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Mergers & Acquitions (Tata-Corus, Daimler-Chrysler)

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Mergers & Acquitions …

Mergers & Acquitions
Successful Merger: Tata-Corus
Unsuccessful Merger- Daimler-Chrysler

Published in Economy & Finance , Business
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  • Acquisitions can be either friendly or hostile. Friendly acquisitions occur when the target firm expresses its agreement to be acquired, whereas hostile acquisitions don't have the same agreement from the target firm and the acquiring firm needs to actively purchase large stakes of the target company in order to have a majority stake.In either case, the acquiring company often offers a premium on the market price of the target company's shares in order to entice shareholders to sell.
  • To extend its Global reach through TATA.To get access to Indian Ore reserves, as well as virgin market for steel.To get access to low cost materials.Saturated market of Europe.Decline in market share and profit.

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  • 1. Mergers and Acquisitions -Nishtha Khandelwal-138 -Nikita Pataial-38 -Anubhav Agarwal-28 -Seerat Gupta-18
  • 2. Merger  The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.  Acquiring company is a single existing company that purchases the majority of equity shares of one or more companies.  Acquired companies are those companies that surrender the majority of their equity shares to an acquiring company.  Merger is a technique of business growth. It is not treated as a business combination.  Merger is done on a permanent basis. Generally, it is done between two companies. However, it can also be done among more than two companies.  During merger, an acquiring company and acquired companies come together to decide and execute a merger agreement between them.  After merger, acquiring company survives whereas acquired companies do not survive anymore, and they cease (stop) to exist.  Merger does not result in the formation of a new company. The management of acquiring company continues to lead (direct) the merger.
  • 3. Examples
  • 4. Acquisition A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company's stock or a combination of both.
  • 5. Difference between M&A
  • 6. Types of Mergers Economists distinguish between three types of mergers: 1. Horizontal 2. Vertical 3. Conglomerate
  • 7. Horizontal mergers A horizontal merger results in the consolidation of firms that are direct rivals—that is, sell substitutable products within overlapping geographic markets. Examples: Boeing-McDonnell Douglas; Staples-Office Depot(unconsummated); Chase Manhattan-Chemical Bank; Southern Pacific RR-Sante Fe RR; Pabst- Blatz; LTV-Republic Steel; Konishiroku Photo-Minolta. Vertical Mergers Examples: Time Warner-TBS; Disney-ABC Capitol Cities; Cleveland Cliffs Iron-Detroit Steel; Brown Shoe-Kinney, Ford-Bendix. The merger of firms that have actual or potential buyer-seller relationships
  • 8. Conglomerate mergers Consolidated firms may sell related products, share marketing and distribution channels and perhaps production processes; or they may be wholly unrelated. •Product extension conglomerate mergers involve firms that sell non-competing products use related marketing channels of production processes. Examples: Cardinal Healthcare-Allegiance; AOL-Time Warner; Phillip Morris- Kraft; Citicorp-Travelers Insurance; Pepsico-Pizza Hut; Proctor & Gamble- Clorox.
  • 9. •Market extension conglomerate mergers join together firms that sell competing products in separate geographic markets. Examples: Scripps Howard Publishing—Knoxville News Sentinel; Time Warner- TCI; Morrison Supermarkets-Safeway; SBC Communications-Pacific Telesis •A pure conglomerate merger unites firms that have no obvious relationship of any kind. Examples: Bank Corp of America-Hughes Electronics ;R.J. Reynolds-Burmah Oil & Gas; AT&T-Hartford Insurance
  • 10. TYPES OF ACQUISITIONS  Depending upon  Acquiree is or isn‘t listed in public markets.  How the communication is done and received by the target.
  • 11. THE FIRST CLASSIFICATION ACQUISITION PUBLIC (IF ACQUIREE LISTED IN PUBLIC MARKETS) PRIVATE (IF ACQUIREE NOT LISTED IN PUBLIC MARKETS
  • 12. THE SECOND CLASSIFICATION ACQUISITION FRIENDLY HOSTILE
  • 13. FRIENDLY ACQUISITIONS  Companies cooperate in negotiations.  Synonymous to merger of equals. HOSTILE ACQUISITIONS  Takeover target unwilling to be purchased.  It can also be if the acquiree company has no prior knowledge of offer.  Hostile takeovers do turn friendly in the end. Most of the times.  For the above thing to happen, offer is usually improved.
