (merger) discussions, representatives of Chrysler stated that it wasimportant to Chrysler that any potential transaction maximize value for its stockholders,that it be tax-free to Chrysler’s U.S. stockholders and tax efficient for DaimlerChrysler AG,that it have the post-merger governance structure of a “merger-of-equals,” that it have theoptimal ability to be accounted for as a pooling-of-interests, that it result in the combinationof the respective businesses of Daimler-Benz and Chrysler into one public company.

Table 2. Chronology of the DaimlerChrysler Merger.

January 12, 1998 Jürgen E. Schrempp, Chairman of the Daimler-Benz Management Board,in U. S. for North American International Auto Show in Detroit, visitsRobert J. Eaton, Chairman and Chief Executive Officer of ChryslerCorporation, to suggest discussion of possible merger.

February 12–18,1998

Initial discussions on possible merger within small group of representativesand advisors from both companies.

March 2, 1998 Robert J. Eaton and Jürgen E. Schrempp meet in Lausanne, Switzerland todiscuss governance and business organization structures for a possiblemerger.

March–April, 1998 Working teams prepare possible business combination in detail.April 23–May 6,1998

Working teams negotiate business combination agreement and relateddocumentation.

May 6, 1998 Merger agreement signed in London.May 7, 1998 Merger agreement announced worldwide: Daimler-Benz and Chrysler

combine to form the world’s leading automotive, transportation andservices company.

May 14, 1998 Daimler-Benz Supervisory Board agrees to merger.June 18, 1998 Daimler-Benz management team visits Auburn Hills.June 25, 1998 Chrysler management team visits Stuttgart.July 23, 1998 European Commission approves merger.July 31, 1998 Federal Trade Commission approves merger.August 6, 1998 Announcement that DaimlerChrysler shares will trade as “global stock”

rather than American Depositary Receipts (ADRs).August 6, 1998 Daimler-Benz and Chrysler mail Proxy Statement/Prospectus to

shareholders.August 27, 1998 Daimler-Benz and Chrysler management teams meet in Greenbrier, West

Virginia to discuss post-merger plans.September 18, 1998 Chrysler shareholders approve merger with 97.5% approval.September 18, 1998 Daimler-Benz shareholders approve merger with 99.9% approval.November 6, 1998 Chrysler issues 23.5 million shares to corporate pension plan to qualify for

pooling-of-interests accounting treatment.November 9, 1998 Daimler-Benz receives 98% of stock in exchange offer.November 12, 1998 DaimlerChrysler merger transaction closes.November 17, 1998 Day One: DaimlerChrysler stock begins trading on stock exchanges

worldwide under symbol DCX.

Source: DaimlerChrysler (1998a). Merger Prospectus.

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Representatives of Daimler-Benz indicated (in addition to the previous) that the survivingentity of any combination be a German stock corporation, thereby enhancing the likelihoodof acceptance of the transaction.

The Chrysler Board unanimously approved the merger and recommended thetransaction as fair to and in the best interests of Chrysler’s stockholders. Theboard suggested several factors that led to its approval:6 (1) the likelihood thatthe automotive industry will undergo significant consolidation, resulting in asmaller number of larger companies surviving as effective global competitors;7

(2) the two companies’ complementary strengths: Daimler-Benz is stronger inluxury and higher-end cars; Chrysler in sport-utility vehicles and minivans;Daimler is stronger in Europe; Chrysler in North America; Daimler’s reputationfor engineering complements Chrysler’s reputation for product development;(3) the opportunities for significant synergies afforded by a combination basednot on plant closings or lay-offs, but on such factors as shared technologies,distribution, purchasing and know-how; (4) expected benefits of $1.4 billion in

Table 3. Analyst Ratings at the Time of Merger.

Credit Suisse First Boston (Nicholas Colas, Susanne Oliver, November 20, 1998)Valuation: EPS: 1998 estimate 11,00DM; 1999 estimate 12.44 DM.Abstract: We believe that the merger of Chrysler Corporation and Daimler-Benz has created theworld’s most formidable competitor in the automotive industry. In our view, DaimlerChryslerrepresents an attractive investment opportunity, with a superior industry position, a very strongbalance sheet and significant cost savings potential. We are introducing a price target of U.S.$101,representing 15% upside potential from the current price.

Goldman Sachs Investment Research (Keith Hayes, Hugh Campbell, October 5, 1998)Valuation: EPS: 1998e U.S.$5.98; 1999e U.S.$7.25Abstract: Preparing for the 21st Century. Proposed merger would create global powerhouse ableto confront changes underway in world automotive industry. Three-year estimated cost benefits of$3 billion create immediate earnings momentum. Complementary strengths in terms of product,geography and organizational skills.

Merrill Lynch (Stephen Reitman, November 27, 1998)Valuation: Accumulate; Long Term: Neutral.Abstract: Upgrade of Intermediate opinion.

BT Alex.Brown (Mark Little, November 12, 1998)Merger of equals. DaimlerChrysler holds a global presence in an industry that is fast consolidating.This offers advantages through economies of scale, purchasing and shared skills, but none of thisguarantees greater profitability. DaimlerChrysler is well placed to withstand the economicdownturn that we are expecting and our current forecast blended valuation looks fair. We thereforeinitiate coverage with a market perform recommendation.

Source: Company reports

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the first year of merged operations, and annual benefits of $3 billion withinthree-to-five years. The Chrysler Board also outlined several potential risks,including the difficulties inherent in integrating two large enterprises withgeographically dispersed operations incorporated in different countries, and therisk that the synergies and benefits might not be fully achieved.

Daimler-Benz’s Management Board also unanimously approved the merger.Four material factors appeared crucial to its approval: (1) Daimler’sstrengthened competitive position through an immediate expansion of itsautomotive product range and a geographic expansion in the U.S., whichreduced the risk associated with the dependency on the premium segment ofthe automobile market; (2) the enhanced liquidity for Daimler’s stockholdersby creating the third largest automotive company in the world in terms ofrevenues, market capitalization and earnings; (3) the potential short-termsynergies in purchasing, distribution, and research and development; and (4)the potential long-term synergies in the development and growth of markets.

5. CONFLICTS OF INTEREST

As in most mergers, potential agency problems exist from manager’s decisionson what actions to take in the merger. For example,

In considering the recommendation of the Chrysler Board, stockholders of Chrysler shouldbe aware that, as described below, certain members of Chrysler’s management and theChrysler Board may have interests in the Chrysler Merger that are different from, or inaddition to, the interests of Chrysler stockholders generally, and that these interests maycreate potential conflicts of interest.

DaimlerChrysler (1998a) merger prospectus, p. 68.

