-
| FinAna p95686$$19 p. 77 07-26-:0 09:01:43 !| TRIM!
International Review of Financial Analysis9:1 (2000) 77102
Value creation and challenges of aninternational transaction
The DaimlerChrysler mergerMatej Blasko, Jeffry M. Netter*,
Joseph F. Sinkey, Jr.Terry College of Business, University of
Georgia, Athens, GA 30602-6253, USA
Abstract
Globalization is a buzzword in international finance and
economics. On May 6, 1998, inLondon, Daimler-Benz of Germany signed
a merger agreement with Chrysler Corporation ofthe United States.
Using the DaimlerChrysler merger as a case study, this paper
focuses onvalue creation and analysis of various issues in an
international transaction. The marketresponded very favorably to
this merger, and we review the potential sources of value
creationin the merger as well as outline the steps undertaken to
consummate the merger. We alsoconsider an interesting question: Can
a company truly be global? Differences in corporateculture,
compensation policies, ownership structure, and the legal
environment pose significantchallenges to all mergers but
especially international business combinations. Important
post-merger events, such as the Standard & Poors decision not
to include DaimlerChrysler in theS&P500 Index and the clash of
corporate cultures and compensation schemes, have presentedmajor
roadblocks to it becoming a truly global company. 2000 Elsevier
Science Inc. Allrights reserved.
JEL classifications: F23, G34
Keywords: Mergers; Acquisitions; International finance; Business
combinations; Value creation;Globalization
1. Introduction
The two companies are a perfect fit of two leaders in their
respective markets.Both companies have dedicated and skilled
workforces and successful products,but in different markets and
different parts of the world. By combining and
* Corresponding author. Tel.: 706-542-4450.E-mail address:
[email protected] (J.M. Netter)
1057-5219/00/$ see front matter 2000 Elsevier Science Inc. All
rights reserved.PII: S1057-5219(99)00020-4
-
| FinAna p95686$$19 p. 78 07-26-:0 09:01:43 !| TRIM!
78 M. Blasko et al. / International Review of Financial Analysis
9 (2000) 77102
Table 1Industry overview (1998)
Rumored mergerLargest carmakers Earnings Revenue Car sales Cash
partners
General Motors $2.8 billion $140 billion 7.5 million $16.6
billion Isuzu, Suzuki,Daewoo
Ford Motor* $6.7 billion $118 billion 6.8 million $23.0 billion
Honda, BMWDaimlerChrysler $6.5 billion $147 billion 4.0 million
$25.0 billion Nissan, FiatVolkswagen $1.3 billion $75 billion 4.6
million $12.4 billion BMW, FiatToyota Motor Co. $4.0 billion $106
billion 4.5 million $23.0 billion Daihatsu, HinoHonda Motor Co.
$2.4 billion $54 billion 2.3 million $3.0 billion BMW
* In the spring of 1999, Ford Motor acquired Swedens Volvo car
division for $6.5 billion. Volvo sold400,000 cars in 1997.
DaimlerChrysler called off merger talks with Nissan. Subsequently,
Renault ofFrance acquired a stake in Nissan. Source: Naughton
(1999), Company reports, Merrill Lynch & Co.,Salomon Smith
Barney, J.P. Morgan, Wasserstein Perella.
utilizing each others strengths, we will have a pre-eminent
strategic position inthe global marketplace for the benefit of our
customers. We will be able toexploit new markets, and we will
improve return and value for our shareholders.This is a historic
merger that will change the face of the automotive industry.
This is much more than a merger, today we are creating the
worlds leadingautomotive company for the 21st century. We are
combining the two most innova-tive car companies in the world.
Jurgen SchremppChairman of the Daimler-Benz Management Board
On May 7, 1998, Daimler-Benz of Germany announced plans to merge
with ChryslerCorporation in the largest international merger in
history. Jurgen Schrempp ofDaimler-Benz and Robert Eaton of
Chrysler had signed the combination agreementthe day before in
London. The combined entity is called DaimlerChrysler AG andis
incorporated under the jurisdiction of the Federal Republic of
Germany. Thecompanys stock (DCX) trades on all of the worlds major
stock exchanges, includingNew York, Frankfurt, London, and Tokyo,
as well as on the other exchanges in theU.S., Germany, Austria,
Canada, France, and Switzerland. In many respects,
theDaimlerChrysler merger is shaping the future of the auto
industry and has triggeredconsolidation in an industry plagued by
overcapacity. Table 1 presents an overviewof the auto industry,
including rumors about mergers that are likely to follow thelargest
international merger ever.
This article provides an overview of the important elements of
the DaimlerChryslermerger and relates them to the empirical
evidence on mergers.1 Specifically, this studyanalyzes potential
sources of value creation and the evidence on whether value
creationhas occurred in the DaimlerChrysler merger. We also discuss
specifically some ofthe important issues that must be taken into
account in cross-border mergers andacquisitions. Differences in
corporate culture, compensation policies, ownership struc-ture, and
legal environment may pose significant challenges to international
businesscombinations.
-
| FinAna p95686$$19 p. 79 07-26-:0 09:01:43 !| TRIM!
M. Blasko et al. / International Review of Financial Analysis 9
(2000) 77102 79
2. Motivations for mergers
According to Myers (1976), Mergers are tricky; the benefits and
costs of proposeddeals are not always obvious. In a
Modigliani-Miller framework, if mergers do createvalue, they do so
by changing tax liabilities, changing contracting costs, or
changinginvestment incentives. If the size, timing, and riskiness
of the combined future cashflows of the merged firms exceed the
cash flows of the separate firms (synergy),the merger will be a
positive net-present-value project. Grinblatt and Titman (1998)and
others identify the potential sources of gains from mergers. They
include:
1. Operating synergies center around cost reductions or
synergies related to econo-mies of scale or scope, lower
distribution or marketing costs, or elimination ofduplicate
assets.
2. Tax motivations include changes that occur in mergers that
reduce tax liabilities.These can include effects from stepping up
the basis of the acquired firms assets,amortization of goodwill,
tax gains from leverage, and acquiring tax losses.
3. Mispricing motivations can occur if bidding firms have
information about targetfirms that permit them to identify
undervalued firms.
4. Market-power motivations are based on the idea that the
acquiring firms cangain monopoly power in a merger, perhaps by
buying competitors or foreclosingsuppliers.
5. Disciplinary takeovers can create value if acquiring firms
recognize managerialshortcomings in target firms and introduce more
efficient managers.
6. Earnings-diversification motivations suggest that acquiring
firms focus on diversi-fying earnings in an attempt to generate
higher levels of cash flow for the samelevel of total risk. This
approach substitutes reductions in business risk
(earningsfluctuations) for greater financial risk (leverage).
Grinblatt and Titman (1998,p. 680) note that diversification can
also reduce the probability of bankruptcyfor a given amount of debt
and avoid information problems that arise in usinga external
capital markets.
Since mergers are tricky they also can destroy value. Most of
the ways mergersdestroy value center on the basic agency-cost idea
that the interests of managers andshareholders may not be aligned.
Thus, managers may pursue mergers because ofmotivations other than
the ones in the best interest of shareholders. Examples
ofmotivations for mergers that may destroy value include mergers
resulting from manag-ers hubris (Roll, 1996), managerial
compensation tied to the size of the firm, andmanagers desire to
make acquisitions in areas where they have human capital,
there-fore making themselves more valuable to their own firm.
3. Empirical evidence
The empirical evidence on mergers and acquisitions, while large,
is not conclusive.Event-study evidence on large samples tends to
find that, on average, in the shortrun around a merger announcement
target shareholders benefit significantly fromacquisitions, while
bidder shareholders are unaffected or lose slightly.2 The net
an-
-
| FinAna p95686$$19 p. 80 07-26-:0 09:01:43 !| TRIM!
80 M. Blasko et al. / International Review of Financial Analysis
9 (2000) 77102
nouncement effects of takeovers (over both target and bidder)
are positive, althoughthe variance of these announcement returns is
large. Various researchers have searchedfor the source of the gains
from mergers, and there is evidence that mergers can createvalue by
reducing taxes, increasing productivity, improving incentives, and
generatingsynergies. Another approach has been to examine the
long-run performance after amerger using stock or accounting data.
The results from the long-run performanceliterature are mixed, in
part, because of the difficulty of estimating long-run
perfor-mance.
Another approach has been to examine the long-run performance of
firms afterthe merger using stock or accounting data. For example,
Loughran and Vijh (1997)examined benefits to long-term shareholders
from corporate acquisitions. They founda relationship between the
post-acquisition returns and the method of payment. Theanalysis
suggests that firms completing cash-tender offers earn
significantly positiveexcess returns, while the stock mergers
appear to destroy value over the long term.It appears that the
method of payment for a target may provide valuable clues aboutthe
managers confidence in the quality of a proposed merger. However, a
growingliterature has noted that serious methodological and
theoretical difficulties exist inestimating long-run performance.
