Do Mergers Create Value in the Automobile Industry - A Study of Daimler Chrysler
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Do Mergers Create Value in the Automobile Industry - A Study of Daimler Chrysler

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Daimler & Chrysler Merger, Merger and Acquisitions, Financial Analysis, Accounting based measures, Literature review

Daimler & Chrysler Merger, Merger and Acquisitions, Financial Analysis, Accounting based measures, Literature review

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Do Mergers Create Value in the Automobile Industry - A Study of Daimler Chrysler Document Transcript

  • 1. Applied Research Project Page 1 Contents Abstract............................................................................................................................................................................................................2 Aim of the Research...................................................................................................................................................................................2 Specific Research Objectives.................................................................................................................................................................2 Introduction...................................................................................................................................................................................................3 Literature Review.......................................................................................................................................................................................3 Methodology..................................................................................................................................................................................................7 Overview of the automobile industry..............................................................................................................................................7 The Daimler – Chrysler merger................................................................................................................................................................9 Company Selection.....................................................................................................................................................................................9 Overview of the companies .....................................................................................................................................................................10 Daimler..........................................................................................................................................................................................................10 Chrysler.........................................................................................................................................................................................................11 The Merger.......................................................................................................................................................................................................13 Structuring of the Transaction..........................................................................................................................................................13 Daimler Chrysler 3 Phase Approach..............................................................................................................................................13 Rationale for Daimler Chrysler Merger.............................................................................................................................................14 Daimler’s Dilemma..................................................................................................................................................................................14 Chryslers Puzzle.......................................................................................................................................................................................14 Daimler & Chrysler .................................................................................................................................................................................15 Merger performance evaluation...........................................................................................................................................................16 Return on Equity......................................................................................................................................................................................16 EBIT/Revenue...........................................................................................................................................................................................16 EPS...................................................................................................................................................................................................................17 Dividends per Share...............................................................................................................................................................................17 R&D/Sales & R&D/ EBIT .....................................................................................................................................................................17 Return on Assets ......................................................................................................................................................................................18 Cultural Clash.............................................................................................................................................................................................18 Daimler Post Merger..............................................................................................................................................................................19 Limitations of our research .....................................................................................................................................................................19 Conclusion........................................................................................................................................................................................................19 Appendix ...........................................................................................................................................................................................................20 References ........................................................................................................................................................................................................27
  • 2. Applied Research Project Page 2 Do Mergers create value in the Automobile Industry – A study of Daimler Chrysler Abstract A merger has many aspects to it, qualitative as well as quantitative in nature that lead to its success or failure. Through our analysis of the Daimler-Chrysler case, the largest value merger in the automobile sector, we can conclude that though the quantitative factors such as prior performance of the individual companies, market share and expected value add were considered, many qualitative factors such as cultural clashes, difference in the strategies are also important and need to be considered. This research has been divided into three phases, the first phase explains the performance of both the companies individually prior to the merger, second phase focuses on the performance of combined companies and last phase details the performance after the demerger of DaimlerChrysler. The performance of the merged company failed due to lack of strategy such as the research and development (R&D) funds were drained out of Chrysler, which to begin with, was a technology driven automobile company. This had a spiral effect on the cars being offloaded in the market by the company, thus affecting the sales and eventually the profitability of the merger. There were differences in the ways of operations of the two companies as both came from completely different cultures. During the merger phase, one company tried to dominate the other, though it was agreed to be a 'Merger of Equals.' This led to conflict of interests within the company and eventually infiltrated down to the employees, thus affecting the overall productivity of the company. The merged company faced a major problem to utilize their available resources and assets in an efficient manner, which individually they were able to master, as was evident with the analysis of the Asset Utilization Ratios. This paper gives a glimpse of merger failure in the automotive industry and also considers a valuable question: Can mergers create value? Using the above factors, the study suggests that big merging companies have low value and do not serve the purpose of entering into a merger transaction. The sad conclusion is that the market capitalization of big companies is at risk and the returns are minimal. Aim of the Research The aim of the project is to find out whether mergers and acquisitions in the automobile create value for the organization, using a case study. Specific Research Objectives Our objective for this project is to evaluate the performance of companies prior to a merger and post- merger in the auto-industry from 1997-2012 and to assess whether the merger created value for the companies or not.
  • 3. Applied Research Project Page 3 Introduction Globalization has triggered rampant increase in cross-border mergers and acquisitions (M&A's). This is often believed to be the winning mantra for companies opting for these activities. Over the recent years, there have been numerous studies on M&As due to the considerable increase in M&A volume. According to Bloomberg, the volume of M&A transactions in 2012 was recorded at US$ 2.23 trillion , which was a decline from US$2.42 trillion in 2011. With the economic slowdown, there was an increase in M&A activity only in select industries such as Oil Exploration & Production, Real Estate Operations & Development and Cellular Telecom. Research from as early as 1960, have various ratioanles about why a company may engage in such M&A transactions- some positive and some negative. The many reasons why an organization may engage in M&As can be to increase market share, market power, improving efficiency, to take advantage of lenient regulations or diversifications. Apart from the external factors that motivate companies to engage in M&A’s there are many internal factors such as synergy, Hubris and agency. (Berkovitch& Narayanan, 1993) A major portion of the literature on this topic focus on the very important question – Do Mergers create value ? There is a lack of consensus on this matter. The differences in opinions stem down to the motives of the mergers, how value is defined and how post merger performance is measured. Prior research into this has shown that only 17% of M&As create shareholder worth (Lau, R. K., Liao, S. Y., Wong, K. F., & Chiu, D. W, 2012). There are various reasons that are attributed towards the success or failure of an M&A. Our research studies this into further detail to look at the reasons for the success or failure of an M&A and how companies look at an M&A as ways to create more value or worth for them and their investors/ shareholders. Literature Review A firm is a unit that is driven by the main motive of profit maximization or maximizing the present value. In the given context, an M&A would be creating value if the corporate transaction increased the present value of the owners’ interest in the firm. (Hogarty, T. F. 1970) Schoenberg (2006), in his research tried to collate and assess the various M&A performance measures and determine the applicability and the reliability of such measures. He identified four main performance measurement measures - cumulative abnormal returns, managers’ assessments, divestment data and expert informants’ assessments. Cumulative abnormal returns is a method adopted whereby the impact of an event such as a merger or acquisition announcement on the acquiring firm’s share price is analyzed. Such an impact is estimated by first identifying the ‘normal’ returns accruing in the absence of the M&A announcement and comparing it to the actual return achieved post the announcement (Fama et al., 1969). This measure only considers share price as an indicator of performance. Managers’ assessment is a measure that incorporates more than one measurement criterion. Schoenberg (2006), The executives of the acquiring firm are made to analyze the performance of the firm and thereby match the actual performance with the objectives defined at the pre- merger stage using specific measurement criterion. For the purpose of such analysis, data is usually gathered 3–5 years after the M&A transaction.
