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Daimler chrysler merger

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Daimler chrysler merger

  1. 1. DaimlerChrysler Merger: The Quest to Create “One Company”Tom Stallkamp, Chrysler president and executive in charge of accelerating integration oftherecently merged Daimler and Chrysler companies, was feeling great frustration. Whycouldn’t he move the integration process along more rapidly? He could see clearlytheamazingpotential for payoffs, but it just wasn’t happening. He wasn’t used tobeingunable to move theorganization, and he hated the feeling of being able to visualize greatthings without being able tomobilize people to action. What else could he do? Maybe itwas time to let the two culturesduke it out, and allow the stronger one to win. That would beone kind of integration, though notquite what he had been working for.BackgroundAt 4:00pm on November 12, 1998 as the final bell rang on the New YorkStockExchange, U.S. automaker Chrysler Corporation and German automaker Daimler-Benz ceased toexist. They emerged the next day as a new global conglomerate namedDaimlerChrysler AG.With combined revenues of $130 billion and a marketcapitalization of $92 billion, DaimlerChrysler became the fifth largest automaker in theworld in number of vehicles sold andthird largest in sales. The $40 billion stock deal was thelargest ever in the industrial world. Uponc om pl et ion of t he t ransact ion Daiml ers tockholders owned 57 percent of t he new DaimlerChrysler and Chryslerstockholders the remaining 43 percent. After ten months of discussions and negotiationsbetween the two companies, the merger was billed as a marriage ofequals. It signaled newlevels of consolidation within the automotive industry and was heraldedas the beginning of anew era where only truly global players would survive. At the May 7, 1998London pressconference officially announcing the merger, Daimler -Benz Chairman JürgenSchremppdeclared,“This is much more than a merger. Today we are creating the world’s leadingautomotivecompany for the 21st Century – DaimlerChrysler AG. We are combining to merge thetwo most innovative car companies in the world. We arecommitted to makingDaimlerChrysler the most innovative competitor this industry has ever seen, one that willset the pace in the automotive world in thenext Millennium. We are doing this merger becausewe share a common passionfor making great cars and trucks…..by combining andutilizing each other’sstrengths, we will have the pre -eminent strategic position inthe globalmarketplace, for the benefit of our customers. We will be able to exploit newmarkets, and thereby improve return and value to our shareholders.”Chrysler CEO Bob Eaton added, 1 | DaimlerChrysler Merger
  2. 2. “We are leading a new trend that we believe will change the future and the face of thisindustry. As a result of being among the first, we had the ability to chooseour favoritepartners.”Schrempp was convinced the two auto companies could form a powerful partnership. Herecalled the first meeting with Eaton,“I just presented the case and I was out again. The meeting lasted about 17minutes. Idon’t want to create the impression that he was surprised. When themeeting was over, Isaid, “If you think I’m naïve, this is nonsense I’m talking justtell me.” He smiled and said,“Just give me a chance. We have done someevaluation as well and I will phone you inthe next two weeks.” I think he phonedme in a week or so.”This was not the first discussion Daimler-Benz had with a U.S. auto manufacturer norwas it thefirst time Chrysler had thought of combining with another major automobile company.In1997 Chrysler and Daimler-Benz had studied the possibility of a joint venture tomergeinternational operations but the deal never came to fruition. Chrysler hadstudied variouscombinations and recognized the need for global presence. The companywas financially healthybut industry overcapacity and huge prospective investment outlayscreated a risky environmentfor global expansion on their own. Only a small number ofautomakers, like Toyota, Volkswagen,Ford and GM had the capability to go global withoutmajor acquisitions. Eaton had gone so far asto poll investment bankers on their ideas andspoke with executives from BMW on this topic. In1998 Ford pitched a merger plan of its ownto Daimler-Benz, unaware of the already ongoingtalks between the German automaker andChrysler. Ford Chairman Alex Trotman acknowledgedthe talks but then suggested thetalks had not become very serious. But the Ford Chairman reportedly briefed both hisboard of directors and the Ford family, which controlled 40 percent ofthe automaker’s votingstock. It was the family’s unwillingness to give up control that apparentlyended thediscussions, a key reason why merger talks between Ford and Fiat a few years prioralsocollapsed.Schrempp and Eaton believed the potential benefits from joint productdesign,development of new technology to meet emissions and fuel economy requirements,efficientmanufacturing, combined purchasing, other economies of scale and brandexpansion anddiversification would position the combined entity as a powerful globalplayer. In discussing thepossibility of a business combination between Daimler-Benz andChrysler, they considered itessential that their respective companies play a leading role inthe process of expected industryconsolidation and in choosing a partner with optimalstrategic fit. In this respect, both the timingof the proposed business combination and theselection of the parties were considered highlyappropriate in order to secure and strengthentheir respective market positions. Furthermore, sincethe companies had virtually no productoverlap there was little threat to immediate rationalizationof product offerings.Before DaimlerChrysler could hope to unseat GM or Ford, however, it had to create asingle company, keeping the best of both former companies in the areas of innovation,costsavings, supplier relationships, quality and brands. The integration of the two 2 | DaimlerChrysler Merger