For example, Lyon, Barber, and Tsai (1999) saythe analysis of
long-run returns is treacherous, while Fama (1998) argues that
bad-model problems are unavoidable and more serious in tests of
long-run returns. Thus,the question of the long-run performance of
firms after mergers remains unsolved.
Another approach to the study of the effects of mergers is a
case approach. Forexample, Kaplan et al. (1997) examined two
acquisitions that in the long run didnot create value, in large
part, they argue, because the bidder management did notunderstand
the targets business. Bruner (1999) analyzed the loss of value in
theaborted deal of Volvo and Renault, while Lys and Vincent (1995)
focused on valuedestruction in ATTs acquisition of NCR. Bruner
argued that his hypothesis of pathdependence could complement
hypotheses about value-destroying mergers that origi-nate from
managers themselves. By path dependence, he means that
researchersshould recognize that decisions managers have made in
the past might constrain theirchoices in the future. While Bruner
suggests that researchers should look further backin time than the
first announcement of a merger to build a deeper understanding
ofthe origins of bad deals, path dependence should also affect good
deals. On balance,past decisions can provide a solid foundation for
good future deals, or they can becomequagmires that doom future
transactions. Nevertheless, Kaplan (1989, 1994) showsthat the
Campeau acquisition of Federated (even though it ended in
bankruptcy)created value.
In summarizing the empirical evidence on mergers Grinblatt and
Titman state:
Based on an analysis of the empirical evidence we cannot say
whether mergers,on average, create value. Certainly, some mergers
have created value while otherswere either mistakes or bad
decisions. Of course, many of the mistakes weredue to unforeseen
circumstances and were unavoidable. (1998, p. 702)
This case analyzes the Daimler-Chrysler merger in the light of
the existing empirical
-
| FinAna p95686$$19 p. 81 07-26-:0 09:01:43 !| TRIM!
M. Blasko et al. / International Review of Financial Analysis 9
(2000) 77102 81
evidence to identify potential areas of value creation and to
present early evidenceon the success of the merger.
4. Company profiles and the reasons for the DaimlerChrysler
merger
Jurgen Schrempp, Chairman of Daimler-Benz Management Board, has
been behinda dramatic turnaround at Daimler, transforming the firm
into a competitive globalpowerhouse.3 On January 12, 1998, Schrempp
visited Robert J. Eaton, Chairman andCEO of Chrysler Corporation,
at an International Auto Show in Detroit to suggestdiscussion of a
possible merger. Less than four months later, there was a signed
mergeragreement. Table 2 presents a chronology of the
DaimlerChrysler merger and themost important steps taken before the
merger closed in November 1998. The keysteps in the merger process
included initial discussions on the feasibility of the
merger,discussions of governance and business organization
structures, signing a merger agree-ment, and closing the merger
transactions after getting approvals from the interestedparties:
boards of directors, shareholders, and regulatory agencies.
Daimler-Benz AG, a stock corporation (Aktiengesellschaft), was
the largest indus-trial group in Germany with 1997 revenues of
DM124 billion ($68.9 billion). Althoughknown primarily for its
luxury Mercedes cars, Daimler operated in four businesssegments:
Automotive (Passenger and Commercial Vehicles), Aerospace,
Services,and Directly Managed Businesses. Chrysler Corporation,
incorporated in Delaware,operated in two principal segments:
Automotive Operations and Financial Services.Primary operations
included research, design, manufacturing, assembly, and
productsales (including trucks and accessories), as well as
financial services providing consumerfinancing for Chrysler
products.4
Several potential reasons exist for the merger. Daimler derives
63% of sales fromEurope, while Chrysler depends almost exclusively
on North America, with a 93%share of all sales. As Robert Eaton
mentioned, Both companies have product rangeswith world class
brands that complement each other perfectly. We will continue
tomaintain the current brands and their distinct identities (Merger
agreement signed,Canada Newswire, May 7, 1998). Moreover, both
companies are trying to expandgeographically in their respective
markets, and immediate growth opportunities willexist by using each
others facilities, capacities, and infrastructure. Auto
industryexperts (see Table 3) also welcomed the merger, although
analysts from firms thatwere not involved in the merger (Goldman
Sachs and CSFB advised Daimler-Benzand Chrysler) were more cautious
in their long-term performance forecasts and recom-mendations.
According to the DaimlerChrysler merger prospectus:
During the course of (merger) discussions, representatives of
Chrysler statedthat it was important to Chrysler that any potential
transaction maximize valuefor its stockholders, that it be tax-free
to Chryslers U.S. stockholders and taxefficient for DaimlerChrysler
AG, that it have the post-merger governance struc-ture of a
merger-of-equals, that it have the optimal ability to be
accountedfor as a pooling-of-interests, that it result in the
combination of the respective
-
| FinAna p95686$$19 p. 82 07-26-:0 09:01:44 !| TRIM!
82 M. Blasko et al. / International Review of Financial Analysis
9 (2000) 77102
Table 2Chronology of the DaimlerChrysler merger
January 12, 1998 Jurgen E. Schrempp, Chairman of the
Daimler-Benz Management Board, inU.S. for North American
International Auto Show in Detroit, visits RobertJ. Eaton, Chairman
and Chief Executive Officer of Chrysler Corporation, tosuggest
discussion of possible merger.
February 1218, 1998 Initial discussions on possible merger
within small group of representativesand advisors from both
companies.
March 2, 1998 Robert J. Eaton and Jurgen E. Schrempp meet in
Lausanne, Switzerland todiscuss governance and business
organization structures for a possible merger.
MarchApril, 1998 Working teams prepare possible business
combination in detail.April 23May 6, 1998 Working teams negotiate
business combination agreement and related docu-
mentation.May 6, 1998 Merger agreement signed in London.May 7,
1998 Merger agreement announced worldwide: Daimler-Benz and
Chrysler com-
bine to form the worlds leading automotive, transportation, and
servicescompany.
May 14, 1998 Daimler-Benz Supervisory Board agrees to
merger.June 18, 1998 Daimler-Benz management team visits Auburn
Hills.June 25, 1998 Chrysler management team visits Stuttgart.July
23, 1998 European Commission approves merger.July 31, 1998 Federal
Trade Commission approves merger.August 6, 1998 Announcement that
DaimlerChrysler shares will trade as global stock rather
than American Depositary Receipts (ADRs).August 6, 1998
Daimler-Benz and Chrysler mail Proxy Statement/Prospectus to
shareholders.August 27, 1998 Daimler-Benz and Chrysler management
teams meet in Greenbrier, West
Virginia to discuss post-merger plans.September 18, 1998
Chrysler shareholders approve merger with 97.5% approval.September
18, 1998 Daimler-Benz shareholders approve merger with 99.9%
approval.November 6, 1998 Chrysler issues 23.5 million shares to
corporate pension plan to qualify for
pooling-of-interests accounting treatment.November 9, 1998
Daimler-Benz receives 98% of stock in exchange offer.November 12,
1998 DaimlerChrysler merger transaction closes.November 17, 1998
Day One: DaimlerChrysler stock begins trading on stock exchanges
worldwide
under symbol DCX.
Source: DaimlerChrysler Merger Prospectus (1998b).
businesses of Daimler-Benz and Chrysler into one public company.
Representa-tives of Daimler-Benz indicated (in addition to the
previous) that the survivingentity of any combination be a German
stock corporation, thereby enhancingthe likelihood of acceptance of
the transaction. (DaimlerChrysler, 1998b, p. 47)
The Chrysler Board unanimously approved the merger and
recommended thetransaction as fair to and in the best interests of
Chryslers stockholders. The boardsuggested several factors that led
to their approval (DaimlerChrysler, 1998b, p. 50):(a) the
likelihood that the automotive industry will undergo significant
consolidation,resulting in a smaller number of larger companies
surviving as effective global competi-tors (see Table 1 for
industry overview); (b) the two companies complementary
-
| FinAna p95686$$19 p. 83 07-26-:0 09:01:44 !| TRIM!
M. Blasko et al. / International Review of Financial Analysis 9
(2000) 77102 83
Table 3Analyst ratings at the time of merger
Credit Suisse First Boston (Nicholas Colas, Susanne Oliver,
November 20, 1998)Valuation: EPS: 1998e 11,00DM; 1999e 12.44
DM.Abstract: We believe that the merger of Chrysler Corporation and
Daimler-Benz has created theworlds most formidable competitor in
the automotive industry. In our view, DaimlerChryslerrepresents an
attractive investment opportunity, with a superior industry
position, a very strongbalance sheet and significant cost savings
potential. We are introducing a price target of US$101,
representing 15% upside potential from the current price.
Goldman Sachs Investment Research (Keith Hayes, Hugh Campbell,
October 5, 1998)Valuation: EPS: 1998e US$ 5.98; 1999e US$
7.25.Abstract: Preparing for the 21st Century. Proposed merger
would create global powerhouse able toconfront changes underway in
world automotive industry. Three-year estimated cost benefits of$3
billion create immediate earnings momentum. Complementary strengths
in terms of product,geography and organizational skills.
Merrill Lynch (Stephen Reitman, November 27, 1998)Valuation:
Accumulate; Long Term: Neutral.Abstract: Upgrade of Intermediate
opinion.