  • 4. Applied Research Project Page 4 Expert informants’ subjective assessment is similar to measurement using Managers’ assessment, but is distinct since it uses the knowledge and viewpoint of experts on the M&A. The data used in this method typically uses direct data from the analysis of the stock in the market as well as the indirect method using the research from rating agencies, reports and publications. (Datta and Grant, 1990). Divestment is a measure that recognizes whether the acquiring firm has subsequently divested the acquired firm. The underlying principle is that the acquired firm would be divested only when the transaction is deemed a failure and does not provide any value add to the acquiring firm. (Ravenscraft and Scherer, 1987). The research done by Schoenberg was used as a base by many researchers to form performance measures that are more applicable to the current market scenario. Research done by Papadakis, V. M., & Thanos, I. C. (2010), modified the measures identified in Schoenberg’s research and prescribed three main performance measurement measures – Accounting based measures, stock market based measures and managers subjective assessments. Accounting based measures use factors such as ROI, cash flows, Per share ratios such as EPS, Cash flow per share and so on, margins – all using EBIT/EBITDA/Net profit depending on the type of industry bottom line KPI, DPS, ROA, utilization ratios and so on and are based on the underlying principle that the M&A can be said to be a failure when the post merger returns (adjusted for the industry and the size of the firm and transactions) are lower than the pre merger returns of the firms. (Sudarsanam, 2003). Stock market based measures, as identified by Papadakis, V. M., & Thanos, I. C. (2010) studied the stock market performance of the firm separately in the short term and the long term. In short-term studies, researchers compare the stock returns of both the target firm and the bidders for a short period of time during the announcement of the transaction and compare it to the “normal” returns, Value is said to be created in the short term if these cumulative abnormal returns are positive. In the long term, researchers evaluate the post merger performance of the acquiring firm usually 5 years after the deal was closed and evaluate the impact of the deal on the long-term shareholder wealth. While evaluating the long-term impact, researchers usually conduct the research with an assumption that the deal leads to a negative impact on shareholder wealth. (Tuch and O’Sullivan, 2007). Managers’ subjective assessments is an extension of what was prescribed in previous literature where the executives of the acquiring firm are required to evaluate and rate the post merger performance to pre merger objectives. But the only variant is apart from questions related to the financial growth such as ROI, ROA, profitability, sales etc the executives are also asked to evaluate non-financial factors such as managerial competence, personnel, competitive position etc. Value is said to be created when the actual results are lower than the pre merger expectations. (Papadakis, V. M., & Thanos, I. C. 2010). Research collated by MIT Sloan also recognized three broad methods of value creation – short term value characterized by short run stock performance with the underlying principle that the markets are efficient and the stock prices will factor the new information of an acquisition and incorporate the related value – I.e. he abnormal returns. The second method is the long run stock performance, usually three to five years from the announcement. The third method measures value by way of analyzing the accounting measures of profitability over a period of three to five years from the announcement of the acquisition and comment on the value proposition that the M&A activity brings to the table. (MIT Sloan Management Review, 2003)
  • 5. Applied Research Project Page 5 Even though firms resort to M&As as a means to increase “value” of the acquiring firm, approximately 60%–80% of all mergers are not successful in creating “value “ (Swaminathan, V., Murshed, F., & Hulland, J. (2008). More than half of the big M&A and other restructuring announcements made fail to create significant value and many have concluded that on an average such transactions accrue little or no value to the acquiring firm with a considerably high degree of risk. (The Mckinsey quarterly 2001) In the midst of the high level of merger activities in the 1960- 1970’s, literature from early researchers can be summarized by two main conclusions – even though M&As were perceived to be predominantly profitable, there was very little evidence that corporate mergers were successful. One study concluded that after merging, the firms were unprofitable and the other study suggested that the acquiring firms were neither more nor less profitable than the peer companies. Based on these early findings (Hogarty, T. F. 1970) investigated the post merger performances of the acquiring companies and concluded that the investment performance of the companies post-merger were lower than the investment performance of the other peer companies. The other findings were that mergers are an extremely risky affair and there are very few companies that boasted of a successful corporate transaction and these firms obtained very attractive returns. These supernormal profits earned by acquiring companies lured other companies to engage in M&A activities. The post acquisition performance was studied by (Yook, 2004) in his study using EVA- economic value added method, rather than studying the stock performance over the short and long term or conventional accounting measurements. His study of 75 large acquisitions between 1989 and 1993 suggested that the operating performance of the acquiring firms is seen to experience a slight upward trend. But the improved operating performance is offset by the high capital costs thereby creating no real economic value add to the acquiring firm. Many researchers tried to take a regional approach, wherein they looked at all the M&A activities in the county and tried to assess the value proposition brought about by M&A. Hoshino, Y. (1982) conducted a research on fifteen mergers in Japan in 1970 and analyzed the financial performance over the span of five years prior to the merger. The results of the study were that of the sample of the 15 mergers were that the sample exhibited a difference in financial performance wherein most of the performance indicators showed deterioration in financial health post the merger. He probed into the strange behavior of Japanese companies of resorting to M&A activities, where the results of his research showed that M&As had adverse effects on the financial health and performance of the acquiring company and does not create any value. There are researchers who don’t believe that mergers have an adverse affect and these corporate transactions lead to “average” if not more returns. (Michel, A., & Shaked, I., 1985) . The post merger performance of the companies engaged in M&A activities were not more or less successful than the comparable firms who did not engage in M&A activities or other peer companies. His studies suggested that the merging companies exhibited average performance to high returns based on the nature of the industry and company and economic factors. (Stiebale, J., & Trax, M. ,2011) studied a set of firms from the U.K. and from France. He selected these two European countries because they are a part of the top five countries with the highest M&A activity in terms of volume of acquirers. Their main conclusions were that cross- border deals in the two countries resulted in an improved growth in domestic sales, employment, and increase in capital in the acquiring firms. These improved growth rates are also coupled with higher productivity growth in few cases.