  3. 3. companies was nosmall challenge. It required a blending of corporate and national culturesand operations. FormerChrysler President Robert Lutz commented,“I do think that managing the cultural issues will indeed be the toughest part of making thismarriage work. And the challenge, as always, will be getting thecultures to really meldbelowthelevel of senior-most management.The task of integrating the two car companies fell to Chrysler President TomStallkamp.Stallkamp had become Chrysler president effective January 1, 1998 just daysbefore Schremppvisited Eaton to plant the seeds for the historic merger. Despite thepowerful company the mergercreated on paper, Stallkamp knew the track record for suchlarge mergers, particularly crossborder ones, was not good. A global report by KPMG atthe time indicated 83 percent of mergerswere unsuccessful in producing any businessbenefit with regard to shareholder value. Daimler-Benz had conducted its own study ofprevious mergers and found that 70 percent had failed.Theworld auto industry had alreadyexperienced culture clashes that ended various mergers and jointventures. Autolatina, theFord Motor Co.-Volkswagen AG venture in Brazil and Argentinacollapsed in 1995, thevictim of continued arguments over product plans between executives of the twoautomakers. A proposed merger of Renault S.A. and Volvo AB also fell ap art in 1995dueto extreme resistance and cultural friction within each company. Merging two largesuccessful companies, incorporated in different countries, with geographicallydispersedoperations, and with different business cultures and compensation structurescreated challengesthat were quite different from absorbing a smaller acquired company intoan existing structure.The attention the merger garnered from the media, industry experts and Wall Streetcreated an environment of speculation. Everyone h ad an opinion about the merger anditschances for success.Autoline Detroit, a weekly industry news show hosted a special one-hourpanel discussion on the merger. Csaba Csere, editor of Car and Driver magazine observed,”Ifthey really want to integrate they need to figure out how their two different systems can[blend].Each side has a very proud history and each side thinks they knowsomething/have uniqueknowledge about how to do things.” Paul Ballew, chief economistat J.D. Power asserted, “The greatest challenge of any major merger is the culture. Itprobably will or should be the numberone topic on their agenda for the next 3-5 years.”Stallkamp thought that,“The way you can make the merger work is to get people excited about findingsomething new, rather than going back to defending their own turf. It’s humannature to fall back on what’s familiar. We have to take away the fear of theunknown by making it fun and exciting.”Both companies had a history of strong turnarounds and recent mark et success (seeExhibit 1for company histories), but all eyes were on DaimlerChrysler, as the price of failureforthe largest industrial merger in history would be immense . 3 | DaimlerChrysler Merger
  4. 4. Potential Benefits of the MergerFor Chrysler and Daimler-Benz there were high hopes about a number of gains to beachieved through their merger. Daimler-Benz was stronger in Europe; Chrysler, inNorthAmerica. Daimler-Benz had a global distribution network. Daimler -Benz’sreputation forengineering complemented Chrysler’s reputation for creative styling andproduct development.Chrysler’s experience in dealing with US investors would helpDaimler-Benz become apacesetter in bringing modern concepts of corporate governanceand shareholder value to theGerman economy. Chrysler’s freewheeling methods of vehicledevelopment would kick-start themore bureaucratic Mercedes-Benz. The combinationwith Chrysler helped reduce the riskassociated with Daimler-Benz’s dependence on thepremium segment of the automobile marketby introducing brand diversity. Daimler-Benz’s financial clout and technical prowess wouldbolster Chrysler in the auto wars.Moreover, the combined company had greater financial strengthwith which to enter newmarkets. Exhibit 2summarizes the potential advantages of the merger toboth.Of particular importance was the need to improve Daimler’s development time andreduce development costs and the need to improve Chrysler’s quality and engineering.Daimler-Benz typically spent 5 percent on R&D, compared to Chrysler’s 3 percen t. As anengineeringcompany Daimler-Benz had high development costs. Mercedes-Benz’scost structure wasconsidered too high to make a reasonable return on cars below $20,000.Mercedes R&D cost wasover $2000 per vehicle compared to Chrysler’s $590 and it couldtake as long as 60 days to builda vehicle in Germany (seeExhibit 3for key performancecomparison for the 1997 calendar year).In addition the two companies had promised to deliver synergies totaling $1.4 billion in 1999 andmore than $3 billion by 2001. Commenting on the areas for integration and savingsStallkampexplained,“Some things will be integrated right away, like global purchasing. Sales and marketingwill be among the first, though the brands will remain separate. Youwon’t sell Chryslerproducts at Mercedes dealerships or Mercedes products through Chrysler. Theintegration will occur behind the scenes. The next area isengineering. This was the area Iwas most concerned about. But our technicalpeople have come in and said let’s find newways of doing things. The last areawill be manufacturing, and that’s driven by product.We need more commonproduct. We’ll never share the same platforms (between Chryslerand Mercedes),never the same vehicles, but maybe common components, like side -impactprotection devices. This could save enormous amounts of money.”Exhibit 4indicates the areas where synergies were expected. Achieving thesesynergiesrequired a focused effort to quickly integrate the necessary functions. Stallkampknew they had todeliver on the promised synergies but the big savings would come from thecombination of backoffice functions and the streamlining of systems and processes. Heenvisioned separate marketingand sales to ensure brand integrity. On the operational side hesaw numerous opportunities forsignificant savings. A more strategically focused R&Dprocess would help drive technologytransition, the sharing of design expertise from 4 | DaimlerChrysler Merger
  5. 5. Chrysler would keep DaimlerChrysler at theforefront of innovation, a singlemanufacturing organization with separate plants would providefor the transfer of keymanufacturing process technologies and systems. DaimlerChrysler couldleverage its unitvolume to achieve additional savings and streamline its systems. Bringing this vision toreality however was a formidable challenge. Chrysler and Daimler-Benz hadverydifferent ways of operating. Getting both sides to see the benefit of operating in a newway wascritical to the success of integration.The Two Companies before the MergerRecent Change and Structure at ChryslerReengineering expert Michael Hammer called Chrysler, “overwhelmingly the most 7innovative auto company in the world.”Chrysler garnered this praise following company-widerestructuring. Beginning in 1991, Chrysler’s management had bulldozed its traditionalfunctionalorganizational structure. It created platform teams for the whole organization,assigning allfunctional employees to one of five teams, large car, small car, minivan,truck or Jeep (seeExhibit 5for platform team structure). Corporate staff was all but eliminated.The executive vicepresidents were co-located on one floor and were forced to workthrough issues together.Chrysler established a matrix management structure for thesesenior managers. Many of thetraditional vice presidents were replaced with people whonot only had functional expertise