BT Alex.Brown (Mark Little, November 12, 1998)Merger of equals.
DaimlerChrysler holds a global presence in an industry that is fast
consolidating.This offers advantages through economies of scale,
purchasing and shared skills, but none ofthis guarantees greater
profitability. DaimlerChrysler is well placed to withstand the
economicdownturn that we are expecting and our current forecast
blended valuation looks fair. Wetherefore initiate coverage with a
market perform recommendation.
Source: Company reports. e denotes estimate.
strengths: Daimler-Benz is stronger in luxury and higher end
cars, and Chrysler isstronger in sport-utility vehicles and
minivans; Daimler is stronger in Europe, Chryslerin North America;
Daimlers reputation for engineering complements,
Chryslersreputation for product development; (c) the opportunities
for significant synergiesafforded by a combination based not on
plant closings or lay-offs, but on such factorsas shared
technologies, distribution, purchasing, and know-how; and (d)
expectedbenefits of $1.4 billion in the first year of merged
operations, and annual benefits of$3 billion within 3 to 5 years.
The Chrysler Board also outlined several potential risks,including
the difficulties inherent in integrating two large enterprises with
geographi-cally dispersed operations incorporated in different
countries, and the risk that thesynergies and benefits might not be
fully achieved.
The Daimler-Benz Management Board also unanimously approved the
merger bytaking into account several other material factors such
as: (a) Daimlers strengthenedcompetitive position through an
immediate expansion of its automotive product rangeand through a
geographic expansion in the U.S., and thus reducing the risk
associatedwith the dependency on the premium segment of the
automobile market; (b) enhancedliquidity for Daimlers stockholders
by creating the third largest automotive company
-
| FinAna p95686$$19 p. 84 07-26-:0 09:01:44 !| TRIM!
84 M. Blasko et al. / International Review of Financial Analysis
9 (2000) 77102
in the world in terms of revenues, market capitalization, and
earnings; and (c) thepotential short-term synergies in purchasing,
distribution, and research and develop-ment, and the potential
long-term synergies in the development and growth of markets.
5. Conflicts of interest
As in most mergers, there are potential agency problems from
managers decisionson what actions to take in the merger:
In considering the recommendation of the Chrysler Board,
stockholders ofChrysler should be aware that, as described below,
certain members of Chryslersmanagement and the Chrysler Board may
have interests in the Chrysler Mergerthat are different from, or in
addition to, the interests of Chrysler stockholdersgenerally, and
that these interests may create potential conflicts of
interest(DaimlerChrysler, 1998b, p. 68).
Some of the potential agency conflicts resulted from the
compensation plans inplace. Subject only to the consummation of the
merger and his continued employment,Robert Eaton receives $3.7
million in cash payment, 628,300 DaimlerChrysler ordinaryshares
($66 million), and stock appreciation rights with respect to 2.27
million Daim-lerChrysler ordinary shares. Four other Chrysler
officers receive cash payments andDaimlerChrysler shares and
options. Moreover, Chryslers executive officers (a groupof 30
persons) have employment continuation agreements for a period of 2
yearsfollowing any event that constitutes a change in control. As a
result, if their employmentwere terminated within 2 years after the
merger, they would receive an estimatedlump sum severance payment
in an aggregate amount of $96,907,018. The largestportion of this
sum ($24.4 million) would accrue to Mr. Eaton, who would receive
asingle lump sum payment equal to three times his base salary plus
the average annualbonus plus certain benefits.
6. Merger announcement effects
Table 4A documents the stock market reaction to the merger
announcement forboth Daimler-Benz and Chrysler, which are similar
to the results from earlier studiesof mergers. There was a 30.9%
abnormal return for Chryslers shares, and somewhatin contrast to
large sample studies that find negative bidder returns, the shares
ofDaimler-Benz realized a positive excess return of 4.6%. The
combined market capital-ization of Daimler and Chrysler was $95.2
billion at the close of NYSE trading onMay 7, 1998. Table 5A shows
the market capitalization of Daimler-Benz and Chrysleraround the
merger announcement. This was $10.2 billion greater than the
combinedmarket value of the firms before the merger announcement.
The increase in firmvalue is consistent with the predicted expected
benefits of $1.4 billion in the first yearof merged operations and
annual benefits of $3 billion within 3 to 5 years.5
-
| FinAna p95686$$19 p. 85 07-26-:0 09:01:44 !| TRIM!
M. Blasko et al. / International Review of Financial Analysis 9
(2000) 77102 85
7. Valuation issues
In a stock swap merger, the exchange ratio must be determined.
The exchangeratio may be determined according to the firms book
values, market values, sales,earnings, or some other
characteristic. Table 6 illustrates the shares of former
Daimler-Benz, Chrysler, and the combined entity based on these
characteristics.
One possible approach is to apportion the ownership rights to
the former sharehold-ers using the market values of the two
companies the day before the merger announce-ment. As market values
change quickly and reflect new information (including leaksfrom the
merger talks), average market values computed over a longer time
periodrepresent a better alternative. The market value of
Daimler-Benz on May 5, 1998,one day before the merger announcement,
was $58.1 billion, whereas Chryslers marketvalue was about half
that value at $26.8 billion. Based on these market
capitalizations,6
Chryslers share of the combined company would be 31.6%.The
actual exchange ratios for the DaimlerChrysler shares were set at
1:1.005 for
Daimler-Benz shareholders and 1:0.6235 for Chrysler
shareholders. Splitting Daim-lerChrysler among the former Daimler
and Chrysler shareholders according to theseexchange ratios put
Chryslers share of the new company at 41.4%. Thus,
Chryslershareholders received a 31% premium over the closing prices
of their shares on May5, 1998 (NYSE).
7.1. Financial analysis
While companies looking for a merger partner often begin with an
in-house analysis,eventually the complexity of financial, legal,
accounting, and taxation issues requiresoutside consultants. The
following section focuses on the financial analyses performedby the
advisors to the involved parties in the DaimlerChrysler merger.
Daimler-Benz retained Goldman Sachs and Chrysler hired CSFB to
act as theirfinancial advisors. In determining the exchange ratio,
Goldman Sachs and CSFBconsidered several valuation techniques,
including discounted cash-flow techniques,P/E multiples, and
comparable-companies analysis (based on equity analyst
pricetargets). Financial advisors reviewed publicly available
business and financial informa-tion related to the merging
companies as well as financial forecasts provided byDaimler and
Chrysler.
CSFB prepared and presented a fairness opinion to the Chryslers
board. It basedits opinion on a variety of financial and
comparative analyses using numerous assump-tions with respect to
Chrysler, Daimler-Benz, industry performance, and generalbusiness,
economic, and market conditions. CSFB maintained that because of
complexconsiderations and judgments used in its analyses
(DaimlerChrysler, 1998b), the opin-ion is not susceptible to
decomposition. Nevertheless, below we briefly describe thecomponent
parts of their analyses.
CSFB reviewed the stock price performance of the merging
companies and com-pared them with the performance of other U.S. and
European auto manufacturers.7
The high, low, and average share prices were considered, and
CSFB concluded thatthe proposed exchange ratio for the
DaimlerChrysler shares represented a premium
-
| FinAna p95686$u19 p. 86 07-26-:0 09:01:44 !| TRIM!
86 M. Blasko et al. / International Review of Financial Analysis
9 (2000) 77102T
able
4A
nnou
ncem
ent
effe
cts
Abn
orm
alre
turn
sA
.Abn
orm
alre
turn
sto
Dai
mle
r-B
enz
and
Chr
ysle
rar
ound
the
mer
ger
anno
unce
men
t
Chr
ysle
rD
aim
ler-
Ben
z
Abn
orm
alU
SDA
bnor
mal
DM
Eve
ntda
teE
vent
desc
ript
ion
retu
rnt-
stat
retu
rnt-
stat
May
6,19
98T
hem
erge
rag
reem
ent
sign
edin
Lon
don
18.7
%13
.55.
93%
2.96
May
7,19
98W
orld
wid
ean
noun
cem
ent
ofth
em
erge
r10
.5%
7.57
21.
25%
20.
90M
ay6
7,19
98C
ombi
ned
2-da
yre
turn
30.9
%15
.04.
57%
1.82
Abn
orm
alre
turn
s(A
Rs)
com
pute
das
mar
ket-
adju
sted
retu
rns.
S&P
500
and
DA
X30
inde
xes
wer
eus
edto
adju
stC
hrys
ler
and
Dai
mle
r-B
enz
retu
rns,
resp
ecti
vely
.U
SDre
fers
toU
.S.
dolla
r,an
dD
Mst
ands
for
Deu
tche
mar
k.T
oco
mpu
tet
stat
isti
c,a
stan
dard
devi
atio
nof
AR
sdu
ring
the
year
1997
wer
eco
mpu
ted.