Some of the potential agency conflicts resulted from the compensation plans inplace. Subject only to the consummation of the merger and his continuedemployment, Robert Eaton receives $3.7 million in cash payment, 628.3thousands DaimlerChrysler ordinary shares ($66 million) and stock apprecia-tion rights with respect to 2.27 million DaimlerChrysler ordinary shares. Fourother Chrysler officers receive cash payments, DaimlerChrysler shares, andoptions. Moreover, Chrysler’s executive officers (a group of 30 persons) haveemployment-continuation agreements for a period of two years following anyevent that constitutes a change in control. As a result, if their employment wereterminated within two years after the merger, they would receive an estimatedlump-sum severance payment in an aggregate amount of $96,907,018. Thelargest portion of this sum ($24.4 million) would accrue to Mr. Eaton, whowould receive a single lump-sum payment equal to three times his base salaryplus the average annual bonus plus certain benefits.

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6. MERGER-ANNOUNCEMENT EFFECTS

Table 4 (Panel A) documents the stock market reaction to the mergerannouncement for both Daimler-Benz and Chrysler, which are similar to theresults from earlier studies of mergers. Specifically, Chrysler’s shares recordeda 30.9% abnormal return and, somewhat in contrast to large-sample studies thatfind negative or zero returns to bidders, the shares of Daimler-Benz realized apositive excess return of 4.6%. The combined market capitalization of Daimlerand Chrysler was $95.2 billion8 at the close of NYSE trading on May 7, 1998,which was $10.2 billion greater than the combined market value of the firmsbefore the merger announcement. The increase in firm value is consistent withthe predicted expected benefits of $1.4 billion in the first year of mergedoperations, and annual benefits of $3 billion within three-to-five years.9

7. VALUATION ISSUES

In a stock-swap merger, the exchange ration must be determined. The exchangeratio may be determined according to the firms’ book values, market values,

Table 4. Announcement Effects (Abnormal Returns) of the DaimlerChryslerMerger and Subsequent Events.

Panel A: Abnormal Returns to Daimler-Benz and Chrysler around the merger announcement

Chrysler Daimler-Benz

Event Date Event descriptionAbnormal USD

return t-statAbnormal DM

return t-stat

May 6, 1998 The merger agreement signed inLondon

18.7% 13.5 5.93% 2.96

May 7, 1998 Worldwide announcement of themerger

10.5% 7.57 –1.25% –0.90

May 6–7, 1998 Combined 2-day return 30.9% 15.0 4.57% 1.82

Abnormal returns (ARs) computed as market-adjusted returns. S&P500 and DAX30 indexes wereused to adjust Chrysler and Daimler-Benz returns, respectively. USD refers to U.S. Dollar, andDM stands for Deutche Mark. To compute t-statistic, we used standard deviation of ARs duringthe year 1997. The methodology follows Ruback (1982), and Bruner et al. (1999) and adjusts forthe autocovariance of returns:SD(�) = [�*VAR(ARt) + 2(� � 1)COVAR(ARt,ARt–1)]; t-stat = AR(�)/SD(�); where � = number ofdays in the event window

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Table 4. (Continued)

Panel B: Post-merger abnormal returns to DaimlerChrysler (DCX) for some important events

DaimlerChrysler

Event Date Event descriptionAbnormal

return t-stat

Top Executives resignations*December 4th, 1998 DaimlerChrysler’s Executive Vice-

President of Manufacturing DennisK. Pawley announced retirement

–1.75% –0.97

February 5th, 1999 Senior Vice-President ofcomunications for DCX, Steven J.Harris, was hired by GeneralMotors Corp.

–1.70% –0.95

March 2nd, 1999 Two top engineering executives atDCX, Chris Theodore and ShamelRushwin, resigned to take similarpositions at Ford Motor Co.

–4.25%(2-day return,March 1st to

March 3rd close)

–1.80

News related to the loss of S&P500 status and merger talks with other automakersOctober 1st, 1998 Standard&Poor’s announces that it

won’t include DaimlerChrysler inthe S&P500 Index

–14.6%** –7.1

January 11–13, 1999 Rumors about DaimlerChryslerdeal to acquire an equity stake inNissan Motor Co.

–5.98%(2-day return)

–2.5

March 10th, 1999 DCX breaks talks with Nissan.Nissan shares fell 10.9%

5.04% 2.1

March 7, 2000 News about DaimlerChrysler’spotential bid for a 30% stake inMitsubishi Motor Corp.

–2.2% –1.3

Abnormal Returns (ARs) computed as Datastream-world-market-index adjusted returns.(*) In addition to these resignations, DaimlerChrysler has been hit by loss of other top executives:Robert Lutz, who retired as Chrysler’s Vice Chairman in June after playing a key role in thecompany’s turnaround; Rex Franson, President of Chrysler Financial Corporation resigned inJanuary; William Glaub, CEO of Chrysler Canada died November 26, 1998. And finally, RobertEaton, former CEO and Chairman of Chrysler, has agreed to retire after 3 years to the merger.(**) U.S.-dollar return to Chrysler shares (midpoint of SEAQ quotes) from the close on September30, 1998 to October 2nd, 1998, adjusted by S&P500.Sources: News: Associated Press, AFX News, PR Newswire, Wall Street Journal, Business Wire.Prices: Datastream Inc.

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sales, earnings, or some other characteristic. Table 6 shows the shares of formerDaimler-Benz, Chrysler, and the combined entity based on these character-istics.

One possible approach is to apportion the ownership rights to the formershareholders using the market values of the two companies the day before themerger announcement. As market values change quickly and reflect newinformation (including leaks from the merger talks), average market valuescomputed over a longer time-period represent a better alternative. The marketvalue of Daimler-Benz on May 5, 1998, one day before the merger

Table 5. DaimlerChrysler Stock-Price Performance.

Panel A: Market capitalization of Daimler-Benz and Chrysler around the merger announcement

Date Chrysler Daimler-Benz Combined

May 5, 1998 (1 day prior to the merger news) $26.8 billion $58.1 billion $84.9 billionMay 6, 1998 (the merger agreement signed in London) $31.6 billion $61.8 billion $93.4 billionMay 7, 1998 (wordwide announcement) $34.6 billion $60.6 billion $95.2 billion

Chrysler had 647.3 million and Daimler-Benz 569.3 million of shares outstanding. Closing pricesof Chrysler (C) shares and Daimler-Benz ADRs (DAI) on NYSE were used to compute therespective market capitalization.Source: Wall Street Journal.