  • 14. Advantages of M&A • From the standpoint of shareholders (a)Realization of monopoly profits; (b)Economies of scales; (c)Diversification of product line; (d)Acquisition of human assets and other resources not available otherwise; (e)Better investment opportunity in combinations • From the standpoint of managers If Merger of two companies guarantee better deals for the managers in terms of perks, fringe benefits as well as raising their status in the company will not only satisfy the managers but resulting company also gets support from these managers.
  • 15. • Promoter‟s gains Mergers do offer to company promoters the advantage of increasing the size of their company, the financial structure and strength. They can convert a closely held and private limited company into a public company without contributing much wealth and without losing control. • Benefits to Consumers- Lower prices and better quality of the product which directly raise their standard of living and quality of life.
  • 16. SYNERGIES RELATED TO M&A • Economies of Scale- Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers. • Staff reductions- The money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package. • Acquiring new technology- To stay competitive, companies need to stay on top of technological developments and their business applications. • Improved market reach and industry visibility- Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities.
  • 17. Costs associated with Mergers and Acquisitions  Cultural mismatches : Every company is shaped by the vision and background of its promoters or management. This is called 'company culture' - the way they project themselves in the market place, how they treat customers, employees, suppliers and shareholders  Redundancy : there may be employees who duplicate each other‘s functions. This can cause excessive payroll expenditures where you pay for two employees to do the work of one. That can reduce motivation among employees.  Increased Debt : Money borrowed to acquire a company along with debt servicing. Many a times a company becomes target of acquisitions because they are struggling financially. Ultimately the financial burden is passed on to another company.  Market saturation : If you acquire a company that is in the same line of business as your original company, your hopes for market expansion may hit a barrier: the two companies together already dominate the market.
  • 18.  Immediate negative effect on the share prices : Reverse takeovers, when a smaller company acquires a larger one, are even worse when the prices paid are high and timings are wrong. Lower share prices and equity valuations may also arise from the merger itself being a short-term disadvantage to the company.  Opportunity Cost : M&A activity can also be exacerbated by the short-term cost of opportunity or opportunity cost. This is the cost incurred when the same amount of investment could be placed elsewhere for a higher financial return  Consumer and shareholder drawbacks In some cases, mergers and acquisitions may not only disadvantage the shareholders but consumers as well. In both cases, this may happen when the newly formed company becomes a large oligopoly or monopoly.  Increase in cost to consumers  Decreased corporate performance and/or services  Potentially lowered industry innovation  Suppression of competing businesses  Decline in equity pricing and investment value
  • 19. The global Steel industry ―I really believe that the owners of iron ore are going to rule the industry. They will be OPEC of the steel industry.‖ (Ratan Tata‘s interview to McKinsey Quarterly quoted by Wheatley in Financial Times, January 29, 2007). In recent years, the steel industry witnessed a high degree of global consolidation due to a few key factors. • A desire amongst the key players to gain efficiencies resulting from scale, • Obtaining access to new and growing markets, • Enhancing purchasing power with respect to suppliers and buyers. The climate at the time of Tata‟s acquisition of Corus was characterized by an “eat-or-be-eaten” mentality in which steel companies increasingly had to decide whether to be an acquirer or an acquisition target. These mergers and acquisitions were expected to eventually result in a handful of worldwide global giants in the steel industry. Merger and acquisition activity in the world steel industry was likely to result in a higher degree of pricing stability and better margins for the steel producing companies.
  • 20. Until the 1990s, not many Indian companies had contemplated spreading their wings abroad. An Indian corporate or group company acquiring a business in Europe or the U.K. seemed possible only in the realm of fantasy.
  • 21. Background of TATA Steel  A part of TATA Group of Company’s.  Formerly known as TISCO and TATA IRON AND STEEL COMPANY LIMITED.  Located in Jamshedpur, Jharkhand, India.  World’s 7th largest steel company.  India’s 2nd largest and 2nd most profitable private sector company.  Data as per March 31, 2008 Capacity = 31 million tones Revenues = 132,110 crore Net profit = 12,350 crore
  • 22. Corus background  One of the largest steel companies in Europe.  Came into being in 1999 with the merger of British Steel plc and Dutch steelmaker.  Also has a presence in The Netherlands, Germany, France, Belgium, the United States, and Canada.  The company manufactures, processes, and distributes metals products to the construction, automotive, mechanical engineering, packaging, and other markets.