The
met
hodo
logy
follo
ws
Rub
ack
(198
2),a
ndB
rune
ret
al.(
1999
)an
dad
just
sfo
rth
eau
toco
vari
ance
ofre
turn
s:SD
5[t
*VA
R(A
Rt)
12
(t2
1)C
OV
AR
(AR
t,AR
t 21)
];t
stat
5A
R(t
)/SD
(t);
whe
ret
5nu
mbe
rof
days
inth
eev
ent
win
dow
.
B.P
ost-
mer
ger
abno
rmal
retu
rns
toD
aim
lerC
hrys
ler
(DC
X)
for
som
eim
port
ant
even
ts
Dai
mle
rChr
ysle
r
Abn
orm
alE
UR
OE
vent
date
Eve
ntde
scri
ptio
nre
turn
t-st
at
Top
exec
utiv
esre
sign
atio
ns*
Dec
embe
r4,
1998
Dai
mle
rChr
ysle
rs
Exe
cuti
veV
ice-
Pre
side
ntof
Man
ufac
turi
ngD
enni
sK
.2
1.75
%2
0.97
Paw
ley
anno
unce
dre
tire
men
t.F
ebru
ary
5,19
99Se
nior
Vic
e-P
resi
dent
ofco
mm
unic
atio
nsfo
rD
CX
,Ste
ven
J.H
arri
s,w
ashi
red
21.
70%
20.
95by
Gen
eral
Mot
ors
Cor
p.M
arch
2,19
99T
wo
top
engi
neer
ing
exec
utiv
esat
DC
X,C
hris
The
odor
ean
dSh
amel
Rus
hwin
,2
4.25
%2
1.80
resi
gned
tota
kesi
mila
rpo
siti
ons
atF
ord
Mot
orC
o.(2
-day
retu
rn,
Mar
ch1
toM
arch
3rd
clos
e)
(Con
tinue
d)
-
| FinAna p95686$u19 p. 87 07-26-:0 09:01:44 !| TRIM!
M. Blasko et al. / International Review of Financial Analysis 9
(2000) 77102 87
Tab
le4
(Con
tinu
ed)
B.P
ost-
mer
ger
abno
rmal
retu
rns
toD
aim
lerC
hrys
ler
(DC
X)
for
som
eim
port
ant
even
ts
Dai
mle
rChr
ysle
r
Abn
orm
alE
UR
OE
vent
date
Eve
ntde
scri
ptio
nre
turn
tst
at
New
sre
late
dto
the
loss
ofS&
P50
0st
atus
and
the
mer
ger
talk
sw
ith
Nis
san
Oct
ober
1,19
98St
anda
rd&
Poo
rs
anno
unce
sth
atit
won
tin
clud
eD
aim
lerC
hrys
ler
inth
e2
14.6
%**
27.
1S&
P50
0In
dex.
Janu
ary
111
3,19
99R
umor
sab
out
Dai
mle
rChr
ysle
rde
alto
acqu
ire
aneq
uity
stak
ein
Nis
san
25.
98%
22.
5M
otor
Co.
(2-d
ayre
turn
)M
arch
10,1
999
DC
Xbr
eaks
talk
sw
ith
Nis
san.
Nis
san
shar
esfe
ll10
.9%
.5.
04%
2.1
Abn
orm
alR
etur
ns(A
Rs)
and
resp
ecti
vets
tati
stic
com
pute
das
spec
ifie
din
the
note
topa
nelA
.Dat
astr
eam
Wor
ldIn
dex
used
toad
just
retu
rns.
*In
addi
tion
toth
ese
resi
gnat
ions
,Dai
mle
rChr
ysle
rha
sbe
enhi
tby
loss
ofot
her
top
exec
utiv
es:R
ober
tL
utz,
who
reti
red
asC
hrys
ler
sV
ice
Cha
irm
anin
June
afte
rpl
ayin
ga
key
role
inth
eco
mpa
nys
turn
arou
nd;
Rex
Fra
nson
,P
resi
dent
ofC
hrys
ler
Fin
anci
alC
orpo
rati
onre
sign
edin
Janu
ary;
Will
iam
Gla
ub,C
EO
ofC
hryl
ser
Can
ada
died
Nov
embe
r26
,199
8.A
ndfi
nally
,Rob
ert
Eat
on,f
orm
erC
EO
and
Cha
irm
anof
Chr
ysle
r,ha
sag
reed
tore
tire
afte
r3
year
sto
the
mer
ger.
**U
Sdo
llar
retu
rnto
Chr
ysle
rsh
ares
from
the
clos
eon
Sept
embe
r30
,199
8to
Oct
ober
2,19
98,a
djus
ted
byS&
P50
0.So
urce
s:N
ews:
Ass
ocia
ted
Pre
ss,A
FX
New
s,P
RN
ewsw
ire,
Wal
lSt
reet
Jour
nal,
Bus
ines
sW
ire.
Pri
ces:
Dat
astr
eam
Inc.
-
| FinAna p95686$u19 p. 88 07-26-:0 09:01:44 !| TRIM!
88 M. Blasko et al. / International Review of Financial Analysis
9 (2000) 77102T
able
5D
aim
lerC
hrys
ler
stoc
kpr
ice
perf
orm
ance
A.M
arke
tca
pita
lizat
ion
ofD
aim
ler-
Ben
zan
dC
hrys
ler
arou
ndth
em
erge
ran
noun
cem
ent
Dat
eC
hrys
ler
Dai
mle
r-B
enz
Com
bine
d
May
5,19
98(1
day
prio
rto
the
mer
ger
new
s)$2
6.8
billi
on$5
8.1
billi
on$8
4.9
billi
onM
ay6,
1998
(the
mer
ger
agre
emen
tsi
gned
inL
ondo
n)$3
1.6
billi
on$6
1.8
billi
on$9
3.4
billi
onM
ay7,
1998
(wor
ldw
ide
anno
unce
men
t)$3
4.6
billi
on$6
0.6
billi
on$9
5.2
billi
on
Chr
ysle
rha
d64
7.3
mill
ion
and
Dai
mle
r-B
enz
569.
3m
illio
nsh
ares
outs
tand
ing.
Clo
sing
pric
esof
Chr
ysle
r(C
)sh
ares
and
Dai
mle
r-B
enz
AD
Rs
(DA
I)on
NY
SEw
ere
used
toco
mpu
teth
ere
spec
tive
mar
ket
capi
taliz
atio
n.So
urce
:Wal
lSt
reet
Jour
nal.
B.P
ost-
mer
ger
mar
ket
capi
taliz
atio
nan
dre
turn
sof
Dai
mle
rChr
ysle
r(D
CX
)
Cum
ulat
ive
retu
rns
sinc
eM
ay5,
1998
(Mer
ger)
DC
Xm
arke
tD
ate
cap
DC
X(e
)D
CX
($)
S&P
500
DA
X30
DSW
orld
May
5,19
98(1
day
prio
rto
the
mer
ger
new
s)$8
4.9
billi
onO
ctob
er26
,199
8(D
CX
star
tstr
adin
gas
whe
n-is
sued
se
curi
ty)
$77.
8bi
llion
213
.8%
28.
4%2
3.8%
211
.8%
28.
5%Ju
ly30
,199
9(m
ore
than
aye
arla
ter)
$72.
4bi
llion
212
.0%
214
.7%
19.1
%2
3.1%
14.9
%
DC
Xde
note
sD
aim
lerC
hrys
ler;
S&P
500
isS&
P50
0C
ompo
site
Inde
x;D
AX
30is
am
ajor
stoc
kin
dex
inG
erm
any;
DSW
orld
isa
com
posi
tw
orld
stoc
k-m
arke
tin
dex
com
pile
dby
Dat
astr
eam
Inc.
Eur
o-re
turn
sfo
rD
CX
(e)
and
DA
X30
;U
.S.
dolla
rre
turn
sfo
rD
CX
($),
S&P
500,
and
DSW
orld
.DC
X(e
)eu
ro-r
etur
nseq
uiva
lent
toD
M(D
eutc
heM
ark)
retu
rns
and
com
pute
dus
ing
DM
/USD
exch
ange
rate
s.D
CX
star
ted
trad
ing
onN
YSE
(as
whe
n-is
sued
se
curi
ty)
onO
ctob
er26
,199
8.So
urce
:Wal
lSt
reet
Jour
nal,
Dat
astr
eam
Inc.
-
| FinAna p95686$$19 p. 89 07-26-:0 09:01:44 !| TRIM!
M. Blasko et al. / International Review of Financial Analysis 9
(2000) 77102 89
Table 6Share of Daimler-Benz and Chrysler of DaimlerChrysler AG
based on different characteristics
Share of DaimlerChrysler derived from
Characteristic Daimler-Benz Chrysler
Market Values (as of May 5, 1998) 68.4% 31.6%Actual Exchange
Ratio 58.6% 44.6%Total Revenues (year ended December 31, 1997)
52.9% 47.1%Net Assets (year ended December 31, 1997) 56.1% 43.9%Net
Income* (year ended December 31, 1997) 46.7% 53.3%
* Goldman Sachs figures in DaimlerChrysler Prospectus (1998, p.