Panel B: Post-merger market capitalization and returns of DaimlerChrysler (DCX)

Buy-and-hold returns since May 5, 1998 (the merger)DCX Market

Date Cap DCX (e) DCX ($) S&P500($) DAX30(e) DSWorld($)

May 5, 1998 $84.9 billion– 1 day prior to the merger newsOctober 26, 1998 $77.8 billion –13.8% –8.4% –3.8% –11.8% –8.5%– DCX starts trading as ‘when-issued’ securityMarch 14, 2000 $62.8 billion –15.5% –26.1% + 21.8% + 46.4% + 30.0%– almost two years later

DCX denotes DaimlerChrysler; S&P500 is S&P500 Composite Index; DAX30 is a major stockindex in Germany; DSWorld is a composit world stock-market index compiled by Datastream Inc.Euro-returns for DCX(e) and DAX30; U.S.dollar returns for DCX($), S&P500 and DSWorld.DCX(e) euro-returns equivalent to DM (Deutche Mark) returns.Source: Wall Street Journal, Datastream Inc.

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Table 5. (Continued)

Panel C: Stock price performance of DaimlerChryslersince 26th October 1998, when DCX shares started trading (initially as ‘when-issued’security)

U.S. dollar-returns for DCX($), S&P500($), and DSWorld($); Euro-returns for DAX-30(e).Source: Datastream Inc.

Table 6. Contributions of Daimler-Benz and Chrysler to DaimlerChryslerAG.

Share of DaimlerChrysler derived fromCharacteristic Daimler-Benz Chrysler

Market Values (as of May 5th, 1998) 68.4% 31.6%Actual Exchange Ratio* 58.6% 44.6%Total Revenues (year ended December 31, 1997) 52.9% 47.1%Net Assets (year ended December 31, 1997) 56.1% 43.9%Net Income** (year ended December 31, 1997) 46.7% 53.3%

* This means that, based on the actual stock exchange ratio, the old Chrysler shareholders received44.6% of DaimlerChrysler shares. ** Goldman Sachs figures in DaimlerChrysler (1998a) mergerprospectus, pp. 64.Source: Company reports – DaimlerChrysler (1998a), and NYSE Daily Stock Price Record(1998)

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announcement, was $58.1 billion, whereas Chrysler’s market value was abouthalf that value at $26.8 billion. Based on these market capitalizations,10

Chrysler’s share of the combined company would be 31.6%.The actual exchange ratios for the DaimlerChrysler shares were set at

1:1.005 for Daimler-Benz shareholders and 1:0.6235 for Chrysler share-holders. Splitting DaimlerChrysler among the former Daimler and Chryslershareholders according to these exchange ratios put the Chrysler’s share of thenew company at 41.4%. Thus, Chrysler shareholders received a 31% premiumover the closing prices of their shares on May 5, 1998 (NYSE).

7.1. Financial Analysis and Due Diligence

While companies looking for a merger partner often begin with an in houseanalysis, eventually the complexity of financial, legal, accounting, and taxationissues require outside consultants. The following section focuses on thefinancial analyses and diligence performed by the advisors to the involvedparties in DaimlerChrysler merger.

Daimler-Benz retained Goldman Sachs (GS) and Chrysler hired CreditSuisse First Boston (CSFB) to act as its financial advisors. In determining theexchange ratio, GS and CSFB considered several valuation techniquesincluding discounted cash-flow techniques, P/E multiples, comparable-com-panies analysis (based on equity analyst price targets), and other techniques.Financial advisors reviewed publicly available business and financial informa-tion from third parties as well as financial forecasts provided by Daimler andChrysler.

CSFB prepared and presented a fairness opinion to the Chrysler’s board. Itbased its opinion on a variety of financial and comparative analyses usingnumerous assumptions with respect to Chrysler, Daimler-Benz, industryperformance, and general business, economic, and market conditions. CSFBmaintained that because of complex considerations and judgments used in itsanalyses,11 the opinion is not susceptible to decomposition. Nevertheless, belowwe briefly describe the component parts of its opinion.

CSFB reviewed the stock price performance of the merging companies andcompared them with the performance of the other U.S. and European automanufacturers.12 The high, low, and average share prices were considered andCSFB concluded that the proposed exchange ratio for the DaimlerChryslershares represented a premium for the former Chrysler shareholders rangingfrom 15% to 37%. CSFB also reviewed the equity analysts’ price targets fromselected investment research reports. The exchange ratio represented apremium of 16% over the mean target prices.

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To estimate the present value of stand-alone Chrysler, a discounted(unlevered) free-cash-flow analysis was performed for the years 1998 to 2002.The analysis defines unlevered free-cash flows as unlevered net income plusdepreciation plus amortization less capital expenditures less investment inworking capital. With projections influenced by vehicle sales, the level of retailincentives, and the success of new product models, two separate businessscenarios were considered: a base case and a sensitivity case. CSFB alsoperformed a similar analysis for every business segment of Daimler-Benz andobserved that the exchange ratio represented a premium of approximately14-to-16% over the ratios of equity valuations based on discounted cashflows.

Operating and stock-market data were used to analyze Chrysler relative topeer companies.13 The EPS (earnings per share) multiples for the selectedcompanies ranged from 8.0-to-9.5. Correspondingly, CSFB performed asimilar analysis for every business segment of Daimler-Benz. Based on the EPSanalyses, the exchange ratio represented a discount of approximately 17%under to a premium of 15% over the ratios of comparable companies’ equityvaluations.

Goldman Sachs, as a financial advisor to Daimler-Benz, also recommendedthe proposed transaction and deemed the exchange ratio to be fair to Daimler’sstockholders. Similar to CSFB, GS reviewed, among others, the CombinationAgreement, the Annual Reports to stockholders and other SEC filings14 for theprior 5 years, including interim reports to stockholders, and internal financialanalyses.

Financial advisors also considered premia (discounts) in similar transactions.CSFB analyzed precedent strategic-business, merger-of-equals (MOE) combi-nations. Its analysis indicated that the exchange ratios were negotiated withina narrow band around the implied pre-announcement stock- market ratios. Forthe twelve precedent MOE transactions,15 where each of the constituentcompanies had even representation on the combined company’s board ofdirectors, the premiums ranged from 0.5% to 21.7%. GS analyzed comparablysized transactions and performed a transaction premium analysis on 40 earliermergers larger than $10 billion. The premium paid in these transactions, ascompared to the price one-day prior to the announcement date, ranged from alow of –5% to a high of 95.1% with a median of 27.3%.

The initial discussions put forth several criteria for the merger.16 However,some of these criteria seem to be at odds with each other. One of the importantissues of the merger transaction was that it had the optimal ability to beaccounted for as a pooling-of-interests. The Chrysler Board expresslyrecognized that17 “purchase accounting treatment would have no impact on

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cash generation or on the business logic for the transaction, although it wouldreduce reported earnings because of the need to account for and to amortizegoodwill (the excess purchase price over book value).” Table 7 providesDaimlerChrysler’s unaudited pro-forma combined consolidated statement ofincome. The pooling-of-interests accounting is at odds with tax-efficiency aspurchase accounting would increase the firm value by decreasing the presentvalue of future tax liabilities. However, popularity of pooling-of-interestaccounting led regulators to mandate purchase accounting for all U.S. mergers.We may thus expect that international mergers may incorporate combinedentities in countries with more lenient accounting regulations.