  • 6. Applied Research Project Page 6 When researchers aimed to understand both the short term and long-term effects of an M&A, the sample of companies also showed diverse results. Based on the short run stock performance, it was seen that it is the target companies shareholders and not the acquiring companies shareholders that earn abnormal returns. In the short run the new combined entity seemed is better off on an average and does create shareholder value. In the long run, the results are contrasting. It was noticed that the acquiring firms underperform their peers in the window of three t five years after the acquisition. But it was also noted that this underperformance is limited to small acquirers and not the bigger sized companies. When accounting measures were used, it was noted that in the long run the acquirers outperform their peers, or are at par with their peers. (MIT Sloan Management Review, 2003). There are very divergent views on the success or failure of an M&A in different countries and different industries in the short as well as long term. But we are interested in looking at the value proposition of M&As in the automobile sector. Since the turn of the last century, the automotive industry has been facing a wave of merger activities. The companies within the industry are compelled to undertake these corporate restricting decisions due to an increasing pressure to be maintain a balance between superior technology and cost effective production techniques and less expensive product offerings. All the previous research in the automotive industry showed that acquiring companies are able to attain significant short-term gains on account of market perception of synergy and potential value held in the transaction (Mentz and Schiereck 2006). (Mentz and Schiereck 2006) in his research used a sample of 201 M&A transactions between 1981 and 2004 and concluded that there was positive abnormal returns to acquiring companies, of +1.6% in the 10 days following the announcement. These findings were in contrast to the previous research that showed abnormal returns to the target companies rather than the acquiring company. But the contrasted findings were justified by the author on the basis that the capital markets perceived M&A as means to global synergies and higher operational efficiency. The first to analyze the long term performance was (Mandelker 1974), who analyzed a sample of 241 mergers, and concluded that there was insignificant negative abnormal returns of −1.4% over a 40- month-period following the announcement date. In contrast (Malatesta, 1983) sampled 256 mergers in the 12-month period following the announcement and found a significant negative return of −7.6%. More recent studies like (Franks, 1991) did not find abnormal returns to acquirers and also mentioned that previous research were due to lack of specific benchmarks Research done by (Agrawal,1992) , (Loderer and Martin (1992), Kennedy and Limmack (1996), Gregory (1997), and Rau and Vermaelen (1998) found negative abnormal returns between −1% and −18% in the time period of 2 to 5years after the transactions. A more recent study done by (Laabs, J., & Schiereck, D., 2010) sampled 230 horizontal merger transactions in the automotive industry between 1981 and 2007. The results confirmed that there was positive abnormal returns in the short run, but indicated that the acquirers were unable to sustain positive long-term returns. The research quantified that there was a destruction of value of about 16%- 20% in the three-year period prior to the announcement. Therefore, it appears that the above-average synergy potentials perceived by capital markets in the short-term perspective cannot be sufficiently realized by the acquirers within the 3years following the transaction.
  • 7. Applied Research Project Page 7 The study also highlighted that larger truncations tend to be more profitable in the long run owing to experience and economies in scale. These findings were consistent with previous research done by (Ferris and Park, 2001). Methodology The methodology adopted for our research, to analyse whether Mergers & Acquisitions create value in the automotive industry is based on a top-down approach. We have read and analysed journals, websites, books and articles to identify the reasons for companies to engage in an M&A transaction. We considered the internal and external factors that influence the decisions & motives backing mergers. We reviewed literature which essentially covered different ways to measure the value of a merger and the different views on how value is perceived to be as described by various analysts. After covering the motives of a merger, ways of valuation of the company post merger, defining the term value, we studied further about the benefits post merger and the loopholes of a merger. This macro study created a base for our next step. Building up on these factors, we adopted a detailed case study method to analyse the research problem. We chose to study the case of Daimler and Chrysler and chalked out a framework to see if the merger created value for both the companies. Our framework consisted of splitting the case in three phases. Phase one evaluates the performance and motives of both the companies individually prior to the merger. Second phase looks at the performance of the companies post merger and the third and final phase explains the success or failure of the merger. The method used to study the case is based on both qualitative and quantitative measures. We analysed the year on year performance of Daimler Chrysler from 1998-2010. We measured the companies on their performance by looking at the evidences of the case, profiles of the company, reasons for their merger, financial statements, financial analysis, calculating the contribution of Daimler Chrysler Group as a whole and Chrysler Group separately. Primarily, the methods were observing the growth rate of each year, profitability and efficiency ratios, comparing them with industry averages and checking the value of the company in each phase. We conclude the research project by providing recommendations based on the analysis of our findings of the causes of our research problem and by stating if mergers create value for the company and as perceived by their investors/shareholders. Overview of the automobile industry The automotive industry is considered one of the largest manufacturing industry globally as well as one of the most important sectors by revenue. The automobile industry is characterized by high fixed- costs and significant barriers to entry as well as exit. There were many breakthroughs that shaped the global automobile industry. The industry went through a series of structural changes from the early1970’s. We can say that the first major breakthrough was the process of Globalization during the world wars that lead to the transfer of technology between the developed nations – the technology transfer of Ford motors from USA to Japan and Western Europe. The next major breakthrough in the automobile industry was the introduction of fuel efficient cars from Japan due to the OPEC oil embargo on the US in 1973- 1974. There was a rapid expansion of the
