DO MERGERS CREATE VALUE IN
AUTOMOBILE INDDUSTRY
1
THE JOURNEY SO FAR …
Mergers and acquisition (M&A)
The automobile industry
M&A in the
automobile industry
Do mergers
creat...
WHAT IS VALUE ? …
Cumulative abnormal
returns
Managers’
assessments
Divestment data
Expert informants’
assessments
Post-Me...
WHAT IS VALUE ? …(CONTD.)
Accounting
based
measures
Stock
market
based
measures
Managers
subjective
assessment
Post – Merg...
DO MERGERS CREATE VALUE ?...
What does the literature say
• Abnormal returns in the short
run
Target
Firm
• Value restrict...
SNAPSHOT OF THE AUTO INDUSTRY
Largest manufacturing industry
Capital intensive
High barriers to entry
Highly consolidated ...
TRENDS IN THE AUTO INDUSTRY
Consolidation
Overcapacity
Technology
Consumer demands
Lean and green production 7
COMPANY SELECTION
 Universe of mergers from 1996 – 2010.
 Ranking by transaction size
 No restructuring, no partial sta...
THE CHRYSLER CORP. STORY
 Originally known as Maxwell Motor Company
 Walter Chrysler pioneered the change
 Computer bas...
CHRYSLER PERFORMANCE PRE-MERGER…
25575
33548
40831
49363 49601
57587 56986
22922
28396
32382
38032
41304
45842 46743
854 9...
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 199...
DAIMLER
 Founded in the year 1886 by Gottlieb Daimler and
Carl Benz
 Personal mobility in 200 countries and 35 operating...
RESULTS OF CHANGE IN STRUCTURE
-20000
0
20000
40000
60000
80000
100000
120000
140000
1991 1992 1993 1994 1995 1996 1997 19...
`
-15
-10
-5
0
5
10
15
20
25
30
35
1992 1993 1994 1995 1996 1997
Basic EPS
Basic EPS
14
MOTIVATIONS FOR MERGERS
 Daimler’s Dilemma
- Entry into U.S domestic market
 Chrysler Puzzle
- European presence
 Daiml...
THE MERGER OF ‘EQUALS’
Structure of the transaction
• 1 Daimler = 1 Daimler Chrysler ( DCX)
• 0.45 Chrysler Corporation = ...
DAIMLER-CHRYSLER POST MERGER
PERFORMANCE
Return on Equity
Profitability
• EPS
• EBIT/share
• Operating margins
• R&D/ sale...
SHAREHOLDER VALUE - ROE
Still below pre-
merger levels
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
1995 1996...
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 20...
PROFITABILITY - R&D/ SALES & R&D/EBIT
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
1995 1996 1997 1998 1999 2000 2001 2...
CASH FLOW/SHARE
12.00
13.00
14.00
15.00
16.00
17.00
18.00
19.00
20.00
1995 1996 1997 1998 1999 2000 2001 2002 2003
Cash Fl...
EFFICIENCY- FIXED ASSET TURNOVER
22
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 2...
CULTURAL CLASH
 Dominance of Daimler over Chrysler
 Power and conflict
 Difference in compensation policies, travel
exp...
DAIMLER AG AFTER DEMERGER
(8.0%)
(3.0%)
2.0%
7.0%
12.0%
Return on Assets % Return on Equity % Net Profit Margin % EBIT Mar...
ETHICAL CONSIDERATIONS & LIMITATIONS
 Due to time constraints we could consider only one
unsuccessful merger for our rese...
CONCLUSIONS
 Mergers should be evaluated for their performance
in the long run rather than in the short run.
 Large auto...
THANK YOU
 Special thanks to our mentor Dr. Parvinder Arora
and Dr. Veena Jadhav for providing
guidance, mentorship and f...