7.2. Fees to Financial Advisors

Daimler-Benz contracted GS to act as its financial advisor to the merger, andagreed to pay $35 million in fees, plus an additional fee equal to 0.25% of theincrease in the market capitalization of DaimlerChrysler during the six-monthperiod following completion of the merger. This fee is limited to be at least $5million but not greater than $25 million. Daimler-Benz also agreed toreimburse GS for all expenses and indemnify it against certain liabilities.

Chrysler engaged CSFB, and agreed to pay CSFB a fee of $35 million forits services, plus an additional fee equal to 0.11% of the change in Chrysler’sfully-diluted equity, market value on December 31, 1997 compared to the fullydiluted value of the DaimlerChrysler shares received by Chrysler’s stock-holders, subject to a maximum of $20 million. In addition, Chrysler agreed toreimburse CSFB for all out-of-pocket expenses, including the fees andexpenses of its legal counsel and any other advisor retained by CSFB.

8. LEGAL STRUCTURE OF THE COMBINATION

To achieve various goals, such as pooling-of-interest accounting, andcompliance with certain regulations required a fairly complicated legalstructure for the Daimler-Benz-Chrysler merger. Table 8 illustrates thetransaction as well as the resulting structure.18 Baums (1999) describes thedetails of the legal structure and problems arising from defective regulatory andlegal environment, and we limit our discussion to the most important points.

Several factors attributed to the legal complexity of merger. Interestingly, notrue merger between Daimler-Benz AG and Chrysler Inc. ever happened.Although, a direct merger of Chrysler into Daimler-Benz would significantlysimplify the transaction, it would have dissolved Chrysler as a legal entity,which would require a costly transfer of assets into a new U.S. subsidiary. The

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Table 7. DaimlerChrysler’s Combined Consolidated Statement of Income.

UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTOF INCOME

(pooling-of-interest method)For the Year Ended December 31, 1997(in millions, except per share amounts)

Historical Pro-Forma

Daimler-Benz Chrysler (e) Combined CombinedDM DM DM USD (e)

Revenues 124,050 105,205 229,255 127,131Cost of sales (98,943) (84,879) (183,822) (101,936)Gross margin 25,107 20,326 45,433 25,195Selling, administrative and otherexpenses

(17,433) (9,703) (27,136) (15,048)

Research and development (5,663) (2,972) (8,635) (4,788)Other income 1,620 1,620 898Income before financial income andincome taxes

3,631 7,651 11,282 6,257

Financial income, net 618 251 869 482Income before income taxes 4,249 7,902 12,151 6,739Tax benefit relating to a specialdistribution

2,908 2,908(a) 1,613

Income taxes 1,074 (3,038) (1,964) (b) (1,089)Total income taxes 3,982 (3,038) 944 524Minority interest (189) (189) (105)

Net income 8,042 4,864 12,906 (c) 7,158

Pro forma combined earnings per sharePro forma combined basic earningsper ordinary share

13.29 (c)(d) 7.37

Pro forma combined diluted earningsper ordinary share

13.16 (c)(d) 7.30

(a) Reflects the non-recurring tax benefit relating to the Special Distribution.(b) Includes non-recurring tax benefits of DM 1,962 relating to the decrease in valuationallowance as of December 31, 1997, applied to the German operations that file a combined taxreturn.(c) Excluding the non-recurring income tax benefits, net income and pro forma combined netincome would have been DM 3,172 ($1,759) and DM 8,036 ($4,456) and pro forma combinedbasic and diluted earnings per share would have been DM 8.28 ($4.59) and DM 8.21 ($4.55),respectively.(d) The assumed weighted average number of ordinary shares outstanding for basic and dilutedearnings per share were 970.8 million and 983.6 million, respectively.(e) Translated at the rate of exchange of $1.00 = DM 1.80Source: Company reports – DaimlerChrysler (1998a).

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Table 8. A Graphic Illustration of the Legal Structure of the Merger.

Panel A:

Source: DaimlerChrysler (1998a) merger prospectus pp. 11–13. Also reproduced in Baums (1999)Baums (1999) describes the legal structure of the merger and what follows draws on his research.Interestingly, no true merger (in a legal sense) between Daimler-Benz AG and Chrysler Inc. everhappened. Instead, Oppenheim KGaA, a private German bank, established a wholly-ownedsubsidiary Oppenheim AG, now renamed “DaimlerChrysler AG”. This subsidiary made a public offerto the Daimler shareholders asking them to swap their shares for Oppenheim stock. Subsequently,Daimler-Benz AG merged with Oppenheim AG. All holdings of Daimler-Benz (Mercedes-Benz,DASA, etc.) were effectively transferred to Oppenheim AG. As to the American side, a U. S.Exchange Agent (trustee) collected the Chrysler shares by means of a reverse triangular merger. Inthe second step, the trustee exchanged Chrysler shares for Oppenheim shares and distributed them toformer Chrysler shareholders. Chrysler Inc. was renamed DaimlerChrysler Inc. and survived as alegal entity and a wholly owned subsidiary of the Oppenheim AG (DaimlerChrysler AG).

Panel B: Result of the merger:

Source: DaimlerChrysler (1998a) merger prospectus pp. 11–13. Also reproduced in Baums (1999)

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resulting structure has kept Chrysler Inc. (later renamed DaimlerChrysler Inc.)as a legal entity, which is now a wholly owned subsidiary of DaimlerChryslerAG. Baums (1999) also describes regulatory obstacles that exist in this andother direct cross-border mergers.

9. OWNERSHIP STRUCTURE AND THE LARGESTSTOCKHOLDERS

DaimlerChrysler was the first automotive company with a genuinely globalownership structure at the time of merger. Initially, stockholders were locatedequally in the United States (44%) and Europe (44%). German stockholdersheld 37% of shares. Three core stockholders owned 27% of DaimlerChryslershares outstanding, 17,000 institutional investors held 49%, and 1.3 millionretail investors held 24%. At the time of merger, insiders controlledapproximately 3% of ordinary shares.19 However, as of December 31, 1999, themembers of the Supervisory Board and the Board of Management as a groupowned 426,668 ordinary shares, which represented 0.04% of all outstandingshares.20

However, on March 15, 1999, the company announced that the percentage ofDaimlerChrysler shareholders in the United States fell to 25% from 44% inNovember 1998, when the merger closed.21 DaimlerChrysler indicated that thedecline was a consequence of Standard & Poor’s decision not to include theresulting German company in the S&P500 index. This move forced manymutual funds that track the S&P500 Index to unload the stock, which couldhave a potentially adverse effect on DaimlerChrysler’s cost of equity. Wediscuss the S&P decision later in the study.