butwho were able to work together. Each vicepresident under the new structure had two jobs,creating mutual dependence amongthem. In order for Tom Stallkamp, then vice president ofProcurement and Supply andgeneral manager of Minivan Operations, to obtain good designs forhis minivans from TomGale, head of design, he needed to provide supply chain support to Gale. Likewise for Galeto receive quality parts from procurement and supply he needed to providegood designs forthe platforms. This teamwork ethic applied to the highest levels within Chrysler.CEO Bob Eaton was considered to be one of the more modest chief executives in theworld, amild mannered and even- tempered man who believed in the power of teams. Eaton andformerChrysler President Bob Lutz, a dynamic and outspoken man, had formed a balancedpartnershipin running the company. When Tom Stallkamp replaced Lutz as Chryslerpresident, it wasbelieved his self-effacing manner and ability to generate consensuswould enable Chrysler tocontinue on its successful path.With the introduction of the platform teams, management focused on determining the“what” -- the specific goals, objectives, constraints, and resources -- but the teamwoulddetermine the “how.” Teams were empowered to find the best way to deliverthe results,providing periodic progress reports to senior management. Chrysler soonbegan to reap thebenefits of its platform team concept and new structure; Chryslerbecame one of the mostprofitable automakers in the world. Chrysler’s brushes withbankruptcy in 1979 and 1990 alongwith its radical restructuring had forged a culturededicated toteamwork,speedy productdevelopment, lean operations, costleadershipandflashy design. 5 | DaimlerChrysler Merger
  6. 6. Eaton commented, “We’re trying to build a culture that is focused oncontinuousimprovement, setting tougher objectives and never being satisfied with wherewe’re at.”Upon taking the position as Chrysler president, Stallkamp commented,“At Chrysler we’re all different personalities. What we’re trying to do is run thecompany asa team like we’ve been doing. The speed in improving quality, improving the companyand the way we operate the business. Timing is veryimportant to us. We’re veryflexible. We’re lean. The speed energizes thepeople within Chrysler.”Chrysler’s management wanted to ensure that speed and adaptability to changeremainedpart of the company’s culture. Former Chrysler President Bob Lutz commented,“One of ourgreatest challenges is to prevent our people from thinking everything is OK becauseChrysler isno longer on the ropes.”With respect to the use of platform teams, Chrysler’s VicePresidentfor Marketing “Bud” Liebler stated, “At this point there is no way we’d be able to eventhink ofmanaging without them. Nor would we want to.”Eaton summed up his thoughts,“Perhaps the most important attribute of any company today is to anticipate change,and to move quickly to capitalize on it. It’s all about speed and flexibility. It’s aboutconverting ideas into profits, and doing it faster than ourcompetitors. It’s about speed tomarket. Above all, we believe it’s about passion -the passion for designing, developing andbuilding the world’s greatest cars andtrucks…Everyone is truly passionate about what we’retrying to do.”Recent Change and Structure at Daimler-BenzWhen Schrempp took over as chairman in May 1995, Daimler was in seriousfinancialtrouble. Many of its 35 business units were making little or no profit. Itstraditional slowbureaucratic structure and amalgamation of disparate businesses created anunwieldy organizationfocused on its past successes. Significant levels of streamlining andrestructuring were needed.Schrempp created a new Board of Management with many newmembers who would undertakethe fundamental changes to the inherited structure.The Board was determined to see the processthrough and to keep the momentum going.They attached great importance at the outset toorganizing the change process so thatthere was a clear division of responsibilities with predefined tasks and priorities and, tokeep friction to a minimum, as few interfaces as possible.The Board quickly carried out astreamlining of Daimler’s business portfolio trimming itto 23 strategic business units(seeExhibit 6for Daimler-Benz structure). The goal was to achievea strong market position infirst or second place in the world market in each business. As part ofthe restructuring of theauto business, Mercedes-Benz was merged with the Daimler-Benz group.Helmut Werner,the head of Mercedes-Benz and the man credited with its success, was a vocalopponent ofthe move. He resigned soon after the decision was made.Profitability became a key measure for the company– once restructured, businessunitswere required to earn a 12% return on capital employed in order to remain part of the 6 | DaimlerChrysler Merger
  7. 7. company’sportfolio. In 1995, to improve financial transparency, Daimler -Benz beganreporting resultsexternally based on US GAAP. In addition Schrempp and his new Boardbegan preaching thenecessity for a strategy focused on “shareholder value.” This approach hadnot yet been expresslyformulated or followed in Germany. The issues surrounding quarterlyreporting and focusing onstock price triggered lively debate. One trade unionrepresentative expressed the opinion that“the obsession with increasing shareholder valuerides roughshod over the interests of employees,the environment and society.”The Board also undertook an aggressive cost cutting program, which included layoffsofthousands of workers, something unprecedented in Germany. A restructuring of theheadquartersgroup was initiated to reduce the bureaucracy and improve planning anddecision-making.Although significant reductions were made Daimler-Benz stillmaintained a strong centralizedcorporate staff. At a January 1997 announcement ofthe new group structure Schremppannounced, “The new structure will make us fit forthe next century. But we still need a cultureshock.”The new structure gave business unitmanagers more autonomy in running theirbusinesses and increased accountability forprofits. Each business unit maintained its own staff.By 1997 the restructure had borne itsfirst fruit. For financial year 1997 Daimler-Benz reportedan operating profit of DM 4.3billion, a 79 percent increase over 1996.“Our strategy of orienting the group around units that are profitable and offer goodprospects for future growth has now borne its first fruit. We must also point outhowever, that Daimler Benz has still only completed the first stage inits effort to reachworld best practice.”The significant changes at Daimler-Benz left many managers dazed by its rapid pace.Many ofthe people working for the century-old company were unable to keep pace or keep trackofthe changes going on around them. Schrempp, a driven and charismatic individual, earnedareputation as a “Rambo,” partly due to the speed with which he demanded change andpartlybecause of his direct and sometimes severe nature. Schrempp responded, “If Rambois someonewho acts quickly and decisively, the image is an appropriate one.”By the end of 1997 the new structure was fully in place. Schrempp reported,“We had once again lashed the new organization down at a time when many inthecompany thought that we were still in the change state. This meant that wehad alreadymoved on to refreezing at a time when many thought that we werestill in the unfreezing andmoving stage.”Daimler-Benz had forged a culture focused on(brand) image, quality, engineering,profitability, andbusiness unit autonomy.Reflecting on the significant changes made at Daimler-Benz, Dieter Zetsche, head ofsales and marketing, concluded,“In many people’s minds Daimler-Benz is thistraditional,conservative company of managers wearing dark suits and moving ahead very 7 | DaimlerChrysler Merger
