DaimlerChrysler, which only two years ago was cruising along with high hopes following its creation from the consolidation of two world-class automakers, now finds itself on the side of the road, its emergency flashers blinking, waiting for a tow truck. The corporation’s Chrysler Group is awash in red ink, many Chrysler executives have quit or have been fired and the company’s market capitalization today is about half what it was when the companies began trading as a single stock in November 1998. In addition, angry shareholders have sued the company, the cyclical auto industry is entering a slump, two major credit-ratings agencies have downgraded the company’s debt, and the chairman of the Stuttgart-based company, Jurgen E. Schrempp, has been urged to step down. It is not impossible to turn the company around, but it will take tremendous effort, according to Wharton professors. They say Schrempp — who added to the company’s woes when he recently acknowledged that the consolidation was a takeover of Chrysler by Daimler and not a merger of equals, as Daimler portrayed it at the time — could be out of a job if things do not substantially improve in 2001. “Here’s an interesting statistic: If a company’s stock price drops by 50% over the course of one year, the likelihood of the CEO stepping down doubles,” says management professor
Useem says the pressure on Schrempp is similar to that experienced by Richard A. McGinn, who was fired as CEO of Lucent Technologies in October in the wake of mounting financial troubles and a tumbling stock price. “Schrempp may say he has no intention of resigning, but McGinn was also saying he had no plans to step aside until Lucent’s board finally said, ‘You’re gone.’”
The Chrysler division posted a $512-million loss in the third quarter. The unit is expected to post a small profit in the fourth quarter but suffer more losses in 2001.
On its face, Useem and the other faculty members say, the consolidation of Chrysler and Daimler-Benz two years ago made eminent sense. For one thing, there was no overlap between the companies’ products: Daimler-Benz produced quality, high end products, while Chrysler demonstrated stylistic flair and strength in market share with its more affordable minivan and Jeep sport utility vehicles. Plus, with the auto industry consolidating worldwide, Daimler and Chrysler knew that competitive advantage, economies of scale and synergies could be found by becoming bigger.
But there were potential problems. There was a big difference in corporate cultures — the top-down, autocratic German style vs. the flexible, more informal way of doing things at Chrysler — along with the myriad challenges associated with any consolidation of this magnitude.
“What first impressed observers was the sense that DaimlerChrysler instantly established a global company out of two single-region firms, and without any need for painful rationalization of the product line or massive layoffs,” says management professor John Paul MacDuffie. “The reassurances that the strong Daimler brand would be protected from any drift downmarket from the merger addressed one short-term worry and suggested that Chrysler would continue to operate relatively autonomously. We now know there was no clear vision of how exactly the strengths of these two companies could be integrated to create value. But even in the absence of this vision, Daimler was intent on taking control, and that’s where things began to unravel. The departure of key people from the highly successful Chrysler top executive team followed almost immediately, along with signs of internal demoralization.”
Still, problems with the merger do not tell the whole story about Chrysler’s current difficulties. “First, I’m sure there are some problems at Chrysler that were not so visible two years ago,” MacDuffie says. “Chrysler’s dramatic outsourcing of many responsibilities to suppliers brought great cost savings and shorter product development cycles, but also contributed to persistent problems related to technical coordination and manufacturing quality. Second, Chrysler dominated the minivan segment of the market for a long time, but competitors have come back strongly to take some of that market share away.”
But MacDuffie adds that the merger has clearly been a distraction, given the complex cross-cultural issues. “Possibly, that has contributed to the trouble Chrysler has had sustaining the appeal of its older product lines over time,” he explains. “And the loss of talent on the design side has most likely affected Chrysler’s skill at anticipating new market trends, such as the current consumer preference for hybrid designs that combine elements of vans and SUVs in a vehicle built on a car platform. The PT Cruiser’s success in this precise niche is the exception that proves the rule: At its hour of greatest need, Chrysler is capacity-constrained for the production of virtually the only vehicle in its lineup that is commanding a premium price.”
Moreover, DaimlerChrysler has been working not only to digest the acquisition of Chrysler but also to get a handle on problems at Japan’s Mitsubishi Motors, in which DaimlerChrysler bought a 34% controlling stake in March, says accounting professor Robert W. Holthausen. “A problem a lot of companies have with mergers is integrating two different organizations and realizing the synergies they want out of the deal,” he says. “Research suggests that mergers and acquisitions drive down the value of the acquiring firm’s common stock more often than not. Daimler consummated a number of acquisitions in a short period of time, and that is not easy to do successfully.”