64).Source: Company reportsDaimlerChrysler Merger Prospectus
(1998), NYSE Daily Stock Price
Record from 1998.
for the former Chrysler shareholders ranging from 15 to 37%.
CSFB also reviewedthe equity analysts price targets from selected
investment research reports. Theexchange ratio represented a
premium of 16% over the mean target prices.
To estimate the present value of stand-alone Chrysler, a
discounted (unlevered)free-cash flow analysis was performed for the
years 19982002. The analysis definesunlevered free-cash flows as
unlevered net income plus depreciation plus amortizationless
capital expenditures less investment in working capital. With
projections influ-enced by vehicle sales, the level of retail
incentives, and the success of new productmodels, two separate
business scenarios were considered: a base case and a
sensitivitycase. CSFB also performed a similar analysis for every
business segment of Daimler-Benz and observed that the exchange
ratio represented a premium of approximately14 to 16% over the
ratios of discounted cash-flow-equity valuations.
Operating and stock market data were used to analyze Chrysler
relative to peercompanies (General Motors Corporation and Ford
Motor Company). The EPS (earn-ings per share) multiples for the
selected companies ranged from 8.0 to 9.5. Correspond-ingly, CSFB
performed a similar analysis for every business segment of
Daimler-Benz.Based on the EPS analyses, the exchange ratio
represented a discount of approximately17% under to a premium of
15% over the ratios of comparable companies equityvaluations.
Goldman Sachs, as a financial advisor to Daimler-Benz, also
recommended theproposed transaction and deemed the exchange ratio
to be fair to Daimlers stockhold-ers. Similar to CSFB, Goldman
Sachs reviewed, among others, the CombinationAgreement, the Annual
Reports to stockholders, and other SEC filings8 for the prior5
years, including interim reports to stockholders and internal
financial analyses.
Financial advisors also considered premia (discounts) in similar
transactions. CSFBanalyzed precedent strategic-business
merger-of-equals (MOE) combinations. Its anal-ysis indicated that
the exchange ratios were negotiated within a narrow band aroundthe
implied pre-announcement stock market ratios. For the 12 precedent
MOE transac-tions9, where each of the constituent companies had
even representation on the com-bined companys board of directors,
the premiums ranged from 0.5 to 21.7%. Goldman
-
| FinAna p95686$$19 p. 90 07-26-:0 09:01:44 !| TRIM!
90 M. Blasko et al. / International Review of Financial Analysis
9 (2000) 77102
Sachs analyzed comparably sized transactions and performed a
transaction premiumsanalysis on 40 earlier mergers larger than $10
billion. The premiums paid in thesetransactions, as compared to the
price 1-day prior to the announcement date, rangedfrom a low of 25%
to a high of 95.1% with a median of 27.3%.
The initial discussions put forth several criteria for the
merger (DaimlerChrysler,1998b, p. 47). However, some of these
criteria seem to be at odds with each other.One of the important
issues of the merger transaction was that it had the optimalability
to be accounted for as a pooling-of-interests. The Chrysler Board
expresslyrecognized that purchase accounting treatment would have
no impact on cash genera-tion or on the business logic for the
transaction, although it would reduce reportedearnings because of
the need to account for and to amortize goodwill (the
excesspurchase price over book value) (DaimlerChrysler, 1998b, p.
51; other details of thetransaction also available there). Table 7
provides DaimlerChryslers unaudited pro-forma combined consolidated
statement of income. The pooling-of-interests account-ing is at
odds with tax-efficiency, as purchase accounting would increase the
firmvalue by decreasing the present value of future tax
liabilities. However, popularity ofpooling-of-interest accounting
led the regulators to mandate purchase accounting forall U.S.
mergers . We may thus expect that international mergers may
incorporatecombined entities in countries with more lenient
accounting regulations.
7.2. Fees to financial advisors
Daimler-Benz contracted Goldman Sachs to act as its financial
advisor to the mergerand agreed to pay $35 million in fees, plus an
additional fee equal to 0.25% of theincrease in the market
capitalization of DaimlerChrysler during the 6-month
periodfollowing completion of the merger. This fee is limited to be
at least $5 million butnot greater than $25 million. Daimler-Benz
also agreed to reimburse Goldman Sachsfor all expenses and
indemnify Goldman against certain liabilities.
Chrysler engaged CSFB and agreed to pay CSFB a fee of $35
million for its services,plus an additional fee equal to 0.11% of
the change in Chryslers fully diluted equitymarket value on
December 31, 1997 compared to the fully diluted value of
theDaimlerChrysler shares received by Chryslers stockholders,
subject to a maximumof $20 million. In addition, Chrysler agreed to
reimburse CSFB for all out-of-pocketexpenses, including the fees
and expenses of its legal counsel and any other advisorretained by
CSFB.
8. Legal structure of the combination
To achieve various goals, such as pooling of interests
accounting, and compliancewith certain regulations required a
fairly complicated legal structure for the Daimler-BenzChrysler
merger. Figure 1 illustrates the transaction as well as the
resultingstructure (described in DaimlerChrysler, 1998b, pp. 1113).
Baums (1999) describesthe details of the legal structure and
problems arising from defective regulatory andlegal environment,
but we limit our discussion to the most important points.
-
| FinAna p95686$$19 p. 91 07-26-:0 09:01:44 !| TRIM!
M. Blasko et al. / International Review of Financial Analysis 9
(2000) 77102 91
Table 7DaimlerChryslers combined consolidated statement of
incomeunaudited pro forma combinedconsolidated statement of income
(Pooling-of-Interests Method) for the year ended December 31,
1997,(in millions, except per share amounts)
Historical Pro Forma
Daimler-Benz Chrysler5 Combined Combined5
DM DM DM USD
Revenues 124,050 105,205 229,255 127,131Cost of sales (98,943)
(84,879) (183,822) (101,936)
Gross margin 25,107 20,326 45,433 25,195Selling, administrative
and other
expenses (17,433) (9,703) (27,136) (15,048)Research and
development (5,663) (2,972) (8,635) (4,788)Other income 1,620 1,620
898
Income before financial income andincome taxes 3,631 7,651
11,282 6,257
Financial income, net 618 251 869 482
Income before income taxes 4,249 7,902 12,151 6,739Tax benefit
relating to a special
distribution 2,908 2,9081 1,613Income taxes 1,074 (3,038)
(1,964)2 (1,089)
Total income taxes 3,982 (3,038) 944 524Minority interest (189)
(189) (105)
Net income 8,042 4,864 12,9063 7,158
Pro forma combined earningsper share
Pro forma combined basic earningsper ordinary share 13.293,4
7.37
Pro forma combined diluted earningsper ordinary share 13.163,4
7.30
1 Reflects the nonrecurring tax benefit relating to the Special
Distribution.2 Includes nonrecurring tax benefits of DM 1,962
relating to the decrease in valuation allowance as
of December 31, 1997, applied to the German operations that file
a combined tax return.3 Excluding the nonrecurring income tax
benefits, net income, and pro forma combined net income
would have been DM 3, 172 ($1,759) and DM 8,036 ($4,456), and
pro forma combined basic and dilutedearnings per share would have
been DM 8.28 ($4.59) and DM 8.21 ($4.55), respectively.
4 The assumed weighted average number of ordinary shares
outstanding for basic and diluted earningsper share were 970.8
million and 983.6 million, respectively.
5 Translated at the rate of exchange of $1.00 5 DM 1.80.Source:
Company reportsDaimlerChrysler Merger Prospectus (1998b).
Several factors attributed to the legal complexity of the
merger. Interestingly, notrue merger between Daimler-Benz AG and
Chrysler Inc. ever happened. Althougha direct merger of Chrysler
into Daimler-Benz would significantly simplify the transac-tion, it
would have dissolved Chrysler as a legal entity, which would
require a costly
-
| FinAna p95686$$19 p. 92 07-26-:0 09:01:44 !| TRIM!
92 M. Blasko et al. / International Review of Financial Analysis
9 (2000) 77102
Fig. 1. Graphic illustration of the legal structure of the
DaimlerChrysler merger. [Source: DaimlerChrysler(1998b)]
transfer of assets into a new U.S. subsidiary. The resulting
structure has kept ChryslerInc. (later renamed DaimlerChrysler
Inc.) as a legal entity, which is now a whollyowned subsidiary of
DaimlerChrysler AG. Baums also describes regulatory obstaclesthat
exist in this and other direct cross-border mergers.
9. Ownership structure and the largest stockholders
DaimlerChrysler was the first automotive company with a
genuinely global owner-ship structure at the time of merger.
Initially, stockholders were located equally inthe United States
(44%) and Europe (44%). German stockholders held 37% of
shares.Three core stockholders owned 27% of DaimlerChrysler shares
outstanding, 17,000institutional investors held 49%, and 1.3
million retail investors held 24%. Insiderscontrolled approximately
3% of ordinary shares.10
-
| FinAna p95686$$19 p. 93 07-26-:0 09:01:44 !| TRIM!