  8. 8. slowly. I have tosay that there are very few companies in the automotive industry that havemade as many rapid,daring and basic changes as Daimler-Benz.”Initial Structure of Management and Integration ProcessAs a public limited company DaimlerChrysler like Daimler-Benz was required underGerman law to have a Board of Management and a Supervisory Board. Based on the GermanCo-Determination Law the Supervisory Board was comprised of ten shareholders’representativesand ten employees’ representatives. Five members from the SupervisoryBoard of Daimler-Benzand five members of the Chrysler Board of Directors comprised thenew Supervisory Board. Inorder to assist the integration of the two companies, HilmarKopper, then chairman of theSupervisory Board of Daimler-Benz, was namedchairman of the Supervisory Board of DaimlerChrysler for at least two years.The Board of Management consisted of 18 members, eight from Daimler -Benz, eightfrom Chrysler and two responsible for the Aerospace and Services divisions. JürgenSchremppand Bob Eaton were to be co-chairmen and co-chief executive officers fora period ofapproximately three years. Eaton announced at the outset of the merger thathe would retirewithin three years, causing considerable consternation at Chrysler, wherehe was seen as havingmade himself a lame duck with considerable loss ofpower.DaimlerChrysler President TomStallkamp was put in charge of the integrationeffort (seeExhibit 7for profiles of Schrempp,Eaton and Stallkamp). Chrysler also hademployment continuation agreements in place with eachof its executive officers to cover aperiod of two years following the merger.The Board of Management formed a committee, called the “Chairman’s IntegrationCouncil,”the stated main task of which was to promote the integration of the two companies(seeExhibit 8 for Integration Organization). It was anticipated that the Council would be inplace fortwo years. The companies prepared for integration through 29 Issue ResolvingTeams; laterapproximately 70 working groups were brought together to makerecommendations. Finaldecisions were left to the Board of Management. An overallcoordination team, called the PostMerger Integration Team (PMI) was also introduced andheaded by managers from both Daimler-Benz and Chrysler. The PMI reported to thechairmen’s Integration Council and was responsiblefor ensuring integration occurred inall areas. Integration teams fell into two categories,automotive, and non -automotiveareas and corporate functions. Each team was co-led byDaimler-Benz and Chryslermanagers.Automotive Integration Teams:  Product Creation  Purchasing  Marketing and Sales 8 | DaimlerChrysler Merger
  9. 9.  Production Planning  Global Strategy-IntegrationNon-automotive and Corporate Functions Teams:  Corporate Development  Technology and Research  Information Technology  Finance and Controlling  Human Resource and Corporate Structure  Corporate Communication  Non-automotive DivisionsCommenting on the integration structure Stallkamp noted, “We had our ownteaminternally that was getting ready for this, and they had their own team doing thesame thingindependently. We have now married those two teams together.”The Quest to Create “One Company”After the May 1998 public merger announcement Daimler and Chryslerexecutivesinitiated efforts to address the challenges of integrating the two companies. Sinceonly a handfulof managers were taken into confidence during the negotiation phase the task of bringingthemanagement levels together needed to begin immediately. Commenting on the uniqueblendingof the two organizations, Chris Benko, managing director of Autofacts, adivision ofPricewaterhouseCoopers stated, “They have the best combination of creativity andcharisma plusbureaucracy and precision management.”Stallkamp commented, “All 420,000 employees need to know we’ve left Chrysler behindand we’ve left Daimler-Benz behind,” he said. “We will all be working for a new company.”Because of the intense scrutiny the merger was under, analysts and the media soughtoutbenchmarks in other major US-German mergers and acquisitions, of which there werevery few.In the May 24,1998Autoline Detroitspecial, Dean Langford, President of OSRAMSylvania, theresult of a 1993 acquisition of GTE’s Sylvania by Siemens subsidiary OSRAM,gave insight intothe challenge of integrating German and American companies.“Americans are more free form in their discussions, a little less rigid. TheGermanstend to be very rigid, more methodological in their meetings and thought processes.Americans have a tendency to sometimes go off on tangents.With the Germans you don’t haveto worry about it. When they say they’re goingto do something and this is the agenda theystick to it.”Charles Jerabek Executive Vice President and General Manager of OSR AM Sylvania 9 | DaimlerChrysler Merger
  10. 10. added,“For the most part Germans don’t understand the informalities of Americanbusiness,everything from casual dress days to drinking coffee throughout a meeting. In thatcontext they don’t take the ideas presented as seriously as theywould if they were beingpresented in their own culture. On the other side Americans often misinterpret theGermans’ need for rules and order as maybedisinterest in doing something. What we’veworked hard to overcome and whatDaimler and Chrysler will have to work hard toovercome is the separation ofNot Invented Here (NIH) syndrome. Both sides of the oceantend to think thatwhat they’ve come up with and developed is the best way to dosomething.”Some close observers believe that the merger was a “marriage ofopposites…Daimlerembraced formality and hierarchy, from its intricately structureddecision-making processes to itssuit-and-tie dress code and starchy respect for titles andproper names. Chrysler shucked barriersand promoted cross-functional teams that favoredopen collars, free-form discussions, and casualrepartee…Virtually all the German executivesspoke English. None of the Americans, with thenotable exception of Lutz, [retired ViceChairman, forced out by Eaton], spoke German.”DaimlerChrysler’s early integration efforts were focused on trying to identify the bestprocess for the new company. “It’s not our intent to say “one side wins and the other loses,” saidStallkamp.