  • 8. Applied Research Project Page 8 industry during the 1990’s fuelled by Globalization. (1. Hiroaka, Leslie S. Global Alliances in the Motor Vehicle Industry. Westport, CT: Quorum Books, 2001, p. 1). Henry Ford’s system based on mass production, standardization is considered one of the major revolutions in process technology. Totota’s “lean production” is considered another revolution in the same field. This system was developed in Japan post the world war, when the country faced severe shortages in resources. This was an efficient system to produce most efficiently with minimal or no wastage or defects. It is this system that made just in time scheduling and production a norm for all players in the automobile industry to improve efficiency. With the passage of time, customers’ needs also were changing. The customers were not only demanding variety in the design of cars but also the latest technology and lower costs. Thus the players used this new lean production system that was characterized by flexibility to achieve economies of scale economies. These economies of scale achieved by companies globally lead to massive overcapacity, thereby resulting in lower price levels. The industry reacted to this massive overcapacity by resorting to massive consolidation both nationally as well as internationally. The Global automobile industry from 1995- 1998 were characterized by a number of trends that lead to the merger of Daimler Chrysler. In 1998, when the merger announcement was made public the Global automobile market size was 500 million units on the road, with nearly 50 million new registrations recorded. The competition among the predominantly oligopolistic market was growing global with the North American players holding nearly 50% of the commercial vehicle market and Western European players holding 41% of the Global car market. The industry was shrinking in growth – was down -2.7% in 1998 as well as in size with a wave of mergers. The high technology intensive industry had a high risk of obsolesce and had extremely high entry and exit barriers. (ACEA - European Automobile Manufacturers' Association) The automobile industry globally can be characterized in the following way : Global Market Dynamics – Up till the 1990’s the developed countries were busy expanding the markets within the country of their domicile or region. Once they realized that these markets were saturated they saw the need to exploit untapped markets. The big automobile manufacturers were no longer confined to just to NAFTA and Europe, they were looking at all the markets globally. Their expansion towards emerging markets was further supported by the growing income levels in these countries as well as the changing consumer preferences. Rampant globalization put forward tremendous new opportunities and challenges at such a rapid pace, which the industry has not experienced before. The industry was not only a capital-intensive industry, but also characterized by high risk and high rewards. The Global automotive industry was no longer a single marketplace. Many of the world’s biggest automobile producers aimed at reducing production costs by continuously investing in emerging markets such as China, South east Asia and Latin America. The industry was going through a revolution - "Go Global or Go Home." Such a market induced a global outlook towards mergers, technologies, and sourcing, pricing and global integration. These became the main drivers of cost and thus the backbone of what the automotive industry had in store for the future. Consolidation – The industry was facing fierce competition with every producer eyeing the most market share. The global automakers were divided into three tiers – Tier I consisting of General Motors, Ford, Toyota, Honda and Volkswagen and the companies in the other two categories attempted to merge or acquire smaller automakers to increase in scale to compete with the Tier I companies
  • 9. Applied Research Project Page 9 Structural excess capacity -The consolidation phase of the industry lead to a serious problem of overcapacity. This was a serious risk in the industry. In 1998, the global light vehicle production was approximately 52 million units, with a capacity of around 75 million units, which resulted in a capacity utilization of near 70%. The global capacity increased by four million units in 1998 from 1997 and this lead to a fall in the capacity utilization by 5 % year-on-year. Even though the global production and capacity was expected to increase, the global capacity utilization was to be lower than 75%. This was a serious problem as this excess capacity was not only cyclical that adjust according to varied global demand patterns but was by and large was a structural problem driven by the ultra competitive industry dynamics. This excess capacity was a result of aggressive strategies adopted by the companies with the aim of expansion. (ACEA - European Automobile Manufacturers' Association) This structural overcapacity lead to market instabilities, lower margins and threatened the survival of many automobile manufacturers The industry got drawn into a vicious circle wherein the fierce competition urged the players to expand into new markets, thereby increasing the idle capacity. This idle capacity was to be eliminated with further expansion and the cycle continued. The actions of the automakers were characterized by massive investments, driven mostly by pre decided corporate objectives and not market reality. Growing Importance of Technology – The automobile industry became very technology centric. The customers demanded state of the art technology at very competitive prices. Cars had started to become a indicator of social status and the car manufacturer also created product lines based on such status segmentations. In order to meet these customer demands, producers had to cooperate of invest to reduce R&D expenses. Another important issue that cropped up in the 1990’s was the growing awareness of the detrimental effects of pollution. The governments of the developed countries started enforcing regulations of many “environmentally unsafe “ industries such as the Automobile industry. This put increased pressure on the producers to invest in facilities as well as fuel-efficient cars that would lower their emissions. Many tried to understand the reason for such massive consolidation. The growing shareholder era and growing accountability to shareholders drove such irrational corporate objectives. Looking at the biggest automobile manufacturer of 1998 General Motors, which was ranked #1 in 1998's Fortune 500 ranking by revenue, but was only ranked #42 in terms of market value. This was the case with most of the automobile manufacturers, wherein there was a growing pressure to justify such a low rate of return. The industry players reacted by consolidating thereby increasing their leverage and size. The Daimler – Chrysler merger Company Selection Our next approach to understand value creation was to select a transaction. The transaction wasn’t a random selection but indeed a series of steps and approach. Using S&P Capital IQ as our primary database the following were the steps undertaken in the company selection process: 1. We took all the historical mergers, acquisitions, restructuring, buybacks, private placements, shelf registrations, spinoffs in the auto industry from 1996 -2010. This included all the global companies
  • 10. Applied Research Project Page 10 2. Since we were interested in only pure mergers and acquisitions we eliminated all the restructuring, buybacks, private placements, shelf registrations and spinoffs. 3. We also eliminated partial mergers and stake acquisitions. 4. Bankruptcy filings and restructurings that happened during the global financial crises were excluded from the study. 5. True mergers and acquisitions were sorted in descending on the basis of the transaction value 6. Based on our screening analysis the following companies emerged at top. 7. Based on the screening, Daimler Chrysler emerged as a true winner based on historical deal value. We still studied all the seven transactions and Daimler Chrysler was our choice of study. Overview of the companies Daimler By 1995, Daimler Benz Group was in financial dilemma. The company had geographical coverage in 200 countries and was operating in 35 units, of which many units were making little or no profits. Over its history, the company had gone in to diversified amalgamations and had incurred huge losses in 1980’s. The company required dramatic changes and rigorous measures to regain its losses and get a competitive edge. The company’s reported operating losses of USD 3995.1, the production volumes were small and R&D expenditure was higher than the industry average. Apart from these internal factors, External factors such as devaluation of the dollar also impacted the aviation business of Daimler. Realignment of European currencies also had a negative impact on company’s income. Date Target Ticker Transaction Type Status Value US$ Mln In Billions Buyers 05/07/1998 Old Carco LLC - Merger/Acquisition Closed 57,095.15 57,095,150,000.0 Daimler AG (XTRA:DAI) 06/01/2009 Motors Liquidation Company, Substantially All Assets - Merger/Acquisition Closed 55,279.55 55,279,550,000.0 General Motors Company (NYSE:GM) 05/14/2007 Old Carco LLC - Merger/Acquisition Closed 7,176.0 7,176,000,000.0 Cerberus Capital Management, L.P. 01/28/1999 Volvo Car Corporation - Merger/Acquisition Closed 6,450.0 6,450,000,000.0 Ford Motor Co. (NYSE:F) 08/13/2009 Porsche Automobil Holding SE (DB:PAH3) DB:PAH3 Merger/Acquisition Closed 5,799.26 5,799,260,000.0 Volkswagen AG (DB:VOW) 07/04/2012 Dr. Ing. h.c.F. Porsche AG - Merger/Acquisition Closed 5,585.12 5,585,120,000.0 Volkswagen AG (DB:VOW) 04/05/2011 Stake in 20 Companies and Assets - Merger/Acquisition Closed 4,214.98 4,214,980,000.0 SAIC Motor Corporation Limited (SHSE:600104)
