Value creation and challenges of an international...

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International Review of Financial Analysis9:1 (2000) 77–102

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 & Poor’s 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

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78 M. Blasko et al. / International Review of Financial Analysis 9 (2000) 77–102

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 Sweden’s 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 other’s 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 world’s 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. Thecompany’s stock (DCX) trades on all of the world’s 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.

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M. Blasko et al. / International Review of Financial Analysis 9 (2000) 77–102 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-

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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 manager’s 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 target’s business. Bruner (1999) analyzed the loss of value in theaborted deal of Volvo and Renault, while Lys and Vincent (1995) focused on valuedestruction in ATT’s 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

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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 other’s 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 Chrysler’s 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

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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 12–18, 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.

March–April, 1998 Working teams prepare possible business combination in detail.April 23–May 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 world’s 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 Chrysler’s 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

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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 theworld’s 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; Daimler’s reputation for engineering complements, Chrysler’sreputation 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) Daimler’s 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 Daimler’s stockholders by creating the third largest automotive company

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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 manager’s 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 Chrysler’smanagement 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, Chrysler’s 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 Chrysler’s 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

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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 Chrysler’s marketvalue was about half that value at $26.8 billion. Based on these market capitalizations,6

Chrysler’s 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 Chrysler’s 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 Chrysler’s 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

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86 M. Blasko et al. / International Review of Financial Analysis 9 (2000) 77–102T

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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 reports—DaimlerChrysler 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 1998–2002. 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 Daimler’s 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 company’s board of directors, the premiums ranged from 0.5 to 21.7%. Goldman

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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 DaimlerChrysler’s 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 Chrysler’s fully diluted equitymarket value on December 31, 1997 compared to the fully diluted value of theDaimlerChrysler shares received by Chrysler’s 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-Benz–Chrysler merger. Figure 1 illustrates the transaction as well as the resultingstructure (described in DaimlerChrysler, 1998b, pp. 11–13). 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.

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Table 7DaimlerChrysler’s combined consolidated statement of income—unaudited 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 reports—DaimlerChrysler 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

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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

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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 & Poor’s 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 increasedDaimlerChrysler’s 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, don’t 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 management’s 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-

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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.

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turing departments. Schrempp understands that the centralization of headquarters isinevitable if the management does not want to repeat mistakes of other cross-borderacquisitions. Renault’s failure in with American Motors and Sony Corp’s 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 Metall’s positions and represent Chrysler’s 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 80–250 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 Daimler’s 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.

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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.

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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 executive’s 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 & Poor’s 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 & Poor’s 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%). Chrysler’s 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: “It’s a German company, it pays taxes in Germany,

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it’s incorporated in Germany. Our long-standing policy is that non-U.S. companieswill not be added to the S&P U.S. indexes. It’s 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 Chrysler’s 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 don’t 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

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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 Germany’s 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-

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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 events—such as the decision of Standard &Poor’s 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,” and“The 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-Benz’s 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-

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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.

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