  • 23. THE DEAL
  • 24. What was the deal? TATA-CORUS  Tata acquired Corus, which is four times larger than its size and the largest steel producer in the U.K. The deal, which creates the world's fifth-largest steelmaker, is India's largest ever foreign takeover and follows Mittal Steel's $31 billion acquisition of rival Arcelor in the same year.  Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion. The price per share was 608 pence(rs 484), which is 33.6% higher than the first offer which was 455 pence. What was the deal?
  • 25. Payment Proposal – A Series of Events  Mid-2006- Ratan Tata made an offer of 455p per share to buy Corus  10/17/06 - Tata Steel makes a cash offer of 5.1billion pounds ($10 billion) bid for Corus worth 455p a share in cash.  10/20/06 - Corus’s Board of Directors recommend acceptance of Tata Steel’s offer.  11/17/06 - Companhia Siderurgica Nacional (CSN) of Brazil makes a bid of GBP 5.3 billion for Corus, worth 475p a share in cash.  12/10/06 - Tata Steel raises its offer by 10 per cent and makes an offer of GBP 5.5 billion including debt, worth 500p a share in cash.  12/11/06 CSN - raises its formal offer for Corus from 500p to 515p a share in cash  1/21/07 - Corus accepts a 515 pence per share offer fromCSN  1/27/07 - Tata Steel and CSN agreed to terms for an auction that will begin January 30 at 4:30 p.m. There will be up to nine rounds of bidding.  1/31/07 - The “battle for Corus” starts.  2/1/07- After three months of bids and counter-bids, Tata Steel wins. Tata Steel acquires 21.1 percent of the equity share capital for 608 pence per share
  • 26. Payment method It was a CASH DEAL because-  Immediate takeover was required.  Share Swap deal would have been less attractive to the Corus shareholders.  Share Swap would have meant FDI and that brings a lot of regulatory hassles which might not have been accepted by Corus shareholders.  Share Swap would have diluted Tata Steel’s Equity base which was not in favor of Tata shareholders.  And moreover cost of equity at around 15% is higher than that of debt of around 8%, so paying in cash brings down the cost of acquisition. Equity + Loan = Deal $3.95 + ($3.654 + $2.233 + $2.233) = $12.07
  • 27. Rationale of deal To tap mature European market. Helped TATA to feature in Top 10 players in world. Technological benefits. Corus holds number of patents and R&D facilities. Cost of acquisition is lower than setting up of Green field plant & marketing and distribution channel. TATA manufactures Low Value, long and flat steel products ,while Corus produce High Value Stripped products. To extend its Global reach through TATA. To get access to Indian Ore reserves, as well as virgin market for steel. To get access to low cost materials. Saturated market of Europe. Decline in market share and profit
  • 28. Synergies expected from the deal  Tata was one of the lowest cost steel producers & Corus was fighting to keep its productions costs under control.  Tata had a strong retail and distribution network in India and SE Asia. Hence there would be a powerful combination of high quality developed and low cost high growth markets  Technology transfer and cross-fertilization of R&D capabilities.  There was a strong culture fit between the two organizations both of which highly emphasized on continuous improvement and Ethics.  Economies of Scale.  Increase in profitability.  Backward integration for Corus and Forward integration for Tata Steel.