  • 11. Applied Research Project Page 11 In 1995, when Jurgen Schrempp took over as CEO of Daimler Benz, the Board under his leadership were determined to streamline the business and decided to restructure and realign the company to complement it with the industry standards. The major criterion of restructuring was profitability and increasing the shareholder value. The company took rigorous measures by eliminating the sources of loss that had a negative impact on the company’s income and focused on its core business of manufacturing high quality automobiles. The Board closed down its unprofitable and non-core subsidiaries and was now operating with 23 units as compared to 35 units previously. Company’s concentration was mainly profitability and market position centric. As a part of restructuring, the company merged few of its internal business and one of them was merger of Mercedes-Benz with Daimler-Benz Group. Mercedes-Benz contributed almost 80% to the total profits of the Daimler parent. The Board under Schrempp leadership redefined the goals and targets of its business units and realigned the management such that the company’s performance is clearly reflected on a timely basis to the board. One of the key indicators was to earn 12% return on capital employed in all of its business units. In 1993, Daimler Benz was the first german company to be listed on New York Stock Exchange. In light of this move, CEO Schrempp responded by reporting results on US GAAP. Another aggressive measure involved layoffs of thousands of employees in various divisions to accelerate its decision process with the Daimler-Benz Group. The restructuring was an impeccable move as by 1997it became the most profitable company in the entire industry. The profits had risen by 69% in 1997 as compared to 1996. In 1997, revenue from sales in Germany were 33% , 25% were from other states in European Union, 21% from US & Canada. Revenues and Operating profits demonstrated an upward trend as explained in the graph 1.1. The COGS and current liabilities were being handled smoothly with liquidity positions getting stronger. The restructuring also aimed at increasing the shareholder value and the EPS also shows a rise post the implementation of action plan. (Refer graph 1.2)The concentration on its core business turned out to be right move for Daimler, with 71% of revenues coming from automotive segment in 1997. The new structure was now in place at Daimler and although the company was growing at a rapid pace, this was only the first step towards its recovery. Schrempp and the management were looking to expand its horizons as they now had a strong base in Europe. Daimler-Benz aimed to create a more integrated system and have better accessibility of U.S markets through mergers and acquisitions. Though Daimler Benz was progressing, there were a few concerns with expansion and acquisition in US markets. Chrysler The history of Chrysler Corporation dates back to June, 1925 when it was founded by Walter Chrysler (Peterson.M, 1986), when the Maxwell Motor Company (established 1904) was restructured to be Chrysler Corporation (Briant.D.D). From the year 1926, Maxwells were being sold as Chryslers to the United States with a lower costing, 4 cylindered cars. By the year 1936, due the superior engineering and testing that went into making of the Chrysler cars, it propelled the company to the number 2 spot in the United States car market, which they secured with them till the year 1949. Chrysler differentiated themselves from the other two major car manufacturers in the United States, namely, General Motors and Ford Motors by making their cars Unibody. This technique, now being adopted as a worldwide standard, offered various benefits such as greater rigidity to the body of the vehicle, better handling and crash safety features (Zatz. D, 1960). Chrysler also were the first to introduce computer for designing their unibody vehicles. By the 1970's, Chrysler was hit by the U.S anti-trust laws which prohibited automakers from forming consortiums which were prevalent in
  • 12. Applied Research Project Page 12 Japanese and European car market. The major benefit sought after from the consortiums formed by the foreign competitors was to reduce the cost of the vehicles on regulatory requirements and emission rules. With the rising fuel costs, the demand for fuel efficient cars increased and Chrysler was caught off guard here. They had to start tuning their engines to meet the emission regulations, in the process the fuel efficiency on the engines went down. By the year 1973, when oil prices started rising, the demand for fuel guzzler vehicles, as the Americans call them, went down. For a company like Chrysler, these fuel guzzlers made a bulk of their product line (Wikipedia). A hurried introduction of two Chrysler cars, namely, the Dodge Aspen and Plymouth Volare in the year 1976 brought with it huge warranty costs for the company due to below standard construction and faulty designs. This killed the long standing loyalty created by their other cars like the Dart and Valiant . In 1977, Chrysler Europe practically collapsed and was offloaded to Peugeot during the succeeding year. By 1980, Chrysler Australia, which was producing the locally conceptualized Valiant and Sigma, was sold to Mitsubishi Motors and the name was eventually changed to Mitsubishi Motors Australia Limited (Unique Cars and Parts). The oil crisis affected the U.S markets further to only deteriorate the markets for Chrysler large trucks and cars. The company at this stage had no other compact line of vehicles to fall back upon for supporting their stage in crisis. Realizing that the company could go out of operations with the ever rising crisis, Lee Iacocca, the then Chief Executive Officer at Chrysler approached the U.S Congress for funds. The U.S Congress passed the Chrysler Corporation Loan Guarantee Act of 1979 and extended a USD$ 1.5 billion loan guarantee to Chrysler Corporation (CCLGA P.L 96-185, 1979). The U.S military would go on to buy bulk orders of Chrysler Dodge pick-up trucks and Chrysler avoided bankruptcy. Following a slow recovery, Chrysler launched a number of small sized vehicles for which there was an ever growing demand. But along with this line of compact cars, Chrysler re-introduced their Imperial line of flagship cars. This time re-introduced with superior technologies in the car, the engine had a fully electronic fuel injection, making it the first of its kind in the U.S (Briant.D.D). In February, 1982 Chrysler announced the sale of Chrysler Defence, its defence subsidiary which was a profitable entity to General Dynamics for USD$ 348.5 million. The sale was eventually completed in the month of March of 1982 for a revised sum of USD$ 336.1 million (New York Times, 1982). The company managed to improve their sales by selling their minivans and k-cars units and by 1983, were able to pay off the Government backed loans, many years ahead of time, thus providing the Government with a profit of approximately USD$350 million (Hickel, James.K,1983). In 1987, Chrysler got into the news again for the wrong reasons with some 40,000 of their units being sold with faulty odometers. The company settled the case out of court with the complainants (Miles, M.A & Herron, C.R for New York Times, 1987). In the same year, Chrysler acquired American Motors Corporation (AMC) for their Jeep brand. This deal increased the size of the company but also increased their debt by USD$ 900 million (Time Magazine). Chrysler also went on to buy the Italian super car maker Lamborghini in the year 1987, and then sold it off in 1994 (Holusha for New York times, 1987). 1988 onwards, Chrysler acquired Gulfstream Aerospace, Electrospace Systems among others to protect Chrysler from the volatility of the car market and industry. But these deals reduced the working capital with the company from USD$ 14.3 billion to a mere USD$ 1.7 billion. By 1992, Lee Iacocca was forced into retirement with his questionable acquisitions and was succeeded by Robert Eaton (Martin Puris).