The three largest stockholders include Deutsche Bank of Germany, theEmirate of Kuwait, and Kirk Kerkorian/Tracinda Corporation of Las Vegas,Nevada. In its 1996 and 1997 Annual Reports, Daimler-Benz AG disclosed thatDeutsche Bank AG and the Emirate of Kuwait had shareholdings representingapproximately 23% and 13% of the ordinary shares, respectively. The largestChrysler stockholder, Tracinda Corporation, owned approximately 11% of theoutstanding shares of Chrysler common stock. Prior to the merger, Mr.Kerkorian (Tracinda Corp.) agreed to vote all of these shares in favor of theapproval and adoption of the merger. In December 1998, Deutsche Bank AGannounced it would spin off more than $24 billion in industrial holdingsincluding DaimlerChrysler by forming separate limited partnerships to manageeach block of shares, all controlled by a new unit called DB Investor (Miller(1998b) in Business Week).

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10. DIFFERENCES IN CORPORATE CULTUREAlthough the managements of Chrysler and of Daimler-Benz expect the transactions willproduce substantial synergies, the integration of two large companies, incorporated indifferent countries, with geographically dispersed operations, and with different businesscultures and compensation structures, presents significant management challenges. Therecan be no assurance that this integration, and the synergies expected to result from thatintegration, will be achieved as rapidly or to the extent currently anticipated.

DaimlerChrysler (1998a) merger prospectus (p. 24).

Unless Daimler imposes its culture on the new company and takes complete charge, don’tbe surprised if the deal fails.

Jeffrey E. GartenDean of the Yale School of Management, (Garten, 1998, p. 20)

The success of this cross-border merger depends on the management’s abilityto create a single corporate culture and strategy. Robert Eaton and JürgenSchrempp emphasized the evolutionary process of combining the twocompanies that exhibit a plethora of differences. Although the combination ofDaimler-Benz and Chrysler was designed as a merger of equals, Daimler-Benzhas been the more-equal partner and is imposing its own corporate imprint onthe merged company. For the moment, DaimlerChrysler keeps dual operationalheadquarters in Stuttgart, Germany and Auburn Hills, Michigan. However,Jürgen Schrempp is expected to take over the whole company after his co-CEO,Robert Eaton, retires after 3 years.22 The centralization of control and decisionmaking is necessary to mesh the now-competing marketing, engineering, andmanufacturing departments. Daimler’s Schrempp understands that the central-ization of headquarters is inevitable if the management does not want to repeatmistakes of other cross-border acquisitions. Renault’s failure with AmericanMotors and Sony Corp’s lack of control over CBS Records and ColumbiaPictures are good examples. The links between the companies of differentcountries may collapse on serious corporate culture, control, and strategydifferences.

Labor unions and financial institutions play a major role in Germancorporate governance. According to German Co-determination Law (Mitbes-timmungsgesetz), the Supervisory Board23 (Aufsichtsrat/Board of Directors)consists of ten shareholder and ten employee representatives. GermanMetalworkers’ Union (IG Metall) invited a representative of the United AutoWorkers (UAW) to take one of the three IG Metall’s positions and representChrysler’s labor union on this board. This system is at odds with the U.S.governance system with a predominantly independent Board of Directors.When downsizing occurs because of the overcapacity in the global autoindustry, management will be faced with politically sensitive issues about how

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to apportion layoffs between America and Europe. However, these concernswere not a topic of the pre- or post-negotiation talks, as the companyannounced that it added 13,000 employees in 1998, bringing its globalworkforce to 434,000.

11. COMPENSATION POLICIES

Another area with potential for culture clash is compensation philosophy andpolicy. When the merger was consummated, both the Chrysler and the Daimler-Benz’s compensation systems disappeared. A scheme of performance-based,stock-appreciation rights replaced the respective option plans. These rightscarry the benefits of an option, but no shares change hands. Holders instead geta cash payout equal to the difference between the strike price and the stockprice on the day of exercise. A global-standard pay system will include 80–250top executives, while the pay of the other 440,000 employees will be set byregion and will be competitive with similar companies operating in the sameenvironment.24 However, given the UAW presence on the board of directors,workers at Daimler’s Alabama plant may get a pay boost too. There is alsosome evidence that their U.S. labor costs are only about half of those inGermany.

Many U.S. firms lose top talent once acquired by a European firm. The socialand cultural environment makes European executives more egalitarian andunwilling to pay top dollar to keep star employees. European politicians andworkers are much less tolerant of high profits and pay than their Americancounterparts. Though many other multinational corporations pay their manag-ers according to their country affiliation, it is increasingly harder for them tokeep the same management-level executives on different pay structures. Theaverage total compensation of the U.S. chief executives ($1.1 million) faroutpaced the rest of the world in 1998. Although Europe is moving toward U.S.pay practices, the compensation ranged only from $400,000 in Germany to$650,000 in Britain, with the base pay being the largest part of the totalcompensation.25

The compensation differences are best illustrated by the recent pay packagesof the two co-CEOs. For 1997, the $11.5 million salary of Robert Eatondwarfed the $2 million take-home pay of Jürgen Schrempp. Since Eaton isunlikely to take a pay cut, managerial compensation most likely will convergeupwards and be linked to stock-price performance. Although the company isrequired to comply with both the SEC and German regulations, Daimler-Chrysler, as a German corporation, is under no obligation to disclose itsexecutive’s pay packages. The 1998 Annual Report (p. 29) says only that the

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aggregate amount of compensation to all members of the Supervisory Board(Aufsichtsrat) and the Board of Management (Vorstand), as a 37-person group,was 43 million Euro ($46 million). This amount includes compensationpayments by the former Chrysler Corp., with the exception of one-timepayments due to the business combination. In addition, the company set aside24 million Euro ($26 million) to provide pension, retirement and other benefitsto this group. For comparison, in 1996 and 1997 Daimler-Benz reportedDM28.9 million ($17 million) and DM30.6 million ($16 million) incompensation and retirement payments to its Management and SupervisoryBoards.

12. POST-MERGER EVENTS

We also look at several other post-merger events with a direct impact on thefuture operations and ownership structure of DaimlerChrysler. We analyzethree major post-merger events: (1) the decision of Standard & Poor’s not toinclude DaimlerChrysler in the S&P500 Index, (2) the departure of Chryslertop executives after the merger, and (3) merger talks with Nissan andMitsubishi Motor Corp.. The stock-price movements associated with thesethree events are reported in Panel B of Table 4.