M. Blasko et al. / International Review of Financial Analysis 9
(2000) 77102 93
However, on March 15, 1999, the company announced that the
percentage ofDaimlerChrysler shareholders in the United States fell
to 25% from 44% in November1998, when the merger closed.
DaimlerChrysler indicated that the decline was aconsequence of
Standard & Poors decision not to include the resulting
Germancompany in the S&P500 Index. This move may have forced
many mutual funds thattrack the S&P500 Index to unload the
stock and has potentially increasedDaimlerChryslers cost of equity.
We discuss the S&P decision later in the paper.
The three largest stockholders include Deutsche Bank of Germany,
the Emirateof Kuwait, and Kirk Kerkorian/Tracinda Corporation of
Las Vegas, Nevada. In its1996 and 1997 Annual Reports, Daimler-Benz
AG disclosed that Deutsche Bank AGand the Emirate of Kuwait had
shareholdings representing approximately 23% and13% of the ordinary
shares. The largest Chrysler stockholder, Tracinda
Corporation,owned approximately 11% of the outstanding shares of
Chrysler common stock. Priorto the merger, Mr. Kerkorian (Tracinda
Corp.) agreed to vote all of these shares infavor of the approval
and adoption of the merger. In December 1998, Deutsche BankAG
announced it would spin off more than $24 billion in industrial
holdings, includingDaimlerChrysler, by forming separate limited
partnerships to manage each block ofshares, all controlled by a new
unit called DB Investor (Miller, 1998).
10. Differences in corporate culture
Although the managements of Chrysler and of Daimler-Benz expect
the Trans-actions will produce substantial synergies, the
integration of two large companies,incorporated in different
countries, with geographically dispersed operations, andwith
different business cultures and compensation structures, presents
significantmanagement challenges. There can be no assurance that
this integration, andthe synergies expected to result from that
integration, will be achieved as rapidlyor to the extent currently
anticipated. (DaimlerChrysler, 1998b, p. 24)
Unless Daimler imposes its culture on the new company and takes
completecharge, dont be surprised if the deal fails.
Jeffrey E. Garten,Dean of the Yale School of Management (Garten,
1998, p. 20)
The success of this cross-border merger depends on the
managements ability tocreate a single corporate culture and
strategy. Robert Eaton and Jurgen Schremppemphasized the
evolutionary process of combining two companies that exhibit
aplethora of differences. Although the combination of Daimler-Benz
and Chrysler wasdesigned as a merger of equals, Daimler-Benz has
been the more-equal partner andis imposing its own corporate
imprint on the merged company. For the moment,DaimlerChrysler keeps
dual operational headquarters in Stuttgart, Germany andAuburn
Hills, Michigan. However, Jurgen Schrempp is expected to take over
thewhole company after his co-CEO, Robert Eaton, retires after 3
years (see Table 8for composition of management board). The
centralization of control and decision-making is necessary to mesh
the now-competing marketing, engineering, and manufac-
-
| FinAna p95686$u19 p. 94 07-26-:0 09:01:44 !| TRIM!
94 M. Blasko et al. / International Review of Financial Analysis
9 (2000) 77102
Table 8Board of Management (Vorstand)
YearYear term
Name Age Area of responsibility appointed expires
Jurgen E. Schrempp 54 Chairman 1998 (19871) 2003Robert J. Eaton
59 Chairman 1998 (19922) 2001Dr. rer. pol. Manfred Bischoff 56
Aerospace & Industrial Non-Automotive 1998 (19951) 2003Dr. rer.
pol. Eckhard Cordes 48 Corporate Development & IT- 1998 (19961)
2003
Management (including responsibility forMTU/Diesel Engines and
AutomotiveElectronics)
Theodor R. Cunningham 52 Sales and Marketing Latin America (all
1998 (19872) 2003automotive brands) and Chrysler
TruckOperations
Thomas C. Gale 55 Product Strategy, Design and Passenger 1998
(19852) 2003Car Operations Chrysler, Plymouth, Jeep,Dodge
Dr. jur. Manfred Gentz 57 Finance and Controlling 1998 (19831)
2003James P. Holden 47 Brand Management Chrysler, Plymouth, 1998
(19932) 2003
Jeep and Dodge & Sales and MarketingNorth America (all
automotive brands) &Minivan Operations
Prof. Jurgen Hubbert 59 Passenger Cars Mercedes-Benz, 1998
(19971) 2003Dr. phil. Kurt J. Lauk 52 Commercial Vehicles &
Brand 1998 (19971) 2003
Management Commercial VehiclesDr. jur. Klaus Mangold 55 Services
1998 (19951) 2003Thomas W. Sidlik 49 Procurement & Supply for
the Chrysler, 1998 (19922) 2003
Plymouth, Jeep and Dodge brands & JeepOperations
Thomas T. Stallkamp 52 Passenger Cars and Trucks Chrysler, 1998
(19902) 2003Plymouth, Jeep, Dodge
Heiner Tropitzsch 56 Human Resources & Labor Relations 1998
(19971) 2003Director
Gary C. Valade 56 Global Procurement and Supply 1998 (19902)
2003Prof. Klaus-Dieter Vohringer 57 Research and Technology 1998
(19971) 2003Dr.-Ing. Dieter Zetsche 45 Brand Management
Mercedes-Benz, 1998 (19971) 2003
Smart & Sales and Marketing Europe,Asia, Africa,
Australia/Pacific (allautomotive brands)
The current members of the Board of Management, their respective
ages as of March 31, 1999, theirareas of responsibility, the year
in which they were appointed, and the years in which their terms
expire,respectively, are shown.
1 Year first appointed to the Board of Management of
Daimler-Benz AG.2 Year first appointed as an officer of Chrysler
Corporation.Source: DaimlerChrysler 1998 Annual Report.
-
| FinAna p95686$$19 p. 95 07-26-:0 09:01:44 !| TRIM!
M. Blasko et al. / International Review of Financial Analysis 9
(2000) 77102 95
turing departments. Schrempp understands that the centralization
of headquarters isinevitable if the management does not want to
repeat mistakes of other cross-borderacquisitions. Renaults failure
in with American Motors and Sony Corps lack ofcontrol over CBS
Records and Columbia Pictures are good examples. The linksbetween
the companies of different countries may collapse on serious
corporate cul-ture, control, and strategy differences.
Labor unions and financial institutions play a major role in
German corporategovernance. According to German Co-determination
Law (Mitbestimmungsgesetz),the Supervisory Board
(Aufsichtsrat/Board of Directors; see Table 9) consists of
10shareholder and 10 employee representatives. German Metalworkers
Union (IGMetall) invited a representative of the United Auto
Workers (UAW) to take one ofthe three IG Metalls positions and
represent Chryslers labor union on this board.This system is at
odds with the U.S. governance system with a predominantly
indepen-dent Board of Directors. When downsizing occurs because of
the overcapacity in theglobal auto industry, management will be
faced with politically sensitive issues abouthow to apportion
layoffs between America and Europe. However, these concernswere not
a topic of the pre- or post-negotiation talks, as the company
announced thatit added 13,000 employees in 1998, bringing its
global workforce to 434,000.
11. Compensation policies
Another area with potential for culture clash is compensation
philosophy. Whenthe merger was consummated, the independent
compensation systems of both Chryslerand Daimler-Benz disappeared.
The performance-based stock appreciation rightsreplaced the
respective option plans. These rights carry the benefits of an
option, butno shares change hands. Holders instead get a cash
payout equal to the differencebetween the strike price and the
stock price on the day of exercise. A global-standardpay system
will include 80250 top executives, while the pay of the other
440,000employees will be set by region and will be competitive with
similar companies op-erating in the same environment (Orr (1999)).
However, given the UAW presenceon the board of directors, workers
at Daimlers Alabama plant may get a pay boost,too. There is also
some evidence that their U.S. labor costs are only about half
ofthose in Germany.
Many U.S. firms lose top talent once acquired by a European
firm. The social andcultural environment makes European executives
more egalitarian and unwilling topay top dollar to keep star
employees (Orr (1999)). European politicians and workersare much
less tolerant of high profits and pay than their American
counterparts.Although many other multinational corporations pay
their managers according totheir country affiliation, it is
increasingly harder for them to keep the same manage-ment-level
executives on different pay structures (Orr (1999)). The average
totalcompensation of the U.S. chief executives ($1.1 million) far
outpaced the rest of theworld in 1998. Though Europe is moving
toward U.S. pay practices, the compensationranged only from
$400,000 in Germany to $650,000 in Britain, with the base pay
beingthe largest part of the total compensation.
-
| FinAna p95686$u19 p. 96 07-26-:0 09:01:44 !| TRIM!