  • 13. Applied Research Project Page 13 In the year 1995, Lee Iacocca assisted billionaire Kirk Kerkorian in taking over Chrysler in a hostile manner, which eventually failed. However, in the following year, Kerkorian and Chrysler made a 5 year agreement that included a gag order preventing Iacocca from speaking publicly about Chrysler (Detroit News, 2002). The Merger Structuring of the Transaction To create a merger of equals following was the structure of the transaction. The merger was a stock merger and no cash was exchanged to create a ‘merger of equals’. Structure of the transaction 1 Daimler = 1 Daimler Chrysler (DCX) 0.45 Chrysler Corporation = 1 Daimler Chrysler (DCX) Particulars Daimler Benz Chrysler Daimler Benz Ordinary Shares 569.3 Chrysler Common stock Outstanding 646.7 Exchange Ratios 1.005 0.6235 Share holding 572.2 422.2 Daimler Chrysler Ordinary Shares 1003.2 The transaction was structured as to neither the acquirer nor the acquired company suffered any losses on the stock transaction. The merger agreement was signed on May 6, 1998 and the deal was closed in 200 days. Daimler Chrysler became the first global share trading in 21 markets of the world simultaneously. As Daimler Chrysler was now headquartered in Germany, S&P dropped it out of the flagship S&P 500 Index. Daimler Chrysler 3 Phase Approach Our historical analysis suggested that Daimler Chrysler was already demerged in 2007 and sold to Cerberus Capital Management. To proceed with our study we decided to follow a three phase approach to understand the process of value creation. 1. Pre Merger (1995- 1997) 2. Merger of Equal (1997- 2006) 3. Post Merger/ Disintegration (2007 – 2010)
  • 14. Applied Research Project Page 14 Rationale for Daimler Chrysler Merger Daimler’s Dilemma In the early nineties Daimler – Benz AG was making significant losses due to operational inefficiencies resulting from the unrelated diversification and acquisition of the loss making units in the 1980’s. It actually resulted in the largest corporate financial loss in German corporate history (The Daimler Chrysler Merger). In 1995 Jurgen Schrempp took over as CEO of the company and initiated a massive restructuring effort. Within a short span Daimler Benz liquidated twelve non-core subsidiaries, and initiated cultural changes in the company by aligning employees to focus on profitability. A massive restructuring of the brand was underway. Schrempp turned around Daimler and made it the post profitable company in the entire automobile industry. This improved Schrempp’s position in the company and increased faith in the eyes of the board (Neubauer, Steger, Radler). Restructuring efforts paid off however they weren’t sufficient for the long term vision of the company. There was a problem. Daimler Benz was extremely focused on one prime brand Mercedes – Benz, and its reach in North America was nonexistent (Neubauer, Steger, Radler). It missed the U.S boom of 1990’s and brand failed to capture even 1% of the U.S domestic market. The strategic team felt the urgent needed and began to look for possible suitors. Chryslers Puzzle Chrysler had always been the underdog and had brought itself back four times from bankruptcy since the world war one. It was a daring and risk taking company, often termed as ‘the comeback kid’. In the 1990’s when U.S consumers were focused on imported cars, Chrysler had repositioned itself and took a massive risk by designing products aligned with the bold and daring spirit of the Americans such as the Dodge Ram, Jeep Grand Cherokee, and LH Sedan. (Waller David). The risk paid off and Chrysler’s market share increased to 23% in 1997, revenues were at all time high, and product development costs shrank dramatically (Waller David). In spite of doing well, Chrysler had a puzzle to solve. It was still significantly smaller in the ‘big three league’, which comprised of Ford, GM and Chrysler. It had very little presence in Europe and outside North America. Eaton recognized this and called it the ‘the perfect storm’ (The Daimler Chrysler Merger). He saw the brewing consolidation in the North American market and seeked international diversification. Eaton’s vision was clear, in a fiery speech in 1997, Easton said, “There may be a perfect storm brewing around the industry today. I see a cold front, a nor’easter, and a hurricane converging on us all at once (The Daimler Chrysler Merger). It was clear that the company was serious about its plans. Eaton recognized the coming age of overcapacity in the auto industry. Eaton reasoned that by 2002 supply would exceed demand as there would be eighty more plants opened up leading to an overcapacity of six times Chrysler’s current production (Neubauer, Steger, Radler). Chrysler had to act.
  • 15. Applied Research Project Page 15 Daimler & Chrysler Earlier in 1995 both Daimler and Chrysler had started looking for options to generate revenues from markets outside their home country (Neubauer, Steger, Radler). Both companies had evaluated the possibility of establishing separate companies in Europe and U.S but somehow the plans never materialized. Independently both Chrysler and Daimler’s boards and executive team recognized the consolidating auto industry and there was an impending necessity to create large globally based enterprise which captures the three most important markets America, Europe and Asia, as being regionally focused was no longer sufficient (Dias Wije). During the 1998 International Auto Show in early January. Jurgen Schrempp decided to meet Robert Eaton. Within the next month merger talks had secretly begun between the two companies and clandestine meeting had begun to take place. On May 7, 1998 the CEO’s of Daimler Benz AG and Chrysler Corporation announced their willingness to get into a ‘a merger of equals’. Daimler Benz AG was represented by Goldman Sachs while Chrysler Corporation was represented by Credit Suisse First Boston. The rationale was clear as initial due diligence suggested that the combined company would be the fifth largest automaker in the world with a projected annual revenues of 132 billion dollars. It would be the largest industrial merger in history and a biggest ever trans-border acquisition of an American corporation (Dias Wije). Due diligence had suggested that the newly formed DaimlerChrysler AG will have no layoffs, total workforce will be close to 440,000 employees and the combined market capitalization close to 100 billion. The expected corporation was expected to create synergies and induce savings in research and development, procurement functions, product design etc. The classical economy of scale argument was proposed for all fronts and it was expected that cost savings worth 1.4 billion will be realized in the first year of the merger itself. Further savings upto three billion dollars can be achieved in the next three years (Annual report 1998). Daimler and Chrysler also planned to create the first of its kind global registered share (GRS) and under this facility Daimler Chrysler share will start trading simultaneously on twenty one markets around the world which would include New York and Frankfurt (Karolyi). One important rationale used by the executives of both companies was that Daimler and Chrysler had very different product lines and the merger would complement and add. While Daimler existed primarily in high price luxury segment, Chrysler dominated the medium and low price segment. They also had a minimum geographic overlap. Basically Daimler will be able to leverage Chrysler’s North American presence by increasing sales of luxury car without disturbing Chrysler’s network of mass- market customers (Schmid, John). Similarly, on the other end Chrysler can penetrate the European market deeper without disturbing Daimler’s arena. Chrysler will be able to use safety innovation from Daimler and also the fuel cell technology that will make Chrysler the dominant player in developing non-combustion engine cars (Surowiecki, James). On Daimler’s end it will be able to leverage the front wheel drive technology of Chrysler and also lean production systems. Chrysler made four times the number of cars manufactured by Daimler with fewer than half the workers (Surowiecki, James). There was also an urgent need to improve Daimler’s development time and a reduction in costs of product development; while on the other hand Chrysler had to improve its quality and engineering. Daimler’s research and development cost per vehicle was over two thousand dollars per vehicle while Chrysler had a much lower cost of five hundred and ninety dollars and another point to note is that it took sixty days to manufacture a car in Germany.