“Take the different ways we conduct meetings. Our approach is more informal,with more giveand take. Theirs tends to be more formal, with a lot more workdone in advance.”The differences in business culture were widespread, as basic as figuring outhowDaimler and Chrysler could share product information when the Germans takemeasurements incentimeters and the Americans use inches, to as complex as ensuringmarket competitivecompensation systems on both sides of the Atlantic. In an effort toimprove the likelihood ofintegration success, Chrysler invited employees to take voluntaryculture training. “The nationalcultures are less of an issue than business culture, and it’smore important to get cultural trainingthan language training,” noted Stallkamp.When asked about his approach to the integration Stallkamp responded,“More and more of my time, if you include the cultural side, is spent on integratingthe two companies. My job is to integrate them as much as possible,so we can get the synergieswe signed up for, to get one company out of two. Thebiggest challenge is the need forface-to-face communications, rather thanvideophones. You need to meet people inperson, rather than long distance, sothat means we have to travel more. You have tosocialize with each other, youhave to meet after business meetings. Otherwise, the comfortfactor would keeppushing people back into their own (traditional cliques).”The pace of integration was also a concern to the DaimlerChrysler management. “To be 10 | DaimlerChrysler Merger
  11. 11. fair we move faster and they’re much more analytical,” said Stallkamp. “That is one of theissues.How fast do we go on this? This is a big deal, and we don’t want to screw it up bycrashing somepremature integration.”Schrempp added his thoughts,“We have said to ourselves, let’s rather make 80 percent correct decisions now and notwait for the 100 percent decision which might not eventually happen. Because the wholeorganization expects change. So if you do something now,they will say, yes it’snecessary. If you do not act for 12 -18 months theorganization will again get into asort of stable situation. And then when youwant t o m ove and chan ge som et hi ngt he y s a y wh y di dn’t t he y do i t immediately?”The Reality of IntegrationThe Chairman’s Integration Council (CIC), ostensibly created to promote the integration ofthe two companies, was in effect an attempt to get around the cumbersome governancestructure and run the company using a small group of leaders with a long-term strategicfocus.The formation of the CIC, however, met with immediate and equal dissatisfactionfrom non-CICmembers on both sides. These senior officers felt they were once againbeing left out of theimportant decisions for the company. Stallkamp saw it as a “slapin the face to non-CICmembers, and doomed to fail.” The CIC met with suchretaliation that it was ultimatelydisbanded. Decisions reverted to the 18-membermanagement board. Schrempp, however,maintained a small cadre of loyal advisors,which the Chrysler managers nicknamed his “kitchencabinet.” This small group served asSchrempp’s primary information network and soundingboard for his plans. Topics to bepresented before the management board were often previewedby this group. This soonincluded merger integration updates by the PMI team.Stallkamp had intended to use the PMI team as the catalyst for process redesign. Initiallythe PMIwould identify “low hanging fruit” that could be used to achieve early synergies. Sincethe PMI consisted of working level managers from each business unit, not seniorofficers,Stallkamp believed the PMI could identify processes that, if redesigned, could providesignificantimprovements and/or savings long term. The framework for process redesign was tobe similar toGE’s Workout sessions; current systems would be detailed and compared andthen new systemsdeveloped containing the best aspects of the current ones. Stallkampand other Chryslermanagers felt the PMI could be used to track synergies, measurethe morale and culturemomentum, and identify new opportunities. Instead of inventing anew best system, however,both sides spent significant time trying to convince the other thattheir system was superior. ThePMI soon became bogged down in the financial accountingof the synergies that had been sopublicly touted and its reports to the management board soonwere sanitized to discussions of thefinancials. The “soft” issues and new processes were notconsidered important by many of theGerman managers. Instead they were focused onachieving their portion of the financial synergytarget that had been allocated to them. 11 | DaimlerChrysler Merger
  12. 12. The different philosophies of organizational structure became a contentious issue earlyon.Chrysler had matrix management and platform teams and operated in essence as a singlestrategic business unit. Daimler-Benz had a more traditional structure with direct linesofauthority and business unit autonomy for each of its 23 business units. The matrix conceptof onemanager having two jobs, for example the head of Mercedes-Benz also headingDaimlerChryslerEngineering, did not make sense to the Daimler-Benz managers. EvenSchrempp himself asked,“Who do you shoot when it doesn’t work?” Daimler-Benzmanagers were rewarded basedprimarily on the profit and loss results of their unit.Chrysler managers were rewarded based onthe success of their team and Chrysler. Thedifferences in compensation, particularly betweenEaton and Schremmp -- one paid at the highAmerican CEO rate with ample stock options, andthe other at much lower German salary --were often highlighted in the press. Further, Chryslerexecutives had rich terminationcontracts, (“golden parachutes”), a practice not used in Germany.In addition, Stallkamp’s title became an issue. In a German AG company there is nopresident; allboard members are considered equal. Even the CEO is not the boss, atleast not legally.Stallkamp’s title of president of DaimlerChrysler caused a disturbanceamong many of theGerman managers, who questioned, “Why is he called president?”At the outset neither side was willing to give up its structure; many managers on bothsideswanted to be left alone to run their business units. Despite these majordifferencesStallkamp believed there were opportunities to demonstrate the benefits offinding the “newway”, stating, “All we needed was a couple key processes to show theworkforce that it could beone company.”Stallkamp’s efforts to integrate the operational systems of the company soon hit anothermajorroadblock. Daimler-Benz managers, particularly those from Mercedes -Benz,wereextremely sensitive to the issues of brand image. Schrempp explained,“We had to keep brand identity and we see how we do it here. And beforeclosing we were ableto come up with a great policy paper on how we wanted todo that, in every detail,describing every brand, describing back offices, infrastructures, identities, etc.”The policy paper became known as the “brand bible.” The Germans pushed for theseparation ofbrands to extend to the back office activities. To the Americans, thisseemedunnecessarily conservative. Stallkamp recalled,“We had one discussion that lasted for three days. It was that we couldn’t haveour (Chrysler)Mopar truck, from our after market parts division, arrive at a Mercedes dealer, even withparts not identified as Chysler-connected. We had aprotracted discussion on whether wecould even use white trucks and unbrandedtrucks! We wasted a lot of intellectual capital andtime on that issue.”Financial reporting and investor relations became another battleground. Over thepreviousseveral years, the finance staff at Chrysler had implemented several major 12 | DaimlerChrysler Merger