  • 29. BENEFITS TO TATA STEEL Strength Lowest cost producer in world. Experience of TATA group in doing global activity. Stable balance sheet (Low Debt to Equity Ratio). Weakness Corus was triple the size of TATA steel in terms of production. Opportunity Consolidation trend in Steel Industry CSN’s lost image after failure of 2002 negotiations To get exposed to global steel market Threat Brazil company CSN Russian company Severstal No committed financers to support the possible deal
  • 30. Between the two companies there exists a high degree of cultural compatibility which would facilitate an effective integration of the businesses over time. Enhanced scale will position the combined group as the fifth largest steel company in the world by production, with a meaningful presence in both Europe and Asia. Powerful combination of low cost upstream production in India with the high-end downstream processing facilities of Corus will improve the competitiveness of the European operations
  • 31. Facilitates cross-fertilization of research and development capabilities in the automotive, packaging and construction sectors and there will be a transfer, from Europe to India, of technology, best practices and expertise of senior Corus management. Increased demand for steel specially in developing countries for growing sectors like Infrastructure, construction, automobiles and consumer durables. The Investment demand was strong and rising with subsequent rises in the in steel prices. (In August 2009, the index for basic metals has recorded growth rate of 8.5% and the production has grown 7.6% compared to last year’s 6.6)
  • 32. Why did CORUS sell?  Rationale behind Corus to sell to Tata :  Corus, the Anglo-Dutch steelmaker, was formed in 1999 by the merger of British Steel with Hoogovens of the Netherlands. With 47,300 employees working in plants across Britain, the Netherlands, Germany, France, Norway, and Belgium,  Corus had the highest cost of production among the world’s steel makers. After the merger, a rift developed between the two camps.  Matters became worse when the British half of the business sustained serious losses while the Dutch side was quite profitable.  The Dutch contended that the UK side of the business was causing the entire organization to be unprofitable.  Corus’s management realized that the status quo was unsustainable given the increased competition from steelmakers in developing economies who had access to cheaper labor and raw materials.  Additionally, higher raw material and energy costs were impacting profitability. So they decided to look for a suitable partner outside Western Europe to acquire Corus, and began negotiations with key players in the steel industry from India, Russia, and Brazil.
  • 33. Impact on Tata  TATA Steel Group rose to 5th position from 56th  The production capacity increased from 4million tones to 28million tones by 2011  Standard & Poor‘s Rating cut it credit Rating to BB from BBB and removed them from the negative watch list  Big boost to the Indian economy as TATA acquired a company 3 times its size.  The R&D Unit of Corus complements that of TATA‘s  Tata took help from financing institutions as $8 billion was raised through debt  Corus‟ EBITDA was at 8% which was much lower as compared to Tata Steel‟s 30%.  Tata‘s debt equity ratio was adversely affected to 2.74:1 from 1.1 which it was maintaining earlier.
  • 34. Pre- Acquisition Scenario
  • 35. Post Acquisition View  TATA steel acquisition of CORUS was a bold and smart move. Complementarities in scale, market geography, financials, technology and raw materials offered a strong rationale for the deal.  The acquisition of CORUS has been timely. Given the rising momentum of consolidation in the industry and rising valuations of steel companies, had TATA steel not acted when it did, the opportunity could have been lost forever.
  • 36. On Share Prices Tata steel stock price post merger in Indian stock markets
  • 37. Tata Steel‘s performance after acquisition 0.71 1.99 1.65 2.45 1.87 1.78 0 0.5 1 1.5 2 2.5 3 FY 06-07 FY 07-08 FY 08-09 Debt to Equity Current ratio
  • 38. Tata Steel‘s Equity performance 73.6 162.6 58.9 6.95 3.91 3.12 0 1 2 3 4 5 6 7 8 0 20 40 60 80 100 120 140 160 180 FY 06-07 FY 06-08 FY 06-09 PAT FY 06-07 Rs. 4,177 Cr PAT FY 07-08 Rs. 12,350 Cr PAT FY 08-09 Rs. 4,951 Cr EPS P/E
  • 39. Post Acquisition company situation 0 2 4 6 8 10 12 14 16 18 2007 2008 2009 2010 2011 2012 Return on Capital employed (%)
  • 40. Interest coverage ratio based on capital base 0 2 4 6 8 10 12 2007 2008 2009 2010 2011 2012 Interest Cover
  • 41. Scenario after merger..  Glory at a cost In 2007, when Tata Steel acquired Corus, an Anglo-Dutch company, for $12.1 billion (Rs 53,460 crore), India‘s first Fortune 500 multi-national company was born. The deal made Tata Steel the world‘s fifth-largest steel producer, with annual capacity of 25 million tonnes. The deal promised access to high-end European markets, supported with low-cost Indian manufacturing. The company was in fact on an acquisition spree for the earlier two years — it had acquired NatSteel in Singapore and a 67 per cent stake in Thailand‘s Millennium Steel, applying the same logic of shipping low-cost steel slabs to finishing plants abroad.  Corus was, however, also bought at a 34 per cent premium to Tata‘s original bid, as Brazil‘s CSN got into the race. It was a boom time for the steel industry as well, due to rising demand from China before the 2008 Olympics.  In comparison, Lakshmi Mittal‘s $34-bn (Rs 156,536 crore) acquisition of Arcelor in June 2006 was cheaper, at an Ebitda (earnings before interest, tax, depreciation and amortisation) multiple of 4.3 vis-à-vis one of nine for Tata Steel‘s acquisition of Corus. Nevertheless, it was considered a ―must deal‖ by many veterans, as the industry was going through consolidation, with leaders such as Lakshmi Mittal looking at this process as the way to bring scale and profitability.