On October 1, 1998, before the merger was completed, Standard&Poor’sannounced its decision not to include DaimlerChrysler in S&P500 index. TheS&P 500 dropped Chrysler on the last day its shares were traded. The S&PIndex Committee commented:

The S&P500 covers leading companies in leading industries and reflects the importance ofthe U.S. markets and economy. Investors see the index as the key benchmark for the U.S.markets. Moreover investors recognize that companies and markets in one country performdifferently from companies or markets in other countries. Our action today affirming thatthe S&P500 represents the U.S. market and companies is a reflection of how investorsmanage their investments.

David M. Blitzer (1998), Chairman of the S&P500 Index Committee

The market reaction to Chrysler shares upon this announcement was negative.Chrysler suffered an abnormal return of –14.6% on the announcement day(actual return of –16.3%).27 Chrysler’s daily volume was increasing sub-stantially in the weeks after the announcement, presumably in response to thefact that index funds would not need DCX shares.28 Even though Co-chairmanRobert J. Eaton tried to persuade S&P to reverse its decision, S&P spokesmanWill Jordan said that was unlikely. “It’s a German company, it pays taxes inGermany, it’s incorporated in Germany. Our long-standing policy is that non-U.S. companies will not be added to the S&P U.S. indexes. It’s fairly

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straightforward,” Jordan said.29 As we discussed earlier, a major consequenceof this decision was a reduction in the number of U.S. shareholders inDaimlerChrysler, making it more of a German company. In response,DaimlerChrysler has continued a campaign to be included in the S&P500Index. The latest lobbying effort occurred in comments by Chairman Schremppat a press conference on July 29, 1999, called to discuss the poor earnings,which we report in the next section.

Another post-merger event was the rumored merger with Nissan. Followingthe merger with Chrysler, Jürgen Schrempp and other DaimlerChryslerexecutives started to search for other suitable partners to expand their Asiaoperations. In January 1999, they started preliminary merger talks with Nissanof Japan. Around January 11, 1999, rumors spread about the intentions toacquire an equity stake in Nissan and the DCX shares fell by 6% (two-dayabnormal return, t-stat = –2.5). The talks continued until March 10, 1999, whenthe ‘no-merger’ decision was announced. At this time, there was an abnormalreturn of 5% to DCX shares, while Nissan’s shares fell by 10.9%. The marketapparently thought this merger would be bad for DaimlerChrysler.

Unsuccessful negotiations with Nissan didn’t convince DaimlerChrysler toabandon its intentions to expand operations in Asia. On March 7, 2000,Japanese business daily Nihon Keizai Shimbun30 reported that Japan’sMitsubishi Motors Corp. was at a final stage of negotiations with Daimler-Chrysler for a tie-up, which would include the German-U.S. acquiring a30-percent stake in Mitsubishi. DaimlerChrysler’s stock price fell by 3.4% onthat day, although the abnormal return is not statistically significant.31

Mitsubishi spokesman has initially dismissed talk of an alliance as ”reporters’speculation”.32 However, on March 27, 2000, DaimlerChrysler announced thatit agreed to buy a controlling 34% stake in Mitsubishi Motors Corp. for $2billion. Collaboration between Mitsubishi Motors and DaimlerChrysler wouldcreate the world’s third-largest carmaker, after General Motors and Ford Motorwith a combined annual sales of 6.5 million units.33

Finally, and perhaps most importantly, several top Chrysler executives andengineers have departed since the merger. The major defection was that of57-year old Dennis Pawley, who left DaimlerChrysler in December 1998. Mr.Pawley, vice president of manufacturing and leader of Chrysler’s turnaround,left for a consulting firm. In February 1999, a top corporate spokesman went toGM. In March 1999 the senior vice-president of international marketing andminivans, and the senior vice president for platform engineering went to Fordin similar positions. In July 1999, Craig Winn, a leading engineer and vice-president for Jeep platform engineering, left for GM.

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While, as Robert Eaton pointed out, departures of executives is normal aftera merger, the differences in culture and compensation from the twointernational partners may have exacerbated departures after this merger. TheAP (March 2, 1999) reported that U.S. executives have “complained privatelythat the Daimler half of the company has taken a firmer grip on the newcompany.” Perhaps another piece of evidence of the culture problems inintegrating the companies came from the actions of Schrempp after thedefections. At news conference in Stuttgart called to promote the increasedearnings of the new company, Schrempp became agitated by the questions fromthe U.S. media about the defections and said in an angry tone: “We don’t needtheir know-how, you can quote me.”

Panel B of Table 4 shows the DCX stock-price movements at the time ofthese resignations. In every case the abnormal return was negative, although notstatistically significant.

13. POST-MERGER PERFORMANCE

The post-merger performance of DaimlerChrysler has been extremelyunfavorable. Tables 5B and 5C depict the post-merger market capitalizationand the stock-price performance of DaimlerChrysler. Shares of Daimler-Chrysler underperformed by a wide margin all three indices examined: (1)Germany’s main index, the DAX30; (2) the S&P500 Index; and (3) theDSWorld, a composite world stock-market index compiled by Datastream Inc.Although the currency that should be used to measure returns to ‘global’ stockis still an open question, DCX stock has underperformed both the DAX30 euro-returns (61.9%) as well as the S&P500 dollar-returns (47.9%).34

Since the day after the merger announcement (May 7th, 1998) Daimler-Chrysler market capitalization has declined by 34.0% (until March 14, 2000),which contrasts to + 34.5% return to GM shareholders and –12.3% return toFord35 over the same period. These findings are consistent with Laughran andVijh (1997) predicting negative post-acquisition returns to long-term share-holders in the stock mergers. The lackluster performance may be traced toseveral events discussed earlier namely departures of executives and thedecision of Standard&Poor’s not to include DaimlerChrysler in its S&P500index. Mishaps in operations may have also contributed to the decline. On July29, 1999, DaimlerChrysler reported lackluster second-quarter earnings and itsstock price fell 8.8%. The New York Times (July 30, 1999, p. c1) reported theearnings had been hurt by weaker than expected results from the Chryslerdivision (heavy losses in Asia and Latin America), the weak Euro, and losseson the Smart car in Europe.

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Even more telling is a wealth-relative measure (see Loughran & Ritter1995). Chrysler shareholders, who liquidated their positions in Chrysler rightafter the merger announcement (May 7, 1998) and invested in the S&P500index, would have earned 50.5% more than long-term Chrysler shareholderswho held their subsequent DCX shares until March 14, 2000. Although it stillmay be too early to judge the ultimate value-creation in this merger, becausepotential future synergies might be realized, we provide evidence that much ofthe initial merger-announcement returns dissipated. Thus, it appears, as of thiswriting, that the merger has destroyed rather than created wealth.