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Do Mergers Create Value - Analyzing Daimler Chrysler

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Do Mergers Create Value - Analyzing Daimler Chrysler

  1. 1. DO MERGERS CREATE VALUE IN AUTOMOBILE INDDUSTRY 1
  2. 2. THE JOURNEY SO FAR … Mergers and acquisition (M&A) The automobile industry M&A in the automobile industry Do mergers create value ? Daimler Chrysler 2
  3. 3. WHAT IS VALUE ? … Cumulative abnormal returns Managers’ assessments Divestment data Expert informants’ assessments Post-Merger performance Early measures …. 3
  4. 4. WHAT IS VALUE ? …(CONTD.) Accounting based measures Stock market based measures Managers subjective assessment Post – Merger performance Current measurement methods…. 4
  5. 5. DO MERGERS CREATE VALUE ?... What does the literature say • Abnormal returns in the short run Target Firm • Value restricted to few success stories • Contrasting results • On an average – no value created Acquiring firm 5
  6. 6. SNAPSHOT OF THE AUTO INDUSTRY Largest manufacturing industry Capital intensive High barriers to entry Highly consolidated industry 6
  7. 7. TRENDS IN THE AUTO INDUSTRY Consolidation Overcapacity Technology Consumer demands Lean and green production 7
  8. 8. COMPANY SELECTION  Universe of mergers from 1996 – 2010.  Ranking by transaction size  No restructuring, no partial stakes, true merger and acquisitions  Daimler Chrysler ‘ Merger of Equals’  Daimler Chrysler – 3 phases 8
  9. 9. THE CHRYSLER CORP. STORY  Originally known as Maxwell Motor Company  Walter Chrysler pioneered the change  Computer based Unibody design  Hasty decisions followed to hit the company financials  Chrysler Corporation Loan Guarantee Act, 1979 for USD$ 1.5 billion  Diversified business in 1988, acquisitions reducing working capital to USD$ 1.7 billion 9
  10. 10. CHRYSLER PERFORMANCE PRE-MERGER… 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 10
  11. 11. 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 11
  12. 12. DAIMLER  Founded in the year 1886 by Gottlieb Daimler and Carl Benz  Personal mobility in 200 countries and 35 operating units  Financial Dilemma of 1995  New Chairman and his ownership: Jurgen Schrempp  Restructure and Realignment  Expansion Plans - Merger 12
  13. 13. RESULTS OF CHANGE IN STRUCTURE -20000 0 20000 40000 60000 80000 100000 120000 140000 1991 1992 1993 1994 1995 1996 1997 1998 Revenue COGS Operating Income Current Liabilities 13
  14. 14. ` -15 -10 -5 0 5 10 15 20 25 30 35 1992 1993 1994 1995 1996 1997 Basic EPS Basic EPS 14
  15. 15. MOTIVATIONS FOR MERGERS  Daimler’s Dilemma - Entry into U.S domestic market  Chrysler Puzzle - European presence  Daimler & Chrysler - Match made in heaven Synergy Equation Daimler AG (2) Chrysler Corporation (2) Daimler Chrysler AG ( 5) 15
  16. 16. 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 16
  17. 17. DAIMLER-CHRYSLER POST MERGER PERFORMANCE Return on Equity Profitability • EPS • EBIT/share • Operating margins • R&D/ sales • R&D/EBIT • CFO/Share Efficiency • Total asset utilization • Fixed asset utilization 17
  18. 18. SHAREHOLDER VALUE - ROE 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 18
  19. 19. 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 19
  20. 20. PROFITABILITY - R&D/ SALES & R&D/EBIT 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Daimler Daimler division Chrysler Division -600.00% -400.00% -200.00% 0.00% 200.00% 400.00% 600.00% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Daimler Daimler division Chrysler Division 20
  21. 21. CASH FLOW/SHARE 12.00 13.00 14.00 15.00 16.00 17.00 18.00 19.00 20.00 1995 1996 1997 1998 1999 2000 2001 2002 2003 Cash Flow Per Share - Daimler 21
  22. 22. EFFICIENCY- FIXED ASSET TURNOVER 22 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
  23. 23. CULTURAL CLASH  Dominance of Daimler over Chrysler  Power and conflict  Difference in compensation policies, travel expenses  Conflicting goals among newly merged departments  Dividend payments germanised  Structured Management V/S Permissive 23
  24. 24. 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 24
  25. 25. ETHICAL CONSIDERATIONS & LIMITATIONS  Due to time constraints we could consider only one unsuccessful merger for our research  We relied on S&P Capital IQ for financial data and were unable to check every line item with SEC filings  Our research data is secondary 25
  26. 26. CONCLUSIONS  Mergers should be evaluated for their performance in the long run rather than in the short run.  Large automobile companies have legacy costs and hence mergers in these companies fail to create value in the long run.  Quantitative factors vs. Qualitative factors.  International diversification and product portfolio diversification might not work 26
  27. 27. THANK YOU  Special thanks to our mentor Dr. Parvinder Arora and Dr. Veena Jadhav for providing guidance, mentorship and facilitation for this research. 27
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