  13. 13. processredesigns, and established itself as a world-class benchmark. It had received formalrecognitionfor these achievements from the U.S. business community. Its brushes withbankruptcy hadingrained a disciplined approach to cash manage ment. Daimler-Benzhad begun reportingaccording to US GAAP in 1995, but was still developing its approach,particularly in the area ofcash management. Since all cash was pooled it was difficult totrace the sources and uses of cashfor Daimler-Benz’ business units. This difficulty became asore point early in the merger.Chrysler executives couldn’t believe, for example, that the topfinance official at Daimler-Benzcould not produce – or seem to understand the need for – asimple cash flow statement.In addition Chrysler was adept at dealing with the investment community. It hadsignificantexperience dealing with analysts, Wall Street and institutional investors. Daimler -enz onthe other hand did not have a strong relationship with Wall Street and followed amoretraditional approach to the investment community, reporting the required numbers andavoidingsignificant attention. In addition to the internal 12 percent ROCE hurdle rate,Daimler-Benzprimarily measured revenue and number of personnel empl oyed asindicators of its size andsuccess.Chrysler also maintained an external focus with emphasis on quarterly reports andcompetitoranalysis. Daimler-Benz was focused internally on achieving managementbyobjectives and maintaining decentralized responsibilities. Heated debates over methodsfor datacollection, data presentation and discussion with analysts marked some of theearliest politicalbattles within the new company. The Daimler-Benz financial headrefused to report a poorquarter’s earnings separately to Wall Street analysts, insisting onreporting only the combinedhalf-year results (which could be determined by subtractingthe previous quarter’s results fromthe total), despite dire warnings from Chryslerexecutives. When brought in to the discussion,Schremmp declared that he wouldn’tbother with trying to please young, immature MBAanalysts. The day after the publicannouncement, DaimlerChrysler shares dropped 12 %.The Daimler-Benz managers prevailed in many of the early arguments over positionsandfunctions, setting the tone for later debates and giving the impression that the “merger ofequals”was in fact a takeover. Stallkamp found himself personally embroiled in thesedebates. BecauseChrysler had no corporate staff to complement the staff at Daimler-Benz,Stallkamp selected anemployee to become part of his Operations Planning and Strategy Group.He recalled,“I was summoned to the management board in Germany because a membercomplained I wascreating “a strategic group” – and strategy belonged to EckhardCordes in Daimler-Benz’Strategic Planning Group. I said I was just trying toidentify someone as a counterpart totheir guy and they said OK, but you can’tcall it strategy. That was one of the real turningpoints in the political battle.”Changing even the “minor” business norms proved difficult. The use of overhead chartswas atradition at Daimler-Benz. Presentations usually involved significant numbers of detailedandcomplex “flimsies,” with many backup slides to address practically any question that might 13 | DaimlerChrysler Merger
  14. 14. be asked. Chrysler presentations, on the other hand, usually took the form of open andpointeddiscussions with little advance preparation. Chrysler’s platform teams typicallygave updatesusing a single 12 point chart. Schrempp joked about the difference, “The oneside a little moreoff the hip, the other side a bit more analytical, possibly too analytical.And you know thewisdom might be somewhere in the middle.”Daimler-Benz employees also flew first-class in keeping with the company’s luxuryimage. AtChrysler only top officers could fly first-class. Like many other seemingly trivialissues,the travel policy became a focal point and took more than six months to resolve.Issuesthat should have been handled easily by the teams, such as labor relations, publicrelations ordifferences in emissions control policies, were bumped up to the company’smanagement boardfor resolution. Even the size of the company business cards becamefodder for debate.The difficulties in bringing the cultures together was perceived by many in the autoindustry andWall Street,“There’s this view within this company that there’s Chrysler guys and there’sDaimler guys,“said Rod Lache, an analyst with Deutsche Bank Securities in New York. “Although thefunctions have been integrated, the cultures havenot.”Stallkamp’s frustration with lack of progress on the integration began to take its toll.Helamented,“We’re missing a golden opportunity to shuck off the past. We’re into this “ourway” or “theirway” instead of saying what do we do right, what do they do right,and let’s take only thegood stuff. The analogy is you’re moving. You’re leavinghome and you don’t have enoughroom in your new house --you have to throwaway something. (You) don’t drag all thatbaggage with you to the new house.”The Frustrations of Managing UpPart of what made it difficult for Stallkamp to get full cooperation was that he hadverylittle contact with Schrempp: “Because of the geographic distance it was hard toestablish arelationship with him. His kitchen cabinet of loyal underlings, who he metwith daily overdrinks, was his information system. We all tried to minimize time awayfrom the office bylearning to do trips to Germany in one day, flying overnight, meeting allday, then flying back toDetroit to sleep at home.”A few months after the merger agreement but several months before it would be fullycompleted,Schrempp had taken the very unusual step for a German manager of asking tovisitStallkamp at his home. Schremmp’s secretary called Stallkamp’s secretary to saythat “Mr.Schremmp would accept an invitation to Mr. Stallkamp’s house.” Bewildered,Stallkamp’ssecretary asked him what to do. Stallkamp was also amazed, but wentthrough with theinvitation. They talked for two hours, during which Stallkamp becameuneasy. 14 | DaimlerChrysler Merger