96 M. Blasko et al. / International Review of Financial Analysis
9 (2000) 77102
Table 9The Supervisory Board (Aufsichtsrat/Board of
Directors)
Year firstelected/
Name Age Principal occupation appointed
Hilmar Kopper 64 Chairman of the Supervisory Board of Deutsche
1998 (19902)Chairman Bank AG
Karl Feuerstein1 58 Retired Chairman of the Corporate Works 1998
(19902)Deputy Chairman Council, DaimlerChrysler Group and the
Central Works Council, DaimlerChrysler AGRobert E. Allen 64
Retired Chairman of the Board and Chief 1998 (19943)
Executive Officer of AT&TWilli Bohm1 59 Senior Manager, Wage
Office, Worth Plant, 1998 (19932)
DaimlerChrysler AGSir John P. Browne 51 Chief Executive Officer
of BP Amoco p.l.c. 1998 (19982)Manfred Gobels1 57 Chairman of the
Senior Managers Committee, 1998 (19932)
DaimlerChrysler GroupErich Klemm1 44 Chairman of the Central
Works Council, 1998 (19882)
DaimlerChrysler AGRudolf Kuda1 58 Head of Department, Executive
Council, 1998 (19782)
German Metalworkers UnionRobert J. Lanigan 70 Chairman Emeritus
of Owens-Illinois, Inc. 1998 (19843)Helmut Lense1 47 Chairman of
the Works Council, Unterturkheim 1998 (19932)
Plant, DaimlerChrysler AGPeter A. Magowan 56 Retired Chairman of
the Board of Safeway, Inc.; 1998 (19863)
President and Managing General Partner of SanFrancisco
Giants
Herbert Schiller1 44 Chairman of the Corporate Works Council,
1998 (19962)DaimlerChrysler Services (debis) AG
Dr. rer. pol. Manfred Schneider 60 Chairman of The Board of
Management of Bayer 1998 (19932)AG
Peter Schonfelder1 49 Member of the Works Council, Augsburg
Plant, 1998 (19902)DaimlerChrysler Aerospace AG
G. Richard Thoman 54 President and Chief Operating Officer of
Xerox 1998 (19983)Corporation
Bernhard Walter 57 Chairman of the Board of Managing Directors
1998 (19982)of Dresdner Bank AG
Lynton R. Wilson 58 Chairman of the Board of BCE Inc. 1998
(19943)Dr.-Ing. Mark Wossner 60 Chairman of the Supervisory Board
of 1998 (19982)
Bertelsmann AGBernhard Wurl1 54 Head of Department, Executive
Council, 1998 (19792)
German Metalworkers UnionStephen P. Yokich1 63 President of
International Union United 1998
Automotive, Aerospace, and AgriculturalImplement Workers of
America (UAW)
The incumbent members of the Supervisory Board of
DaimlerChrysler AG, their respective ages asof March 31, 1999,
their principal occupation and the year in which they were first
elected or appointedto the Supervisory Board are shown.
1 Representative of the employees.2 Year first elected to the
Supervisory Board of Daimler-Benz AG.3 Year first elected to the
Board of Directors of Chrysler Corporation.Source: DaimlerChrysler
1998 Annual report.
-
| FinAna p95686$$19 p. 97 07-26-:0 09:01:44 !| TRIM!
M. Blasko et al. / International Review of Financial Analysis 9
(2000) 77102 97
The compensation differences are best illustrated by the recent
pay packages ofthe two co-CEOs. For 1997, the $11.5 million salary
of Robert Eaton dwarfed the $2million take-home pay of Jurgen
Schrempp. Since Eaton is unlikely to take a pay cut,the managerial
compensation will be converging upwards and be linked to the
stockprice performance. Although the company is required to comply
with both the SECand German regulations, DaimlerChrysler, as a
German corporation, is under noobligation to disclose its
executives pay packages. The 1998 Annual Report (Daim-lerChrysler,
1998b, p. 29) says only that the aggregate amount of compensation
to allmembers of the Supervisory Board (Aufsichtsrat) and the Board
of Management(Vorstand), as a 37-person group, was 43 million euro
($46 million). This amountincludes compensation payments by the
former Chrysler Corp., with the exceptionof one-time payments due
to the business combination. In addition, the company setaside 24
million euro ($26 million) to provide pension, retirement, and
other benefitsto this group. For comparison, in 1996 and 1997
Daimler-Benz reported DM28.9million ($17 million) and DM30.6
million ($16 million) in compensation and retirementpayments to its
Management and Supervisory Boards.
12. Post-Merger events
We also looked at several other post-merger events with a direct
impact on thefuture operations and ownership structure of
DaimlerChrysler. We analyzed threemajor post-merger events: the
decision of Standard & Poors not to include Daimler-Chrysler in
the S&P500 Index, the departure of Chrysler management, and
mergertalks with Nissan. The stock price movements associated with
these three events arereported in Table 4B.
On October 1, 1998, before the merger was completed, Standard
& Poors an-nounced its decision not to include DaimlerChrysler
in the S&P500 Index. The S&P500dropped Chrysler on the last
day its shares were traded. The S&P Index
Committeecommented:
The S&P500 covers leading companies in leading industries
and reflects theimportance of the US markets and economy. Investors
see the index as the keybenchmark for the US markets. Moreover
investors recognize that companiesand markets in one country
perform differently from companies or markets inother countries.
Our action today affirming that the S&P500 represents the
USmarket and companies is a reflection of how investors manage
their investments.Blitzer (1998).
The market reaction to Chrysler shares upon this announcement
was negative.Chrysler suffered an abnormal return of 214.6% on the
announcement day (actualreturn of 216.3%). Chryslers daily volume
doubled in the weeks after the announce-ment as compared to the
weeks before the announcement, presumably in responseto the fact
that index funds would not need DCX shares. Even though
Co-chairmanRobert J. Eaton tried to persuade S&P to reverse its
decision, S&P spokesman WillJordan said that was unlikely: Its
a German company, it pays taxes in Germany,
-
| FinAna p95686$$19 p. 98 07-26-:0 09:01:44 !| TRIM!
98 M. Blasko et al. / International Review of Financial Analysis
9 (2000) 77102
its incorporated in Germany. Our long-standing policy is that
non-U.S. companieswill not be added to the S&P U.S. indexes.
Its fairly straightforward (1998, October1, Business Wire). As we
discussed earlier, a major impact of this decision was toreduce the
number of U.S. shareholders in DaimlerChrysler and make it more of
aGerman company. In response, DaimlerChrysler has continued a
campaign to beincluded in the S&P500. The latest lobbying
occurred in comments by ChairmanSchrempp at a press conference on
July 29, 1999, called to discuss the poor earningsreport we discuss
in the next section.
Another post-merger event was the rumored merger with Nissan.
Following themerger with Chrysler, Jurgen Schrempp and other
DaimlerChrysler executives startedto search for other suitable
partners to expand their Asia operations. In January 1999,they
started preliminary merger talks with Nissan of Japan. Around
January 11, 1999,rumors spread about the intentions to acquire an
equity stake in Nissan, and the DCXshares fell by 6% (2-day
abnormal return, t-stat 5 22.5). The talks continued untilMarch 10,
1999, when the no merger decision was announced. At this time,
therewas an abnormal return of 5% to DCX shares, while there was a
negative return of10.9% for Nissan. The market apparently thought
this merger would be bad forDaimlerChrysler.
Finally, and perhaps most importantly, several top Chrysler
executives and engineershave departed since the merger. The major
defection was that of 57-year old DennisPawley, who left
DaimlerChrysler in December 1998. Mr. Pawley, vice president
ofmanufacturing and leader of Chryslers turnaround, left for a
consulting firm. InFebruary, a top corporate spokesman went to GM.
In March 1999, the senior vice-president of international marketing
and minivans and the senior vice-president forplatform engineering
went to Ford for similar positions. In July 1999, a lead
Jeepengineer Craig Winn, vice-president for Jeep platform
engineering, left for GM .
While, as Robert Eaton pointed out, departures of executives is
normal after amerger, the differences in culture and compensation
from the two international part-ners may have exacerbated
departures after this merger. The AP wire (March 2, 1999)reported
that U.S. executives have complained privately that the Daimler
half ofthe company has taken a firmer grip on the new company.
Perhaps another pieceof evidence of the culture problems in
integrating the companies came from the actionsof Schrempp after
the defections. At a news conference in Stuttgart, when called
topromote the increased earnings of the new company, Schrempp
became agitated bythe questions from the U.S. media about the
defections and said in an angry tone,We dont need their know-how,
you can quote me. In Table 4B we report the DCXstock price
movements at the time of these resignations. In every case the AR
wasnegative, although not significant.
13. Post-merger performance
The post-merger performance of DaimlerChrysler has not been
good. Table 5Band Figure 2 depict the post-merger market
capitalization and the stock price perfor-mance of DaimlerChrysler.
Shares of DaimlerChrysler underperformed by a wide
-
| FinAna p95686$$19 p. 99 07-26-:0 09:01:44 !| TRIM!
M. Blasko et al. / International Review of Financial Analysis 9
(2000) 77102 99
Fig. 2. Relative performance of DaimlerChrysler (DCX) to S&P
500 Index, DS World Index and GermanDAX30 Index. [Source:
Datastream Inc.]
margin the following three indices: the Germanys main index
DAX30, S&P500 Index,as well as the DSWorld, a composite world
stock market index compiled by DatastreamInc. While it is still an
open question which currency should be used to measurereturns to
global stock, DCX stock has underperformed both DAX30
euro-returnsby 9 percentage points, as well as S&P500
dollar-returns by 34%. On July 29, 1999,DaimlerChrysler reported
lackluster second quarter earnings, and its stock price fell8.8%.