  • 42.  Crash, then crisis Then, the 2008 subprime crisis happened. Automobile companies and construction companies, the main sectors affected in the financial crisis, were key customers of Corus. The company recorded a 23 per cent decline in Ebitda for 2008-09, followed by a $303 mn (Rs 1,361 crore) operating loss in 2009-10.  This was attributed to a significant decline in European demand and continuation of production at the loss-making Teesside Cast Products unit in the UK. A consortium of four customers pulled out of a 10-year purchase contract with Corus, leading to a loss of nearly 1,500 jobs. The contract had helped the company sell nearly 80 per cent of the plant‘s total output.  ―There is nothing new to the cyclical nature of steel business,‖ said Vikas Kaushal, partner at global management consultancy firm A T Kearney. ―A company‘s strategy for scale and footprint should not be undermined with every decline in the cycle.‖
  • 43.  Response Corus undertook two major cost saving initiatives in the second half of 2008-09. Total savings in 2009-10, with both the programmes, were Rs 6,800 crore. The company came back into the black in the second quarter of 2010-11, on the back of improved economic sentiment and demand for the alloy, as governments in the US and Europe increased spending. The company reported operating profit of Rs 886 crore for the quarter and renamed Corus as Tata Steel Europe. It also agreed to sell the beleaguered Teesside plant to Thailand‘s Sahaviriya Steel Industries, for Rs 2,242 crore.  The refinancing of about Rs 24,700 crore of term loans and revolving credit facilities was also completed. This pushed the repayment by three to four years, besides giving additional flexibility to borrow for working capital purposes and to incur capital expenditure. Following this, the company reported Rs 4,111 crore Ebitda for 2010-11 and Rs 1,775 crore for 2011-12.  The European debt crisis again proved a drag on Tata Steel‘s consolidated performance. On a standalone basis, it reported Rs 2,669 crore Ebitda for the quarter ending September, compared with Rs 2,779 crore in the year-earlier period.  Sales in India rose 13 per cent to Rs 9,034 crore, while sales volume grew five per cent to 1.73 mt.  "European steel demand and prices have weakened since the spring and this took its toll on our financial performance," said Köhler while announcing the quarterly result. "Our response has been to accelerate our efforts to reduce those costs that we can influence."  Obviously, analysts feel domestic operations will continue to play their role and give back- end support to the overall performance. ―We do not anticipate significant improvement in the company‘s financials in the near term,‖ said Umesh Patel, analyst with Mumbai-based domestic brokerage K R Choksey.
  • 44. A Marriage Made In Heaven An Incompatible Marriage The Perfect Union Deal of The Century A merger of ‗equals‘
  • 45. Overview of the Auto Industry Largest manufacturing industry Capital intensive High barriers to entry Highly consolidated industry
  • 46. Trends in the Auto Industry Consolidation Overcapacity Technology Consumer demands Lean and green production
  • 47. Background of Daimler AG  Daimler-Benz AG founded in 1926 by Gottlieb Daimler and Carl Benz.  Business Divisions: Mercedes-Benz Cars, Daimler Trucks, Daimler Financial Services, Daimler Buses, Mercedes-Benz Vans  Today is the 2nd of the Big Three European Automakers (Volkswagen, Daimler AG, Renault
  • 48. Background of Chrysler  Founded by Walter P. Chrysler on June 6, 1925.  Business Divisions: Chrysler, Dodge, ENVI, Jeep, Global Electric Motorcars (GEMCAR), Mopar, Chrysler Financial.  In 1928, Acquisition of the Dodge Brothers firm made Chrysler the third of Detroit’s “Big Three” (GM, Ford, Chrysler) automakers overnight.