  15. 15. “… Schrempp was reaching out...in a way that was a little uncomfortable. [He]was alreadywondering when Eaton would leave DaimlerChrysler.”“It was like, you and I are going to do this, don’t worry about Bob,” Stallkamprecounted later.“It was clear that he didn’t want to be viewed as throwing Bobout…I thought he might betrying to co-opt me to get Bob to leave and I told himI would never do that…But it wasalso like Schrempp saying, you and me,buddy, we’ll make this thing work.”Stallkamp added that he knew the visit to his home was an important gesture, but beingasked tohelp get Eaton out was “not a really fun assignment and one I foundpersonallydistasteful.”A few months later, after an offsite meeting to discuss post-merger integration, SchremppinvitedStallkamp to lunch in his suite.“Here’s what we’re going to do,” Schrempp said. “You stay close to me. Call mewhenever youwant. Don’t worry about going through Bob Eaton, and all that kind of stuff.”Stallkamp felt intensely uncomfortable with the idea of circumventing Eaton. It seemeddisloyal,almost unethical.“I can’t do that,” he protested. “I won’t do that. I don’t think it’s the right thing to do.Iwouldn’t feel right.”“Don’t worry about it,” Schrempp asserted.As the merger and integration efforts moved forward, however, Eaton was no helpbecause,Stallkamp believed, he didn’t like confrontation and had abdicated. So Stallkamp was leftto raise what he believed were some critical issues that he saw being handled incorrectly.Forexample, after a while, the management board meetings were moved to New York toreducetravel back and forth to Germany. Fancy suites at expensive hotels were held forboard members,even when they did not stay overnight. Stallkamp was worried that thewrong message aboutspending was being sent to the Chrysler managers who were used totraveling coach and stayingat Holiday Inns. He “circulated a critical memo, whichSchrempp immediately took offense at.he costs, Schrempp scolded Stallkamp, wereinconsequential. As president of the Chrysler unitand head of integration, he should bespending more time on making the merger work than sweating meaningless details of hotelrooms and the price of wine.”Stallkamp backed off.Another misunderstanding occurred when Stallkamp said to Schremmp, with admiration,thatSchremmp was not caught up in details and “operated at 50,000 feet.” To Schremmp thiswas an insult, implying that he was not on top of things, and Stallkamp had to explain that hehadmeant it as a compliment.Soon after the merger was culminated, however, Stallkamp felt compelled to opposeSchremppon his plan for the potential acquisition of Nissan. Schrempp was excited about 15 | DaimlerChrysler Merger
  16. 16. thepossibility of extending the company’s reach into Asia, but Stallkamp and otherlong-termChrysler executives were very concerned about whether the precarious newDaimlerChryslercould handle the added integration burdens. Stallkamp wrote a three pagememo of opposition tothe board, declaring that Nissan was going to go bankrupt and that itwould be better off doing so,since the world didn’t need it. Schrempp was furious, but endedup calling off the deal for Nissanwhen he realized how little support he had.This led Schrempp to confront Stallkamp about “block voting” on the American side. AtfirstSchremmp maintained that creating an analytical team to prepare strategic reports for theAmerican executives was an attempt to vote as a block, though he eventually concede dthat itmight be because the Americans had no staff while the Daimler executives did.But thenSchrempp argued that the Nissan decision was block voting, to whichStallkamp exclaimed,“That’s bullshit…We all thought individually it was a stupid idea. There was no blockvoting.”It was in this climate that Stallkamp was trying to figure out what to do about integration.Underthe watchful eye of the auto industry and Wall Street, Schrempp and Eaton pushed forresults and faster integration. It just didn’t feel right to allow Chrysler to become one of 24SBUswhen it was half of the total company size, and other Chrysler executives were incensedabout theidea. Stalkamp felt an obligation to protect their interests. But he was beginning towonder if heshould abandon the effort to create one company and let the power strugglebetween the twosystems continue so that the stronger would take over the weak, revertingto a “survival of thefittest” approach. He was beginning to think there might be no othersolution. 16 | DaimlerChrysler Merger
  17. 17. Exhibit 1Chrysler Corporation and Daimler-Benz Company HistoriesChrysler CorporationIn 1908 Walter P. Chrysler bought his first automobile, a Locomobile Phaeton. Notsatisfiedwith merely driving the car, he took the car apart and put it back together several timesto getto know its technology. In 1912 Chrysler became production manager at Buick MotorCompany,then a subsidiary of GM. From GM, Chrysler moved on to the MaxwellMotorCompany. In 1924 the first vehicle to bear the Chrysler name was unveiled. OnJune 6, 1925Walter Chrysler purchased the company he chaired, transferring all rights andobligations fromthe Maxwell Motor Company to the new Chrysler Corporation. In 1928Chrysler acquired DodgeBrothers, Inc. a company five times its size. In 1942 Chryslerstopped civilian vehicle productionin favor of war production.Throughout the post-war period Chrysler nearly succumbed to the effects of the cyclicalautoindustry. In 1979, with a huge inventory of low-mileage cars at a time of rising fuelprices,Chrysler faced bankruptcy. Chrysler elected Lee Iacocca as Chairman to turnaround thecompany. In 1980, President Jimmy Carter signed the Chrysler Corporation LoanGuarantee Act,providing Chrysler with $1.5 billion in federal loans. Chrysler facedbankruptcy again in 1990 butthe Chrysler management team used the crisis to conduct amajor restructure of the business,returning Chrysler to profitability by 1992.By 1997 Chrysler Corporation operated in two principal industry segments:AutomotiveOperations and Financial Services. Automotive Operations included theresearch, design,manufacture, assembly and sale of cars, trucks and related parts andaccessories. Substantially allof Chrysler’s automotive products were marketed through retaildealerships, most of which wereprivately owned and financed. Financial Services included theoperations of Chrysler FinancialCorporation and its consolidated subsidiaries, which wereengaged principally in providingconsumer and dealer automotive financing for Chrysler’sproducts. Chrysler focused heavily ontrucks in its product line. In 1997, trucks, includingminivans, accounted for about 65 percent ofChrysler’s vehicle sales in the U.S. and carsmade up the remaining 35 percent. Chrysler’s brandsincluded Jeep, one of the mostrecognized car brands in the world, Chrysler, Dodge, and Plymouth. One of its mostsuccessful products was the minivan, which Chrysler invented in 1983.In 1997, minivans accounted for approximately one third of Chrysler’s truck sales.Chrysler’slarger cars, such as the Stratus, were priced similar to Mercedes-Benz’ lower mid-size car, the C-class. At the bottom end of the range Chrysler offered the Dodge/PlymouthNeon. Its car productline included mass-market cars such as the Neon to niche vehicles such asthe Dodge Viper andthe Plymouth Prowler.Daimler-Benz A.G. 17 | DaimlerChrysler Merger