  • 16. Applied Research Project Page 16 Merger performance evaluation To analyze the Daimler Chrysler merger, the first step was to dissect the financials according to the three phases. We extracted the Chrysler Financials from the annual reports filed from Daimler to understand what division of the company was problematic and where was the ultimate value erosion. In order to evaluate how successful the merger of Daimler Chrysler was and analyze the performance of the company through the three phases – the pre merger, merger period and post merger period, we adopted a study of the value creation through the accounting based measures. We studied the performance through the following measures: 1. ROE 2. EBIT/Revenue – EBIT is the bottom line KPI used by automobile manufacturers 3. Dividend payout ratio 4. EPS 5. Cash flow per share 6. R&D/ Sales – R&D is a very important factor used as a KPI by automobile manufacturers 7. R&D / EBIT 8. Return on Assets Return on Equity This is our fundamental model to analyze whether Daimler Chrysler merger created value or not. Before the merger both Daimler AG and Chrysler were returning more than 20% on their equity. However after the merger the return on equity started dwindling and almost turned negative during the dot com crises. Return on equity barely reached 10% again, and in the final years the company Daimler Chrysler never earned more than 8% on their equity. This leads us to the fundamental question as to why did the ROE start dwindling. The measures used above are the key measures we have used in our analysis based and we have included our rationale as to why we used those measures. EBIT/Revenue EBIT is one the main bottom line KPI used in automobile industry for inter company as well as intra company comparison. In a capital-intensive industry such as the automobile industry, it helps compare companies based on their actual operating profits without considering depreciation and amortization, which is a sizeable non-cash expense for automotive industries. In the phase 1 stage of our analysis (3 years prior the merger announcement), shows that the EBIT margins were displaying an upward trend after their restructuring measure and recorded an EBIT margin of 4% in the financial year before the merger announcement. Chrysler also recorded very strong margins mainly due to the smaller proportion of expenses and larger sales as opposed to Daimler that was focused on the high-end luxury market. In the phase 2 of our analysis, we saw that the EBIT margin of the newly merged company increased substantially to almost 7% in 1998, and both Daimler and Chrysler contributed equally to this upward trend. But since 2000, the margins of the Chrysler subdivision fell drastically. This downward trend
  • 17. Applied Research Project Page 17 was not noticed in such an amplified extend on Daimler. Chrysler reported negative margins and recorded the lowest EBIT margin in 2006 (the immediate year prior to the demerger) of -3%. EPS Daimler’s restructuring in 1995 increased EPS from -7.79 to 7.61 by 1997. Restructuring had redefined the goals of the company and had focused on increasing the profitability and shareholder value. By 1997, the company’s efforts were showing up in their results. However, restructuring didn’t serve the long term goal of the company and in 1998, Daimler started to look for alternatives to expand and grow. After filtering its alternatives, the company entered in to a merger with Chrysler AG in 1998. DaimlerChrysler AG, combined profits had remained majorly consistent during the merger phase, but weren’t showing an increasing trend. The same was reflected in the Earnings per share of DaimlerChrysler AG. Company also incurred losses in the years of financial crises and dot.com bubble which resulted in lower earnings per share. Overall the company’s performance was average as compared to their performance before the merger. Company’s decision to merger didn’t solve their purposes. The shareholder’s interpreted the figures of EPS as a sign of lower earnings, an unstable financial position and was an indication of taking measures for improvement. The earning power of the company was affected as the Chrysler division of the Group wasn’t contributing majorly. Taking in to consideration, analysis and impact of Chrysler division on EPS, the group in 2007 had to let go off Chrysler and de merge themselves from Chrysler AG. The merger efforts didn’t pay off and the damage had to be controlled. Post the demerger, Daimler regained its stability. The overall performance of the Daimler’s EPS is depicted in Graph 1.4 (appendix) Dividends per Share Both Chrysler Corporation and Daimler Benz AG paid healthy dividends before the merger and continued improving dividend payments till 2000. The dot com crises slowed down the economic activities in 2001, and they had to take a cut. Further when the financial performance of Daimler Chrysler was weakening, the company continued to pay dividends even when the net losses were not supporting it. Upon analysis, it came to our notice that German companies pay dividends based on cash flow and not on income. This we believe is another important cultural difference between the two companies as in spite of the merger being a merger of equals; the merger was never a merger of equals. Daimler continues to run the company according to the policies which it believed was fit. R&D/Sales & R&D/ EBIT Research and development is a very important expenditure for the automobile industry. Automobiles thrive on innovation and without significant research and development it is difficult to be competitive. One of the most important findings in our analysis of value creation was difference in spend in the research and development between the two divisions. Since the beginning of the merger the Daimler Chrysler’s expenditure to sales reduced from 6% to 3%, which is a significant drop for an automobile company. Upon further inspection it came to our notice that research and development for Chrysler division was very close to 3% throughout the history, while of Daimler’s was significantly higher. There is a clear mismatch between the two divisions of the company.