14. SUMMARY AND CONCLUSIONS

Using the DaimlerChrysler merger as a case study, this paper has focused onvalue creation and destruction, and various challenges of an internationaltransaction. Although the initial market reaction to the merger was favorable forboth firms, the returns since then have been negative and well below marketindices. We analyze both the initial value creation and the subsequentdestruction of value. The former traces to product lines that meshed well,Daimler’s movement into the American market and Chrysler’s movement intothe European market, and complementary engineering and marketing skills. Incontrast, the latter reflects, among other things, Standard & Poor’s decision notto include DaimlerChrysler in the S&P500 index and the clash of corporatecultures and compensation schemes. On balance, we provide evidence that theinitial positive market returns have dissipated.

Although globalization is one of the buzzwords in international finance andeconomics, an interesting and important question is: Can a company truly beglobal? Differences in corporate culture, compensation policies, ownershipstructure, and the legal environment can be viewed as “barriers to entry” to aglobal environment. While all these factors affect mergers of domestic firms,the factors are magnified and pose important challenges to internationalbusiness combinations. Important post-merger events shaped the valuedestruction in DaimlerChrysler’s case. Standard & Poor’s decision not toinclude DaimlerChrysler in the S&P500 Index was the most likely reasonbehind an important repercussion: the desertion of DaimlerChrysler’s U.S.shareholders from 44%, right after the merger, to about 22% two years later,possibly leading to an increase in DaimlerChrysler’s cost of equity. In addition,the departures of executives from Chrysler (not Daimler), perhaps caused bythe clash of corporate cultures and compensation schemes, illustrate potentialroadblocks to aspiring multinational firms becoming truly global companies.

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Table 9. Board of Management (Vorstand)The current members of the Board of Management, their respective ages as of March 31, 1999, theirareas of responsibility, the year in which they were appointed and the years in which their terms expire,

respectively, are as follows:

YearYear term

Name Age Area of responsibility Appointed expires

Jürgen E. Schrempp 54 Chairman 1998 (19871) 2003Robert J. Eaton 59 Chairman 1998 (19922) 2001Dr. rer. pol. Manfred

Bischoff56 Aerospace & Industrial Non-

Automotive1998 (19951) 2003

Dr. rer. pol. EckhardCordes

48 Corporate Development & IT- 1998 (19961) 2003Management (including responsibilityfor MTU/Diesel Engines andAutomotive Electronics)

Theodor R. Cunningham 52 Sales and Marketing Latin America(all automotive brands) and ChryslerTruck Operations

1998 (19872) 2003

Thomas C. Gale 55 Product Strategy, Design andPassenger Car Operations Chrysler,Plymouth, Jeep, Dodge

1998 (19852) 2003

Dr. jur. Manfred Gentz 57 Finance and Controlling 1998 (19831) 2003James P. Holden 47 Brand Management Chrysler,

Plymouth, Jeep and Dodge & Salesand Marketing North America (allautomotive brands) & MinivanOperations

1998 (19932) 2003

Prof. Jürgen Hubbert 59 Passenger Cars Mercedes-Benz, 1998 (19971) 2003Dr. phil. Kurt J. Lauk 52 Commercial Vehicles & Brand

Management Commercial Vehicles1998 (19971) 2003

Dr. jur. Klaus Mangold 55 Services 1998 (19951) 2003Thomas W. Sidlik 49 Procurement & Supply for the

Chrysler, Plymouth,Jeep and Dodgebrands & Jeep Operations

1998 (19922) 2003

Thomas T. Stallkamp 52 Passenger Cars and Trucks Chrysler, 1998 (19902) 2003Plymouth, Jeep, DodgeHeiner Tropitzsch 56 Human Resources & Labor Relations

Director1998 (19971) 2003

Gary C. Valade 56 Global Procurement and Supply 1998 (19902) 2003Prof. Klaus-Dieter

Vöhringer57 Research and Technology 1998 (19971) 2003

Dr.-Ing. Dieter Zetsche 45 Brand Management Mercedes-Benz,smart & Sales and Marketing Europe,Asia, Africa, Australia/Pacific (allautomotive brands)

1998 (19971) 2003

1 Year first appointed to the Board of Management of Daimler-Benz AG.2 Year first appointed as an officer of Chrysler Corporation.Source: DaimlerChrysler (1998b).

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Table 10. The Supervisory Board (Aufsichtsrat/Board of Directors).The incumbent members of the Supervisory Board of DaimlerChrysler AG, their respective ages as ofMarch 31, 1999, their principal occupation and the year in which they were first elected or appointed to

the Supervisory Board are as follows:

YearFirst

Elected/Name Age Principal Occupation Appointed

Hilmar Kopper 64 Chairman of the Supervisory Boardof Deutsche Bank AG

1998 (19902)

ChairmanKarl Feuerstein1 58 Retired Chairman of the Corporate

Works Council, DaimlerChryslerGroup and the Central WorksCouncil, DaimlerChrysler AG

1998 (19902)

Deputy ChairmanRobert E. Allen 64 Retired Chairman of the Board and

Chief Executive Officer of AT&T1998 (19943)

Willi Böhm1 59 Senior Manager, Wage Office, WörthPlant, DaimlerChrysler AG

1998 (19932)

Sir John P. Browne 51 Chief Executive Officer of BP Amocop.l.c.

1998 (19982)

Manfred Göbels1 57 Chairman of the Senior Managers’Committee, DaimlerChrysler Group

1998 (19932)

Erich Klemm1 44 Chairman of the Central WorksCouncil, DaimlerChrysler AG

1998 (19882)

Rudolf Kuda1 58 Head of Department, ExecutiveCouncil, German Metalworkers’Union

1998 (19782)

Robert J. Lanigan 70 Chairman Emeritus of Owens-Illinois,Inc.

1998 (19843)

Helmut Lense1 47 Chairman of the Works Council,Untertürkheim Plant, DaimlerChryslerAG

1998 (19932)

Peter A. Magowan 56 Retired Chairman of the Board ofSafeway, Inc.; President andManaging General Partner of SanFrancisco Giants

1998 (19863)

Herbert Schiller1 44 Chairman of the Corporate WorksCouncil, DaimlerChrysler Services(debis) AG

1998 (19962)

Dr. rer. pol. Manfred Schneider 60 Chairman of the Board ofManagement of Bayer AG

1998 (19932)

Peter Schönfelder1 49 Member of the Works Council,Augsburg Plant, DaimlerChryslerAerospace AG

1998 (19902)

G. Richard Thoman 54 President and Chief Operating Officerof Xerox Corporation

1998 (19983)

Bernhard Walter 57 Chairman of the Board of ManagingDirectors of Dresdner Bank AG

1998 (19982)

325The DaimlerChrysler Merger: Short-Term Gains, Long-run Wealth Destruction?