  • 49. Daimler-Benz and Chrysler Corporation‘s strengths in 1998 Daimler-Benz  Mercedes is the most popular luxury brand  A strong dealer network  Ranked #17 globally Chrysler Corporation  Low-end/sub-compact cars and trucks  Big auto manufacturer in North America  Mini-vans, Jeep and Dodge trucks  Ranked #25 globally
  • 50. Chrysler performance pre-merger… -1.64 1.11 -3.81 5.06 2.68 4.83 4.15 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 1991 1992 1993 1994 1995 1996 1997 Basic EPS Basic EPS
  • 51. ` -15 -10 -5 0 5 10 15 20 25 30 35 1992 1993 1994 1995 1996 1997 Basic EPS Basic EPS Daimler performance pre-merger…
  • 52. Motivations for Mergers (Expected Synergies)  Daimler’s Dilemma - Entry into U.S domestic market  Chrysler Puzzle - European presence  Daimler & Chrysler - Match made in heaven  To leverage on each other’s strengths.  Improving shareholder’s return.  Reducing the overall effective global competition.  Purchasing, distribution, Research & Development. Daimler AG (2) Chrysler Corporation (2) Daimler Chrysler AG ( 5) Synergy Equation
  • 53. The Merger  In May, 1998, Daimler-Benz and Chrysler Corporation, two of the world's leading car manufacturers, agreed to combine their businesses in what they claimed to be a ―merger of equals.‖  On May 7th, 1998, Eaton, CEO Chrysler, announced that Chrysler would merge with Daimler-Benz, resulting in a $37 billion stock-swap deal.  The merger resulted in a large automobile company, ranked third in the world in terms of revenues, market capitalization and earnings, and fifth in the number of units sold.  The new company, with 442,000 employees and a market capitalization approaching $100 billion, would take advantage of synergy savings in retail sales, purchasing, distribution, product design, and research and development.
  • 54. 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
  • 55.  The companies expect to realize cost savings of $1.4 billion in the first year after the merger and $3 billion in savings over the next several years.  Executives said no layoffs or plant closings are planned.  The company will have headquarters in Germany and Michigan but it will be incorporated in Germany and have a traditional German structure with separate supervisory and management boards.  The combined company would have $92 billion in market value and an estimated $130 billion in annual revenue, still below Chrysler's two U.S. rivals, Ford Motor Co. and General Motors Corp., and just behind Japan's Toyota Motor Corp. and Germany's Volkswagen AG as the fifth-largest automaker in the world.
  • 56. Following the alliance… Daimler-Chrysler post merger performance
  • 57. 1999  "The first full year of DaimlerChrysler had been a great one.  Their sales revenues for 1999 are up about 12 %. They sold 3 .2 million Chrysler, Dodge, Plymouth, and Jeep products - more than any other year history.  They also sold more than a million Mercedes-Benz passenger cars, and 550,000 commercial vehicles - also a record."
  • 58. But as we all know that Not All Marriages are Made in Heaven.
  • 59. Share Prices before and after Merger
  • 60. Shareholder Value – ROE(Return on Equity) Still below pre- merger levels -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Daimler Chrysler
  • 61. Profitability - EBIT/Share -15.00 -10.00 -5.00 0.00 5.00 10.00 15.00 20.00 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Daimler Group Daimler division Chrysler / division
  • 62. Efficiency- Fixed Asset Turnover 1.1x 2.1x 3.1x 4.1x 5.1x 6.1x 7.1x 8.1x 9.1x 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Daimler Chrysler
  • 63. Reasons for Failure
  • 64. Troubled Times  When Chrysler performed badly in 2000, its American president, James P Holden, was replaced with Dieter Zetsche from Germany.  A few senior Chrysler executives had already left and more German executives were joining Chrysler at senior positions.  In an interview to the Financial Times in early 1999, Schrempp admitted that the ―DCX deal was never really intended to be a merger of equals‖ and claimed that ―Daimler-Benz had acquired Chrysler.‖  By the end of 2000, there were only 128,000 Chrysler employees still working in the US operations.  Chrysler reported a third quarter loss of $512 million for the period ending September 30, 2000; and its share value slipped below $40 from a high of $108 in January 1999.  The expected and wished for synergy effects stayed out. Instead of gaining competitive advantage over their competitors, the merger rushed the two car producers ever deeper into the crisis and did not provide the companies with the necessary tools to overcome the recession.