  • 18. Applied Research Project Page 18 How can a division survive without investing enough in research and development? We believe this could be one of the major factors in the destruction of value of the two companies. This to less competitive products for Chrysler division and hence the entire Daimler Chrysler corporation was suffering due to this. Return on Assets The asset utilization ratio is an analysis tool identifies whether a company is putting their assets to good use, or are the assets being piled on in the company and not being utilized to its capacity. Chrysler as a company, heavily driven by technology and managing high sales volumes, maintained a utilization ratio of USD$1 on average over three years between 1995 to 1997 (S&P Capital IQ). This means that Chrysler was able to derive USD$1 of every USD$1 investment in its assets. Daimler on the other hand had a healthier utilization ratio which averaged USD$1.21 over the same period (S&P Capital IQ). It is interesting to know that the industry average for automobile sector is usually between USD$0.5 to USD$0.8 (Hillman.H), which also reiterates that fact that both Chrysler and Daimler were able to manage their companies in a very efficient and profitable manner when they were separate. The efficiency came down drastically from the year 1998 onwards all the way till 2008, the period during which Daimler and Chrysler were merged into one company. The asset utilization ratio during this tenure of courtship was averaging USD$0.79 (S&P Capital IQ), which was down from their individual performances prior to the merger. The assets were sitting idle and capacity was being wasted with both companies trying to figure out the best mix to utilize the resources. The merger should have improved the performance as was intended, but it turned down the possibility of taking advantage and pulled down the efficiency of the companies, which later on had adverse effects on their financials and eventually lead to them splitting up in 2008. While we analyse the above uantutatuve measurements, it is not surprising that the merger was finally called off in 2007, when Daimler sold Chrysler to Cereberus Capital for US$7.8 million. The merger was a failure. Apart from the quantitative fators mentioned above, there were several qualitative factors that fuelled this fall of such a huge merger. Cultural Clash The deterioration of the performance of the company was attributed to qualitative factors also apart from the quantitative factors explained above. DaimlerChrysler success depended on two extremely different cultures. Daimler, a german company had a methodical decision making model, while Chrysler had more of a permissive and creative way of working. Chrysler working culture was American driven, adaptable and resilient, whereas Daimler culture embedded values of empowerment, efficiency. These cultural differences soon caused problems in every level of the company. There were huge differences in the pay structures of both the companies. Even the dividends paid were out of the cash flows, which was the germanised way of paying dividends unlike other companies who paid dividends out of profits. The management had dominance of Germans with more of Daimler representatives in the management. Americans and Germans had different working styles which was evident from instances such as Germans preferred long reports and Americans preferred little paperwork and short meetings. The newly merged teams had conflicting goals and couldn’t contribute productively. All the attempts to build the gap failed and situation became chaotic. Both the companies failed to realise the synergies. The initial thought process of merging to complement each other’s working styles and cultures was proving to backfire instead.
  • 19. Applied Research Project Page 19 Opposing culture and management styles were a hindrance in their decision making. Daimler and Chrysler weren’t ready to compromise and eventually doomed to failure. Daimler Post Merger Daimler AG has fared well again after the disintegration and demerger with Chrysler AG. Compared to its competitors the company was able to sustain itself in the global financial crises and maintain the steady line or revenues. The company was back again to investing more into its research and development and profit margin increased. Cash on hand started remaining steady and investments in property, plant and equipment one. It was bitter marriage, but Daimler AG fared much better than its partner Chrysler AG. Limitations of our research Following are the limitations of our research: • Our analysis includes a case study approach based on Daimler and Chrysler merger and is limited to that company. • Due to time constraints our research is limited to only an unsuccessful merger. There are quite a few success stories in this industries • Our analysis is limited to accounting based measures of value analysis. • We only used a limited time frame from 1996- 2010 for our research. Conclusion Based on secondary research and analysis and through the limited case study approach of a single company (Daimler Chrysler AG), we conclude that mergers and acquisitions do not create value in the long run. Our conclusion is supported by our in depth analysis of accounting based measures and qualitative based measures. Even though the size of the mergers and acquisitions deal does affect the value proposition of the combined entity very seldom do the merger company perform better than the individual entities in the long run.
  • 20. Applied Research Project Page 20 Appendix Chrysler performance pre-merger In USD million Source: S&P Capital IQ 25575 33548 40831 49363 49601 57587 56986 22922 28396 32382 38032 41304 45842 46743 854 902 4677 6767 4444 7099 5563 0 12005 16093 18864 19657 24057 25708 0 10000 20000 30000 40000 50000 60000 70000 1991 1992 1993 1994 1995 1996 1997 Revenues COGS Operating Income Current Liabilities
  • 21. Applied Research Project Page 21 Chrysler performance pre-merger US$/share Source: S&P Capital IQ Daimler AG: 2007-2010 USD million Source: S&P Capital IQ -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 -20000 0 20000 40000 60000 80000 100000 120000 140000 Revenue Cost Of Goods Sold Operating Income Total Current Liabilities
  • 22. Applied Research Project Page 22 Daimler AG: 2007-201 USD/share Source: S&P Capital IQ Layoff of Employees Source : Company Documents (10.0) (8.0) (6.0) (4.0) (2.0) 0 2.0 4.0 6.0 8.0 10.0 EPS EPS
  • 23. Applied Research Project Shareholder value – ROE (%) Source: S&P capital IQ Profitability - EBIT/share USD/share Source: S&P capital IQ -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 1995 1996 1997 1998 -15.00 -10.00 -5.00 0.00 5.00 10.00 15.00 20.00 1995 1996 1997 1998 Daimler Group 1998 1999 2000 2001 2002 2003 2004 2005 Daimler Chrysler 1998 1999 2000 2001 2002 2003 2004 2005 Daimler division Chrysler / division Page 23 2005 2006 2005 2006
  • 24. Applied Research Project Profitability - R&D/sales (%) Source: S&P capital IQ Profitability - R&D/EBIT (%) Source: S&P capital IQ 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 1995 1996 1997 1998 Daimler -600.00% -400.00% -200.00% 0.00% 200.00% 400.00% 600.00% 1995 1996 1997 1998 Daimler 1998 1999 2000 2001 2002 2003 2004 2005 Daimler division Chrysler Division 1998 1999 2000 2001 2002 2003 2004 2005 Daimler division Chrysler Division Page 24 2005 2006 2005 2006
  • 25. Applied Research Project USD/share Source : S&P Capital IQ Efficiency- fixed asset turnover Source : S&P Capital IQ -10 -8 -6 -4 -2 0 2 4 6 8 10 1995 1996 1997 1998 1999 EPS of Daimler Chrysler 1.1x 2.1x 3.1x 4.1x 5.1x 6.1x 7.1x 8.1x 9.1x 1996 1997 1998 1999 fixed asset turnover 1999 2000 2001 2002 2003 2004 2005 2006 EPS of Daimler Chrysler 1999 2000 2001 2002 2003 2004 2005 Daimler Chrysler Page 25 2006 EPS 2005 2006
  • 26. Applied Research Project Page 26 Daimler ag after Demerger(%) Source : S&P Capital IQ (8.0%) (3.0%) 2.0% 7.0% 12.0% Return on Assets % Return on Equity % Net Profit Margin % EBIT Margin 2008 2009 2010
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