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On balance, we conclude by echoing and expanding on the words of Myers(1976): “Mergers are tricky; the benefits and costs of proposed deals are notalways obvious”. To wit, we add: International mergers are even trickier; thebenefits and hidden costs of these combinations are even less obvious.

NOTES

1. The comparative evidence derives mainly from large sample studies. We are awareof three other separate studies of the DaimlerChrysler merger: (1) using the same publicdata we use, Bruner, Christmann, Spekman, Kannry and Davies (1999) have developeda Darden case as a negotiation exercise on the price of the acquisition and other detailsof the acquisition, (2) Baums (1999) describes the legal structure of the merger, and (3)Karolyi (1999) describes multi-market trading in this first ’global’ share and documentshow almost 95% of its order flow migrated back to Germany. K. L. Miller (1998a) inBusiness Week (November 16, 1998) provides a good overview of the merger.

2. Maquiera, Megginson and Nail (1998) find no evidence that conglomerate stock-for-stock mergers create financial synergies or benefit bondholders at stockholders’expense.

3. Daimler-Benz turned net losses of $3.5 billion in 1995 to net profits of $4.4 billionin 1997 under Schrempp. Business Week (January 11 and 25, 1999) profilesSchrempp.

4. Information in this section is from the DaimlerChrysler merger prospectus(1998a) and company Annual Reports. Bruner, Christmann, Spekman, Kannry andDavies (1999) present an extensive review of the companies’ operations.

Table 10. (Continued)

YearFirst

Elected/Name Age Principal Occupation Appointed

Lynton R. Wilson 58 Chairman of the Board of BCE Inc. 1998 (19943)Dr.-Ing. Mark Wössner 60 Chairman of the Supervisory Board

of Bertelsmann AG1998 (19982)

Bernhard Wurl1 54 Head of Department, ExecutiveCouncil, German Metalworkers’Union

1998 (19792)

Stephen P. Yokich1 63 President of International UnionUnited Automotive, Aerospace, andAgricultural Implement Workers ofAmerica (UAW)

1998

1 Representative of the employees.2 Year first elected to the Supervisory Board of Daimler-Benz AG.3 Year first elected to the Board of Directors of Chrysler Corporation.Source: DaimlerChrysler (1998b).

326 MATEJ BLASKO, JEFFRY M. NETTER AND JOSEPH F. SINKEY, JR

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5. In Canada NewsWire Ltd., May 7, 1998. Merger agreement signed . . .”6. DaimlerChrysler merger prospectus (1998a, p. 50).7. See Table 1 for an industry overview.8. Panel A of Table 5 shows the market capitalization of Daimler-Benz and Chrysler

around the merger announcement.9. We calculate the announced benefits correspond to the actual abnormal increase in

combined value: ($1.4 bill. + $3 bill in 5 years forever discounted at 10%) * (1–0.3current tax rate on distributed earnings in Germany) = $14 billion.

10. Using closing prices of Daimler-Benz’s ADRs and Chrysler shares on the NYSEon May 5, 1998.

11. DaimlerChrysler merger prospectus (1998a)12. General Motors Corporation, Ford Motor Company, Bayerische Motoren Werke

AG, Fiat SpA, PSA Peugeot Citroen, Renault SA, Volkswagen AG and Volvo AB.13. General Motors Corporation and Ford Motor Company.14. Securities and Exchange Commission (SEC) Annual Reports forms 10-K

(Chrysler) and 20-F (Daimler-Benz).15. For example, BancOne Corp. and First Chicago NBD Corp; Travelers Group Inc.

and Citicorp; TransCanada Pipelines Ltd. and Nova Corp.; Grand Metropolitan PLCand Guinness PLC; Bell Atlantic Corp. and NYNEX Corp; Sandoz Ltd. and Ciba GeigyGroup.

16. DaimlerChrysler merger prospectus (1998a, p. 47).17. The quote and other details of the transaction are from the DaimlerChrysler

merger prospectus (1998a, p. 51).18. The structure of transaction is described in DaimlerChrysler merger prospectus

(1998a, pp. 11–13).19. DaimlerChrysler merger prospectus (1998a) disclosed that directors and

executive officers of Chrysler and their affiliates beneficially owned an aggregate of1.26% of the Chrysler Common Stock outstanding (including shares under option) as ofJuly 20, 1998.

20. DaimlerChrysler annual report (1999) as filed with SEC, form 20-F.21. The proportion of U.S. holders has decreased further. As of Feb. 15, 2000, only

about 22% of DaimlerChrysler ordinary shares were held by U.S. holders. Ibid.22. See Table 9 for the composition of DaimlerChrysler Management Board.23. See Table 10 for the composition of DaimlerChrysler Supervisory Board.24. See Orr (1999) in Forbes magazine (May 17, 1999) for a discussion of

DaimlerChryslers’s and international patterns in compensation policies.25. Ibid.26. This Chrysler return is computed from Datastream’s SEAQ prices. The

Chrysler’s raw return computed from NYSE closing prices was –10.1%. The (S&P500)market-adjusted abnormal return to Chrysler shares was –7.04% (t-stat = –5.1).

27. The NYSE trading volume in Chrysler shares on October 1, 1998 was 3.3 millionshares – not significantly different from the average daily volume during the previousthree months (3.6 million shares, �(volume) = 1.7 million shares).

28. S&P dropped Chrysler from the its S&P500 index on the last day (November 12,1998) Chrysler shares traded on the NYSE. On that day, the NYSE trading volumereached 51.76 million shares (about 8% of all Chrysler shares), which is 14.4 times ofthe average daily volume during the three months before S&P’s announcement.

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29. See Akre (1999) in The Associated Press State & Local Wire, March 25, 1999.Lexis-Nexis.

30. As Reported on CNNfn news: “Daimler, Mitsubishi in talks?”, March 6, 2000,9.47 pmET. Original source: Reuters.

31. The S&P500 was down 2.56%, DAX was up 0.93%, and the DSWorld-market-index was down 1.2%. It is interesting to point out that DCX’s stock price waspositively correlated with S&P500 index (� = 0.74) since the beginning of year 2000,and negatively correlated with German DAX30 index (� = –0.80).

32. Mariko Ando report for CBS MarketWatch. Source: CNNfn.com33. The New York Times. NYTimes.com. March 27,2000.34. The difference between buy-and-hold returns to DaimlerChrysler and an index,

May 5th, 1998 (before the merger announcement) until March 14, 2000 (as of thisstudy). These returns would be even worse if measured on a post-announcement basis.

35. Ford Motor Co. has also been involved in a merger during this time period. In thespring 1999, Ford bough Sweden’s Volvo car division for $6.5 billion.

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