Corporate Level Strategy

no. 1-0071

This case was written by Professor Sydney Finkelstein

© 2002 Trustees of Dartmouth College. All rights reserved. For permission to reprint, contact the Tuck School of

Business at 603-646-3176.

The DaimlerChrysler Merger

Summary

In the mid-1990s, Chrysler Corporation was the most profitable automotive producer in the

world. Buoyed by record light truck, van, and large sedan sales, revenues were at an all-time

high. Chrysler had taken a risk in producing vehicles that captured the bold and pioneering

American spirit when imports dominated the market - the Dodge Ram, the Jeep Grand

Cherokee and the LH Sedan Series. In these vehicles Chrysler found an instant mass appeal,

and its U.S. market share climbed to 23% in 1997. As revenues and market share rose,

product development costs shrank to 2.8% of revenues - compared with 6% at Ford and 8%

at General Motors1. Chrysler's integrated design teams and noncompetitive relationships

with suppliers kept costs down, while its marketing department scored success after success

in gauging consumer tastes.

Chrysler had always fashioned itself the bold and risk-taking underdog. It had brought itself

back from the brink of bankruptcy four times since the Second World War, and its boombust

revenue flow pattern had earned it a "comeback kid" reputation. With $7.5 billion in

cash on hand and a full range of best-selling products, Chrysler finally seemed ready in 1997

to weather the volatile American automotive business cycle on its own - without

government bailouts or large-scale R&D cutbacks2. Its wealth did not go unnoticed: Investor

Kirk Kerkorian, a 13% shareholder, threatened to mount a takeover -- citing "the

management's practice of cash hoarding" as his reason3.

1 Waller, David. Wheels on Fire: The Amazing Inside Story of the DaimlerChrysler Merger. London: Hodder & Stoughton,

2001, p.108.

2 Vlasic, Bill and Bradley Stertz. Taken for a Ride: How Daimler-Benz Drove off with Chrysler. New York: Harper Collins,

2001, p. 92.

3 "Kerkorian accuses Chrysler of cash hoarding" The Detroit News. Detroit, (4/12/97), Business Section, p. 3.

The DaimlerChrysler Merger no. 1-0071

Tuck School of Business at Dartmouth 2

In 2001, three years after a "merger of equals" with Daimler-Benz, the outlook is much

bleaker. The financial data is sobering: Chrysler Group is on track to hemorrhage $3 billion

this year, its U.S. market share has sunk to 14%, earnings have slid by 20%, and the onceindependent

company has been fully subordinated to Stuttgart4. Its key revenue generators -

the minivan, the Jeep SUV, and the supercharged pickup truck - have all come under heavy

competition from Toyota, Honda, General Motors and Ford. Chrysler continues to make few

passenger cars of note, save the Neon and limited-release Viper and Prowler.

In the words of DaimlerChrysler CEO JÑŒrgen Schrempp, "What happened to the dynamic,

can-do cowboy culture I bought?"5

The Rationale for a "Merger of Equals"

On July 17, 1997, Chrysler CEO Bob Eaton walked into the auditorium at company

headquarters in Auburn Hills, Michigan, and gave the speech of his life. Instead of reveling

in four years of rapid growth, he warned of trouble brewing on the horizon. His urgent

oratory, adapted from the nonfiction bestseller The Perfect Storm, a tale of three fishermen

caught at the confluence of three potent storms off the Canadian coast, warned that a triad of

similar factors threatened to sink Chrysler in the coming decade. "I think," Eaton said, "there

may be a perfect storm brewing around the industry today. I see a cold front, a nor'easter,

and a hurricane converging on us all at once.6" The cold front was chronic overcapacity, the

nor'easter was a retail revolution that empowered buyers, and the hurricane was a wave of

environmental concerns that threatened the very existence of the internal combustion engine.

"Read The Perfect Storm, and you will learn," Eaton implored the assembled executives,

"that when a seventy-two foot boat tries to climb a hundred-foot wave and doesn't make it, it

slides back down the face of the wave, out of control . . .and plunges into the trough, stern

first. Sometimes the boat bobs back up. Sometimes it doesn't.7" "In the book, the lesson was

4 "DaimlerChrysler AG" Standard & Poors Stock Reports. New York: Standard & Poors, Inc., July 21, 2001.

5 "Schrempps Fehler" Sueddeutsche Zeitung. Munich, Germany, (12/07/01), page 6.

6 "Vlasic, Bill and Bradley Stertz" Taken for a Ride: How Daimler-Benz Drove off with Chrysler. New York: Harper Collins,

2001, p. 174.

7 Ibid, p. 175.

The