  • 65. 1. Cultural Clash  At first, the German management granted Chrysler the freedom to do what they had always done.  Daimler-Benz wanted to simply take advantage of Chrysler‘s efficiency.  But a number of Chrysler‘s key players had left the corporation and remaining employees were demoralized and demotivated.  Within 19 months two American CEOs were dismissed and German management took over.  Daimler-Benz tried to administer the Chrysler division as if it was a German company.  From Chrysler‘s point of view, instead making use of new synergy effects, and instead of gaining competitive advantages over the competitors, the merger with Daimler-Benz drove Chrysler into chaos.
  • 66. Opposing Cultures Chrysler Daimler-Benz Encouraged creativity Methodical decision-making Egalitarian relations among staff Respect for authority, bureaucratic precision, and centralized decision-making American CEOs were rewarded handsomely Disliked huge pay disparities Performed little paperwork and liked to keep their meetings short Used to lengthy reports and extended discussions Favoured fast-paced trial-and-error experimentation Detailed plans and precise implementation Flat structure Top-down management approach
  • 67. 3. Mismanagement  Failure to inform all stakeholders accurately about the terms of the mergers.  Oct 2000, Schrempp, Daimler CEO, confessed that it was never meant to be merger of equal – Chrysler was to be a subsidiary of Daimler-Benz.  This caused ―Deep Mutual Distrust‖.  No clear message and communication about answer to current problems and who is going to run the entity. The German? Will facilities of Chrysler have to close down?  DaimlerChrysler‘s communication strategy was not effective enough to meet this challenge.  Less than 2 years, it had lost the confidence of the media and credibility it had with US management staff and shareholders.  Soon DaimlerChrysler was referred to as acquisition rather than merger. 2.Communication Failure
  • 68. The Divorce  In May 2007, a private equity firm Cerberus Capital Management LP bought percent of Chrysler, for billion.  Far from the $37 billion Daimler spent to acquire Chrysler back in 1998.  Not all money goes to DaimlerChrysler, the money actually goes to paying off Chrysler's outstanding loans, ensuring the new Chrysler Holding company begins life debt-free.  Today Daimler AG is the 2nd of the Big Three European Automakers (Volkswagen, Daimler AG, Renault)
  • 69. Just A Plain Daimler -- Back to Daimler AG
  • 70. Top Companies (in terms of production, 1998) Rank Group Total 1 GM 7582 2 Ford 6556 3 Toyota-Daihatsu 5210 4 Volkswagen 4809 5 DailmerChrysler 4512 6 Fiat 2696 7 Nissan 2620 8 Honda 2328 9 Renault 2283 10 PSA 2247 11 Mitsubishi 1591 12 Suzuki-Maruti 1298 In thousands
  • 71. Top Companies (in terms of production, 2012) Rank Group Total 1 Toyota 10,104,424 2 GM 9,285,425 3 Volkswagen 9,254,742 4 Hyundai 7,126,413 5 Ford 5,595,483 6 Nissan 4,889,379 7 Honda 4,110,857 8 PSA 2,911,764 9 Suzuki 2,893,602 10 Renault 2,676,226 11 Chrysler 2,371,427 12 Daimler AG 2,195,152
  • 72. Daimler AG after Demerger (8.0%) (3.0%) 2.0% 7.0% 12.0% Return on Assets % Return on Equity % Net Profit Margin % EBIT Margin 2008 2009 2010 (3.0) (2.0) (1.0) 0 1.0 2.0 3.0 4.0 5.0 2008 2009 2010 EPS Dividends 77
  • 73. Conclusion  When it comes to cross-border or cross-cultural M&As, the inherent cultural differences must not be disregarded. One corporate culture cannot simply suppress and replace the other one. A consensus has to be reached and the foundation for a new culture, based on elements of both cultures involved, has to be laid.  In the case of DaimlerChrysler, both parties were never truly willing to cooperate wholeheartedly and to accept changes and to enter compromises which was a necessity to make this merger of the two companies a success.