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On May. 7, 1998, Daimler-Benz (Benz) makers of the luxury auto car, Mercedes-Benz, announced a $36 billion merger with the Chrysler Corporation. The purchase of Chrysler by Benz marked the biggest acquisition by a foreign buyer of any U.S. Company in history. The merger was marketed to investors as an “equal pairing,” it soon emerged that Benz would be the dominant partner, with Benz holding the majority of the new companies shares. The merger was supposed to be a win-win for both parties. The move was supposed to raise Benz’s market share in the U.S. auto market. Chrysler was supposed to improve its vehicles with exposure to Benz car expertise and also lower it’s costs.
Chrysler had survived a near collapse and needed a government bailout in 1979 just to stay afloat. Under Lee Iacocca in the 1980s, Chrysler made a revival in the auto industry. The main reason for the survival was its trendsetting minivans. Minivans are not hip by any means today, but they were a must-have family car in the 1980s.
The new company was named DaimlerChrysler AG, and its stock started being traded on the stock exchanges the following November. After a few months, its stock rose to an impressive high of $ 108.62. This high proved to be short-lived. Benz was attracted by Chrysler’s profitability with its Minivans and Jeeps; unfortunately, the U.S. auto market was moving profoundly into the SUV era. SUV’s had become the automobile of choice from rappers and to soccer moms. Chrysler’s profits were up and down and by 2006, Chrysler had cut 26,000 jobs and was still losing money. The merger introduced such “classic” cars to the U.S. public like the Dodge Nitro and Jeep Compass.
In 2006, Chrysler posted a loss of $ 1.5 billion and fell behind Toyota to 4th place in the U.S. car market. The loss came even though Chrysler introduced ten new car models that year, with a promise of 8 new models to follow next year. The U.S auto buying public wasn’t feeling Chrysler and its new car models. It didn’t help matters much that the U.S. was at the beginning of the great recession, and buying new cars was a low priority for most Americans.
Rumors started circulating that the Chrysler part of Daimler Chrysler was for sale. General Motors was rumored to be the front runner to buy it. In May 2007, Daimler Chrysler announced it was selling 80.1% of Chrysler to a private equity firm. Cerberus Capital Management for 7.4 billion dollars. Benz kept a 19.9% stake in Chrysler.
In 2008, increasingly dismal sales from Chrysler led it to seek a $ 4 billion bailout from the U.S. federal government just to stay afloat. Under increasing pressure from the Obama administration, Chrysler filed for bankruptcy protection in 2009. Chrysler then entered a partnership with Fiat, and in 2014 it became Fiat Chrysler Automobiles.
Mistakes Were Made:
In a perfect world, the Daimler Chrysler merger would have resembled modern-day Toyota. Mercedes Benz would have been the luxury (Lexus) brand of the group. Chrysler would have been the regular practical (Toyota) automobile for everyone. In theory, the two should have been able to appeal to and cover all auto buyers. So why did the merger fail so severely that Benz sold Chrysler less than 10 years later for a $29 billion loss?
Two companies, from two different countries, two different languages, and two different styles, what can go wrong with that? There was no synergy between the two companies. They disagreed on marketing, sales, techniques and never saw eye to eye on how to best run the company for the best interest of both brands
The merger was an example of empire building by Juergen Schrempp, who was the then CEO of Benz at the time. Picture a king or queen conquering and acquiring another country just because it can and really have no plan on what to do with said country. It seems that Benz had no strategy on how to develop and grow Chrysler after it acquired it. In the words of Heavy D, “Now that we found love what are we going to do with it?” If all Benz wanted was a big trophy to show off to the world, there were cheaper alternatives to achieve that goal
Lack of Cooperation
The original plan was for Chrysler to use Benz parts, components, and vehicle architecture to reduce Chrysler’s costs to produce future vehicles. Benz was unwilling to contribute to Chrysler in numerous ways. In the end, all Chrysler got were some steering and suspension components, a transmission and a diesel engine.
Lack of Due Diligence/ Market Forecast
Benz never did due diligence before it bought Chrysler. It never looked into the future to see if Chrysler could be competitive with others in its markets. Chrysler learned its lesson and bet heavily in the SUV\Truck market. Gas prices skyrocketed upwards, and the great recession hit, suddenly people didn’t feel it was feasible to pay $100 to fill up their gas tanks. The car-buying public moved to smaller cars and electric cars. Other U.S. automakers made the same mistake, but Chrysler finished last in the losers circle.
A cumulation of all of these mistakes led to the Daimler Chrysler merger being one of the biggest merger and acquisition mistakes of all time. Hopefully, future companies can learn from the mistakes of this merger, so the same blunders won’t be repeated.
Originally published at https://mwmblog.com on December 2, 2019.