Companies that succeed in the acquisition game, Holthausen adds, “have well-developed notions of how to merge the organizations so that they get the value they anticipated. A lot of companies don’t think through the integration and retention issues in detail before the merger is closed. In this particular deal, there was a tremendous amount of work to be done just to complete the transaction. They were trying to blend German tax laws with U.S. tax laws, German legal issues with U.S. legal issues and German accounting rules with U.S. accounting rules. A lot of time was spent figuring out how to structure the deal so there weren’t negative tax consequences for the parties involved. There had not been a German acquisition of a major American firm prior to that, so the deal charted new waters.”
Another culture-related issue that caused friction: Big differences in compensation at Daimler and Chrysler. Former Chrysler chairman Robert Eaton and other top executives were earning substantially more than Schrempp and other Daimler executives, says Holthausen. “When there are enormous differences in compensation magnitudes and forms across merging companies, it creates additional frictions. Moreover, retention of key management and employees becomes more difficult. The loss of key Chrysler personnel was completely predictable, absent some effective retention mechanisms.”
Schrempp’s recent comments to the press that Daimler always viewed the consolidation as an acquisition and not as a merger of equals did a lot to add egg to the corporation’s face. Indeed, it prompted billionaire Kirk Kerkorian, DaimlerChrysler’s third largest shareholder, and others to sue the company for fraud.
Schrempp has been described as supremely self-confident and no milquetoast. A new book on the Daimler-Chrysler consolidation, Taken for a Ride, describes how Schrempp enjoys hiking in the South African backcountry with a pistol on his hip for protection. But Useem says it would be an oversimplification to view Schrempp as a pinstriped Darth Vader and to blame executive hubris and arrogance for the company’s troubles. “In person, Schrempp is persuasive,” says Useem. “He comes across as a confident, articulate visionary who is reshaping the global auto industry.”
Management professor Harbir Singh, much of whose research focuses on mergers and acquisitions, says: “There is a temptation to personalize this situation and attribute all the ills of the transaction to Schrempp. But, in fact, you can make the case that, even if he was less egregious in his statements, there are fundamental difficulties in managing a transaction as complex as this. It appears the company simply did not have a well-developed, post-merger integration strategy.”
Ironically, Singh notes, it is possible that Daimler actually hurt its cause in the beginning by trying to position the consolidation as a merger and not as an acquisition. “Companies are often tempted to call an acquisition with another large corporation a merger of equals because they want to signal stability,” Singh says. “But this commitment can come back to haunt them because they can’t make decisive calls early on.” To help the other party save face, decisions are often made through compromise, which often is not the best way to arrive at a course of action.
DaimlerChrysler has already taken a couple of steps to turn things around. On Dec. 1, Schrempp granted a series of interviews to reporters. With Daimler’s stock down so sharply, Useem says, this attempt to make the case for the company’s future to the financial press, money managers and other investors was essential.
More important, Schrempp has dispatched Dieter Zetsche, one of his top lieutenants, to take over as president of Chrysler. Singh says Zetsche, who has been told to draw up a turnaround plan by February, will enable Schrempp to keep closer tabs on what is happening in Michigan.
DaimlerChrysler is by no means without strengths. Singh notes that the company’s flagship Mercedes brand has fought off challenges in recent years from other luxury-car manufacturers and that the corporation was able to staunch massive financial losses in the mid-1990s. And even though Chrysler’s share of the minivan market has slipped, the PT Cruiser has proven to be a hit with car buyers.
Schrempp has said that the company has no plans to sell the Chrysler unit. He told reporters on Dec. 1 that his strategy remains a good one and that he has no intention of quitting.
Clearly, though, he is under the gun. Singh says Daimler’s board may give Schrempp six months to show substantial improvement before seriously considering bringing in new management. Useem says the embattled chairman may be given a year to prove that his attempt to create the global automaker of the future was not ill-conceived.
“Daimler’s current stock price represents a tremendous dilution of value,” says Singh. “Even in the German context [where there is typically less pressure on companies to deliver short-term performance] I don’t think a chairman can survive that kind of pressure on the stock price for very long.”