  18. 18. Gottlieb Daimler and Karl Benz were two rival German carmakers who went intothbusiness atthe turn of the 20century. While both Daimler and Benz achieved individualsuccess inthe early 1900s, the challenge of rebuilding Germany after World War I, as well ascompeting with the burgeoning Ford Motor Company, led the two companies to merge in1926 toform Daimler-Benz. The company shifted to military production during WorldWar II, butDaimler began manufacturing cars again in 1947. By the 1980s, Daimler and itsMercedes brandhad become synonymous with premier quality and craftsmanship. Daimlerbegan a program ofdiversification in the mid-1980s, intending to transform thecompany into a self-described“integrated technology group” with product lines ranging from transportation to aerospacetomicroelectronics to white goods. A string of largely unprofitable acquisitions in the late1980sleft Daimler unfocused and inefficient, culminating in a staggering DM 5.7 billionloss for 1995the largest peacetime loss ever by a German company.Under the direction of the new chief executive Jürgen Schrempp, Daimler began toshedunprofitable business units, to return the company to its core business of making highqualityautomobiles and to move towards a more “American-style” management designedto enhanceshareholder value. Under Schrempp’s direction Daimler-Benz quickly returnedto profitability.By 1997, Daimler-Benz was the largest industrial group in Germany with1997 revenues of DM124 billion. Daimler-Benz operated in four business segments--Automotive (Passenger Cars andCommercial Vehicles), Aerospace, Services and DirectlyManaged Businesses. Daimler-Benzwas primarily active in Europe, North and SouthAmerica and Japan and continued to expand inmarkets such as Eastern Europe and East andSoutheast Asia, which were also assuming strategicimportance as production locations. In1997, approximately 33 percent of Daimler-Benz’revenues was derived from sales inGermany, 25 percent from sales in other member states of theEuropean Union and 21percent from sales in the United States and Canada. The Automotive segment contributedapproximately 71 percent of Daimler-Benz’ revenues in 1997. 18 | DaimlerChrysler Merger
  19. 19. Exhibit 7Executive ProfilesThomas T. Stallkamp, President DaimlerChrysler AGStallkamp’s tenure as president of Chrysler Corp. was unexpectedly short. Stallkampwasappointed Chrysler President in January 1998, just a few short months before thesurprisingpublic announcement of the merger with Daimler-Benz AG. Some observerssaid the mergercouldn’t have happened without the 52-year-old executive. Prior to taking onthe president’s post,he’d overseen Chrysler’s global purchasing program. It was his job toget the most for the morethan $60 billion the automaker was spending for parts andcomponents each year. But Stallkampdid more than just demand good prices. He activelysought to make suppliers part of Chrysler’s“extended enterprise,” taking on many of thedesign, engineering and development chorestraditionally handled in-house. The processpaid off by making Chrysler one of the world’sleanest and most efficient carmakers. Hewas described as having an easy manner mixed with awry sense of humor.“The reason he is so successful is because he has a small ego,” says one longtime friend.Hiskeen sense of humor, often self-effacing attitude and “my word is my bond” ethic wonhimthe trust of Chrysler suppliers.“Tom has an unusual ability to get people to march in the same direction”, said JackSights, anexecutive with automotive glass supplier Guardian Industries in Auburn Hills.“Tom is sort of custom-made for this role he is playing” said Robert Liberatore ChryslerVicePresident of Washington Affairs. “He is an excellent listener, which is part of the skillsetyou need when you bring two gigantic entities together.”9Jürgen E. Schrempp, Co-Chairman DaimlerChrysler AGDuring his tenure as Chairman of Daimler-Benz, Schrempp proved to be a master ofboardroompolitics, with the ability to make decisions quickly and the willingness to take risks. Hecalled these decisions “digital” decisions: uncompromising yes/no determinations thatacomputer might make. He was respons ible for significant restructuring andportfoliorationalization at Daimler-Benz, returning the company to profitability in just oneyear. He brokeGerman business taboos through his tough labor negotiations, ordering hugelayoffs to try to turnthe company around. His aggressive American style management practicesand his focus onshareholder value were not popular in many German business circles.Schrempp characterizedhis methods stating, “Nobody will ever spread a rumor about myhaving been brought up at agirls’ boarding school.”33 A driven and charismatic individualSchrempp believed that businessalways comes before personal or career considerations.When he announced the end to his 35-year marriage in 1999 he explained it by saying he 19 | DaimlerChrysler Merger
  20. 20. wanted to concentrate on making the merger asuccess. In an interview with a Dutchnewspaper Schrempp stated, “This company needs memore than I need the company. Doyou think that’s arrogant? I can tell. Write it down.Schrempp valued decisiveness over protracted consensus building. “He’s very much adon’twaste my time guy,” commented Hypo bank auto analyst Thomas Aney. Schremppcounted GEChairman Jack Welch among his business heroes.Robert J. Eaton, Co-Chairman DaimlerChrysler AGA no-nonsense engineer from Kansas, Eaton spent more than two decades climbing theladder atGM before jumping to Chrysler in 1992. Prior to accepting the ChryslerchairmanshipEaton was running GM’s vast European operations. Eaton was considered tobe one of the moremodest chief executives of the world, a mild mannered and even-tempered man who believed inthe power of teams. His demure, less forceful mannerwas a significant departure fromSchrempp’s style. One GM executive commented thatEaton had a solid self-worth without beingon an ego trip, adding, “You always know he’sthe boss but he doesn’t always push to the centerstage.” He approached problems in a direct,straightforward manner and sought the advice of hismanagement team. 20 | DaimlerChrysler Merger

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