The New York Times (July 30, 1999, p. c1) reported the earnings had
beenhurt by weaker than expected results from the Chrysler division
(heavy losses in Asiaand Latin America), the weak euro, and losses
on the Smart car in Europe. Althoughit may be still too early to
judge the value-creation or destruction in this merger, asmany of
the synergies are yet to be realized, we provide preliminary
evidence thatmuch of the initial merger-announcement returns
dissipated.
14. Summary and conclusions
Using the DCX merger as a case study, this paper has focused on
value creationand analysis of various issues in an international
transaction. The market reaction tothe merger was very favorable
for both firms, and we illustrate the potential sourcesof value
creation in DaimlerChrysler. These include product lines that
meshed well,movement into the American market by Daimler and the
European market byChrysler, and complementary engineering and
marketing skills. However, we provideevidence that the initial
positive returns have dissipated.
Although globalization is one of the buzzwords in international
finance and econom-ics, an interesting and important question is:
Can a company truly be global? Differ-
-
| FinAna p95686$$19 p. 100 07-26-:0 09:01:44 !| TRIM!
100 M. Blasko et al. / International Review of Financial
Analysis 9 (2000) 77102
ences in corporate culture, compensation policies, ownership
structure, and the legalenvironment can be viewed as barriers to
entry to a global environment. While allthese factors affect
mergers of domestic firms, the factors are magnified in an
interna-tional merger. On balance, they pose important challenges
to international businesscombinations. Important post-merger
eventssuch as the decision of Standard &Poors not to include
DaimlerChrysler in the S&P500 Index causing an outflow ofU.S.
investors and the departures of executive from Chrysler (not
Daimler)perhapscaused by the clash of corporate cultures and
compensation schemes, illustrate poten-tial roadblocks to becoming
a truly global company.
On balance, we conclude by echoing and expanding on the words of
Myers (1976),who said: Mergers are tricky; the benefits and costs
of proposed deals are not alwaysobvious (p. 633). To wit, we add:
International mergers are even trickier; the benefitsand hidden
costs of these combinations are even less obvious.
Notes
1. The comparative evidence derives mainly from large sample
studies. We areaware of two other separate studies of the
DaimlerChrysler merger: (a) usingthe same public data we use,
Bruner et al. (1999) have developed a Dardencase as a negotiation
exercise on the price of the acquisition and other detailsof the
acquisition; and (b) Baums (1999) describes the legal structure of
themerger. The Auto Baron in Business Week (November 16, 1998)
provides agood overview of the merger.
2. Maquiera et al. (1998) found no evidence that conglomerate
stock-for-stockmergers create financial synergies or benefit
bondholders at stockholders ex-pense.
3. Daimler-Benz turned net losses of $3.5 billion in 1995 to net
profits of $4.4billion in 1997 under Schrempp. Top Executives,
Industry Outlook, andThe Global Six (in Business Week, 1999)
profile Schrempp.
4. Information in this section is from the DaimlerChrysler
merger prospectus(1998b) and company Annual Reports (1998a). Bruner
et al. (1999) present anextensive review of the companies
operations.
5. We calculate the announced benefits correspond to the actual
abnormal increasein combined value: ($1.4 bill. 1 $3 bill in 5
years forever discounted at 10%) 3(1 2 0.3 current tax rate on
distributed earnings in Germany) 5 $14 billion.
6. Using closing prices of Daimler-Benzs ADRs and Chrysler
shares on the NYSEon May 5, 1998.
7. General Motors Corporation, Ford Motor Company, Bayerische
MotorenWerke AG, Fiat SpA, PSA Peugeot Citroen, Renault SA,
Volkswagen AG,and Volvo AB.
8. Securities and Exchange Commission (SEC) Annual Reports forms
10-K(Chrysler) and 20-F (Daimler-Benz).
9. For example, BancOne Corp. and First Chicago NBD Corp.;
Travelers GroupInc. and Citicorp; TransCanada Pipelines Ltd. and
Nova Corp.; Grand Metropol-
-
| FinAna p95686$$19 p. 101 07-26-:0 09:01:44 !| TRIM!
M. Blasko et al. / International Review of Financial Analysis 9
(2000) 77102 101
itan PLC and Guinness PLC; Bell Atlantic Corp. and NYNEX Corp;
andSandoz Ltd. and Ciba Geigy Group.
10. The DaimlerChrysler merger prospectus (1998b) disclosed that
directors andexecutive officers of Chrysler and their affiliates
beneficially owned an aggregateof 1.21% of the Chrysler Common
Stock outstanding (including shares underoption) as of July 20,
1998.
References
Baums, T. (1999). Corporate contracting around defective
regulations: the Daimler-Chrysler case. Unpub-lished
manuscript.
Blitzer, D. (1999). Chairman of the S&P 500 Index Committee,
quoted on Business Wire, Business WireInc. (Oct. 1, 1998).
Bradsher, K. (1999). A struggle over culture and turf at
DaimlerChrysler. New York Times (Sept. 25).Bruner, R. F. (1999). An
analysis of value destruction and recovery in the alliance and
proposed merger
of Volvo and Renault. Journal of Financial Economics 51,
125166.Bruner, R., Christmann, P., Spekman, R., Kannry, B., &
Davies, M. (1999). Daimler-Benz A.G.: negotia-
tions between Daimler and Chrysler. Darden Graduate School of
Business Administration, Universityof Virginia, Case
UVA-F-1241.
DaimlerChrysler. (1998a). Annual report, as filed with the SEC
on March 31, 1999, Form 20-F.DaimlerChrysler. (1998b). Merger
prospectus. Chrysler Corporation proxy statement (for a special
meet-
ing of its stockholders to be held on September 18, 1998) and
DaimlerChrysler AG prospectus. SECfilingForm F-4registration
statement under the securities act of 1993, as filed with the
Securitiesand Exchange Commission on August 6, 1998.
Fama, E. (1998). Market efficiency, long-term returns, and
behavioral finance. Journal of FinancialEconomics 49, 283306.
Garten, J. E. (1998). Economic viewpoint: Daimler has to steer
the Chrysler merger. Business Week(July 10), 20.
Grinblatt, M., & Titman, S. (1998). Financial Market and
Corporate Strategy. Boston, MA: Irwin/McGrawHill.
Hooke, J. (1997). M&A: A Practical Guide to Doing the Deal.
New York, NY: John Wiley & Sons.Industry Outlook 1999:
ManufacturingAutos. (1999). Business Week (Jan. 11), 112113Jenkins,
H. (1999). Just another German car company. Wall Street Journal
(May 26, 1999), A23.Kaplan, S., Mitchell, M., & Wruck, K.
(1997). A clinical exploration of value creation and destruction
in
acquisitions: organizational design, incentives, and internal
capital markets. Unpublished manuscript,University of Chicago and
Harvard University.
Kaplan, S. (1989). Campeaus acquisition of federated: value
created or value destroyed? Journal ofFinancial Economics 25,
191212.
Kaplan, S. (1994). Campeaus acquisition of federated:
post-bankruptcy results. Journal of FinancialEconomics 35,
123136.
Loughran, Tim, & Vijh, A. M. (1997), Do long-term
shareholders benefit from corporate acquisitions?Journal of Finance
52(5), 17651790.
Lys, L., & Vincent, L. (1995). An analysis of value
destruction in AT&Ts acquisition of NCR. Journalof Financial
Economics 39, 353378.
Maquieira, C. P., Megginson, W. L., & Nail, L. (1998).
Wealth creation versus wealth redistributions inpure
stock-for-stock mergers. Journal of Financial Economics 48,
333.
Merger agreement signed. (1998). Canada NewsWire Ltd. (May
7).Miller, K. (1998). The auto baron, Business Week, (Nov. 16),
8290.Myers, S. C. (1976). Introduction: a framework for analyzing
mergers. In Myers, S. C. (Ed.), Modern
Developments in Financial Management (pp. 633645). New York:
Praeger.
-
| FinAna p95686$$19 p. 102 07-26-:0 09:01:44 !| TRIM!
102 M. Blasko et al. / International Review of Financial
Analysis 9 (2000) 77102
Naughton, K. The Global Six. (1999). Business Week (Jan. 25),
6872.Orr, D. (1999). Executive compensation: Damn Yankees, Safe
Haven. Forbes (May 17, 1999), 206207.Reed, S. F., & Lajoux, A.
R. (1995). The Art of M&AA Merger and Acquisition Buyout Guide.
New
York: McGraw-Hill.Roll, R. (1986). The hubris hypothesis of
corporate takeovers. Journal of Business 59, 197216.Ruback, R. S.
(1982). The effect of discretionary price control decisions on
equity values. Journal of
Financial Economics 10(1), 83105.Yates, B. (1996). The Critical
Path: Inventing an Automobile and Reinventing a Corporation.
Boston:
Little, Brown and Company.